Competition Law, Technology Transfer and the TRIPS Agreement Implications for Developing Countries
Tu Thanh Nguyen Faculty of Law, Lund University, Sweden and Ho Chi Minh City School of Law, Vietnam
Edward Elgar Cheltenham, UK • Northampton, MA, USA
© Tu Thanh Nguyen 2010 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 The Lypiatts 15 Lansdown Road Cheltenham Glos GL50 2JA 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 Control Number: 2009941282
ISBN 978 184980 125 6
02
Typeset by Cambrian Typesetters, Camberley, Surrey Printed and bound by MPG Books Group, UK
Contents Abbreviations Preface 1 1.1
1.2
1.3
1.4
x xiii
Technology transfer and competition rules under the TRIPS Agreement Introduction 1.1.1 Overview 1.1.2 Principles of the TRIPS Agreement 1.1.3 Effect of the TRIPS Agreement at the domestic law level The TRIPS Agreement and international technology transfer 1.2.1 Property rules of IPRs 1.2.1.1 Economic and legal justifications for IPRs 1.2.1.2 Intellectual property protection: property rules v. liability rules 1.2.2 IPRs and technology transfer 1.2.3 Technology transfer-oriented provisions of the TRIPS Agreement The TRIPS Agreement and competition rules 1.3.1 IPRs and competition law 1.3.2 Pre-TRIPS Agreement 1.3.3 Competition rules in the TRIPS Agreement 1.3.3.1 Introduction 1.3.3.2 Interpretation 1.3.3.3 Overview of application and disposition Concluding remarks
Application of competition law to technology transfer in developed countries – US and EU perspectives 2.1 Background 2.1.1 Introduction 2.1.1.1 Development of the IP–antitrust law intersection in the US 2.1.1.2 Development of the IP–competition law intersection in the EU
1 1 1 5 7 11 11 11 18 24 28 32 32 39 42 42 45 52 58
2
v
59 59 59 59 64
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Competition law, technology transfer and the TRIPS Agreement
2.1.2
2.2
2.3
2.4
2.5
Principles 2.1.2.1 Anti-competitive agreements: per se rule and rule of reason 2.1.2.2 Monopolization or abuse of a dominant position: a two-pronged test Anti-competitive price practices 2.2.1 Royalty concerns 2.2.1.1 Excessive royalties 2.2.1.2 Post-expiration royalties 2.2.1.3 Total sale royalties 2.2.1.4 Remarks 2.2.2 Restrictions on product prices Anti-competitive non-price practices 2.3.1 Grantback 2.3.2 Tying and package licensing 2.3.3 Non-challenge clause 2.3.4 Exclusivity in technology transfer agreements 2.3.4.1 Exclusive licensing 2.3.4.2 Exclusive dealing 2.3.5 Output restrictions and other non-price restrictions Refusal to transfer technology 2.4.1 Refusal to license in the US 2.4.1.1 Trinko and traditional views 2.4.1.2 Post-Trinko development: eBay and Credit Suisse 2.4.1.3 Kodak, Xerox and others: a split among US courts of appeals 2.4.1.4 Remarks 2.4.2 Refusal to license in the EU 2.4.2.1 Refusal to deal in the EU: introduction 2.4.2.2 Volvo and Renault: initial cornerstones 2.4.2.3 Magill, IMS Health and Microsoft v. Commission: new guidance 2.4.2.4 Remarks Contractual restrictions on downstream purchasers 2.5.1 US perspective 2.5.1.1 Implications of Quanta 2.5.1.2 Federal Circuit’s judgments revisited through the Quanta prism 2.5.2 EU perspective 2.5.2.1 Community exhaustion 2.5.2.2 Contractual restrictions on downstream purchasers in the EU
68 68 71 77 78 78 82 84 86 86 90 90 92 97 99 99 103 104 105 106 106 109 114 118 119 119 120 121 128 128 129 129 136 145 145 150
Contents
2.5.3 Remarks 2.6 Compatibility with the TRIPS Agreement 2.6.1 Arguments against TRIPS compatibility 2.6.2 Arguments for TRIPS compatibility 2.7 Concluding remarks Application of competition law to technology transfer in developing countries 3.1 Background 3.1.1 Overview 3.1.2 Current models in developing countries 3.1.2.1 Overview 3.1.2.2 Normative models 3.2 Certain specific cases 3.2.1 Microsoft tying cases 3.2.1.1 Microsoft Korea 3.2.1.2 Microsoft Taiwan 3.2.1.3 Microsoft Croatia 3.2.1.4 Remarks 3.2.2 Refusal to license pharmaceutical patents cases 3.2.2.1 Background 3.2.2.2 Hazel Tau v. GlaxoSmithKline and Boehringer Ingelheim 3.2.2.3 TAC v. Bristol-Myers Squibb 3.2.2.4 TAC v. MSD & Merck 3.2.2.5 Remarks 3.2.3 Abbott’s withdrawal of drug registration application 3.2.3.1 Section 25(3) complaint 3.2.3.2 Section 28 complaint 3.2.3.3 Remarks 3.2.4 Philips’ Taiwan package licensing case 3.2.4.1 Background 3.2.4.2 Other cases involved 3.2.4.3 Remarks 3.3 IPRs, technology transfer and competition law in Vietnam – a case study 3.3.1 Background 3.3.1.1 Overview 3.3.1.2 IP law in Vietnam 3.3.1.3 Competition law in Vietnam 3.3.2 Technology transfer-related competition law issues in Vietnam
vii
154 155 155 157 159
3
161 161 161 166 166 169 174 174 175 178 179 180 180 180 184 188 189 192 199 200 202 202 204 204 206 210 212 212 212 214 216 226
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3.3.2.1 From the perspective of IP law 3.3.2.2 From the perspective of competition law 3.3.2.3 Relevant cases 3.3.3 Remarks 3.4 Obstacles for developing countries 3.4.1 Internal obstacles 3.4.1.1 Lack of capacity 3.4.1.2 Deficiency of legislation 3.4.1.3 Absence of competition culture 3.4.1.4 Lack of cooperation between competition authorities and IP authorities 3.4.2 External obstacles 3.4.2.1 Argentina–US mutually agreed solution 3.4.2.2 Communications from the EC relating to the anti-monopoly law of China 3.4.2.3 Bilateral agreements and TRIPS-plus standards 3.5 Concluding remarks Prospects of technology transfer-related competition law in a global context 4.1 Alternatives and challenges 4.1.1 Enforcement outsourcing 4.1.2 International cooperation between competition authorities 4.1.3 Harmonization through international forums 4.1.3.1 WTO 4.1.3.2 OECD 4.1.3.3 UNCTAD 4.1.3.4 ICN 4.1.3.5 Other international forums: WIPO and WHO 4.1.3.6 Remarks 4.2 Prospects for the technology transfer-related competition provisions of the TRIPS Agreement 4.2.1 Over-enforcement and under-enforcement 4.2.2 IPR-related trade and competition 4.2.3 Dispute settlement 4.3 Concluding remarks
226 230 233 243 244 244 244 244 246 246 247 247 250 251 254
4
5 Implications for developing countries 5.1 Purposes and principles
256 256 256 260 267 267 271 272 273 274 275 276 276 278 280 283 286 286
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5.2 General implications 5.2.1 Importance of IPR-related competition law in technology transfer and economic growth 5.2.2 Tailoring and enforcing domestic IPR-related competition law to suit particular socio-economic contexts 5.2.3 Cooperation between competition authorities and IP authorities 5.2.4 International cooperation in enforcement of IPR-related competition law 5.2.5 Other general implications 5.3 Specific implications 5.3.1 Refusal to license 5.3.2 Excessive pricing 5.3.3 Tying 5.3.4 Use restriction on downstream purchasers 5.4. Summary and final remarks
290
Bibliography Index
303 327
292
293 294 294 295 296 297 298 299 299 300
Abbreviations AG Antitrust–IP Guidelines
Article 82 EC Guidance
ARV BIT CCHC CCS CDIP CD-R(s) CFI CUTS DC DOJ DSB DSU EC ECJ EFV EPA EU FTA FTAIA FTC GATS GATT ICN
Advocate General US Antitrust Guidelines for the Licensing of Intellectual Property of 1995, available at www.usdoj.gov/atr/public/guidelines/0558.pdf European Commission Guidance on the Commission’s enforcement priorities in applying Article 82 EC to abusive exclusionary conduct by dominant undertakings, OJ 2009 C 45/7 Anti-retroviral Bilateral Investment Treaty (US) Competition Case Handling Council (Vietnam) Competition Commission of Singapore Committee on Development and Intellectual Property (WIPO) Recordable Compact Disc(s) Court of First Instance (EU) Consumer Unity & Trust Society (India) District of Columbia Department of Justice (US) Dispute Settlement Body (WTO) Understanding on Rules and Procedures Governing the Settlement of Disputes (WTO) European Community (Communities)/Treaty Establishing the European Community European Court of Justice Efavirenz (anti-AIDS medicine) Economic Partnership Agreement European Union Free Trade Agreement Foreign Trade and Antitrust Improvements Act (US) Federal Trade Commission (US) General Agreement on Trade in Services General Agreement on Tariffs and Trade International Competition Network x
Abbreviations
ICTSD IDRC IP IPR(s) ISO(s) ITC ITO KFTC LDC(s) MFN MNC(s) MRFTA NAFTA NOIP OECD OUP PC R&D SACC SSO(s) TAC TFTC TIPO ToT Code TRIPS TRIPS Council TT Guidelines
TTBER 2004
UN
xi
International Centre for Trade and Sustainable Development International Development Research Centre (Canada) Intellectual Property Intellectual Property Right(s) Independent Service Organization(s) International Trade Commission (US) International Trade Organization Republic of Korea’s Fair Trade Commission Least Developed Country (Countries) Most Favoured Nation (treatment) Multi-National Corporation(s) South Korea’s Monopoly Regulation and Fair Trade Act North American Free Trade Agreement National Office of Intellectual Property of Vietnam Organization for Economic Co-operation and Development Oxford University Press Personal Computer Research and Development South Africa’s Competition Commission Standard Setting Organization(s) Treatment Action Campaign (South Africa) Taiwan’s Fair Trade Commission Taiwan’s Intellectual Property Office UNCTAD International Code of Conduct on the Transfer of Technology Agreement on Trade-Related Aspects of Intellectual Property Rights Council for Trade-Related Aspects of Intellectual Property (WTO) European Commission Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, OJ 2004 C 101/2 European Commission Regulation No. 772/2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements, OJ 2004 L 123/11 United Nations
xii
Competition law, technology transfer and the TRIPS Agreement
UNCTAD US VCAD VLC WB WGTCP WHO WIPO WTO
United Nations Conference on Trade and Development United States of America Vietnam’s Competition Administration Department Vietnam’s Law on Competition of 2004 World Bank Working Group on the Interaction between Trade and Competition Policy (WTO) World Health Organization World Intellectual Property Organization World Trade Organization
Preface Competition law and IP law are two major areas of law governing the market and promoting economic efficiency, consumer welfare, competition, innovation and technology transfer. Although they share the same objectives, the anti-competitive exercise of IPRs through unilateral or collusive conduct may adversely affect competition and innovation, and in fact hinder technology transfer. The negative effects of such exercise are not limited to the territory of one country. They expand to other countries, especially now IP protection is globalized while competition law is still a domestic issue. Applying competition law to control IPR abuses in general, and international technology transfer-related anti-competitive practices in particular, needs to be considered at both domestic and international levels. Issues concerning IPR-related competition law in general, and competition rules regarding technology transfer under the TRIPS Agreement in particular, have been studied from a variety of perspectives for a long time. However, they have been, and will continue to be, controversial issues because of their complexity and the way the issues change over time. They are also one of the most difficult issues in legal studies. Although the competition issue, one of the four so-called Singapore issues, was no longer on the negotiating agenda of the WTO in the Doha Round, it is still a timely and ‘hot’ issue at both domestic and international levels. As IPRs are protected globally by the minimum standards of the TRIPS Agreement, or even the higher standards of TRIPS-plus bilateral or regional agreements, competition law plays a very important role in addressing possible IPR abuses. It is commonly accepted that competition law should develop in tandem with the development of IP protection. Countries that do not have competition laws on their books and enforced deprive themselves of an important public interest safeguard. Appropriate competition law and policy towards technology transfer depend on, and should be compatible with, the level of development and the economic, political, and institutional environment of a country. There are many ways to adopt and apply domestic competition law to technology transfer so as to foster domestic economic growth and consumer welfare. It seems that developed countries have tailored their competition law to cover IPRs in general, and technology transfer in particular, all in the light of their overall innovation objectives. Aiming at promoting innovation and xiii
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Competition law, technology transfer and the TRIPS Agreement
protecting IPR holders, the developed countries are trying to minimize the impact of competition law on technology transfer. However, intervention can be undertaken if it is proved, on a case-by-case basis, that IPR-based market power is unreasonably restraining competition in the relevant market. From the competition law perspective in developed countries, IPRs (and technology) are considered like other kinds of property. Any IPR-related anti-competitive practices, including both collusive and unilateral conduct, are scrutinized under competition law with due regard to the legal monopoly granted by IP law to right holders. In contrast, competition law is quite new and not well developed in most developing countries. Further, even if certain IPR-related anti-competitive conduct may be addressed in their competition and/or IP legislation, developing countries rarely apply these laws. In practice, finding an optimal solution in a specific case for the application of competition law to technology transfer is not an easy task for competition authorities, even in developed countries. The competent authorities in developing countries are faced with greater and more serious problems. This is one of the reasons why developing countries rarely use competition flexibilities in the TRIPS Agreement to address international technology transfer-related anti-competitive conduct. This book, which focuses on competition law and technology transfer in the context of the competition flexibilities of the TRIPS Agreement, has two purposes. The first is the investigation of competition law and international technology transfer under the TRIPS Agreement in the light of the experience of both developed and developing countries. The second is the drawing of relevant implications for developing countries. Chapter 1 of the book analyses technology transfer and competition rules under the TRIPS Agreement. Chapter 2 investigates the application of competition law to technology transfer in the US and the EU, two representatives of the developed world. A similar investigation in developing countries is made in Chapter 3, with the focus on a handful of specific cases, and Vietnam is selected as a case study. In Chapter 4, the global development of the relationship between competition law and technology transfer is reviewed with a focus on the perspective of the WTO. Possible implications for developing countries are discussed in Chapter 5. It is worth noting that the issues discussed in this book are limited to two categories of anti-competitive practices in the context of international technology transfer. They are: (i) anticompetitive contractual restraints in international technology transfer agreements, and (ii) unilateral abuses by IPR holders which relate to refusal to transfer and excessive pricing of technology-embodied products, where no technology transfer agreement is available, together with compulsory licensing as a remedy correcting those abuses. In this book, the term ‘technology’ is confined to patents, know-how, soft-
Preface
xv
ware copyright, or a combination of them.1 The term ‘technology transfer’, unless otherwise stated, is understood as licensing between two unconnected firms, which is directly related to the production, or assignment of the technology. Therefore, issues relating to technology pools, standard setting, IPR settlement, technology transfer-related mergers and acquisitions are outside the scope of the book. As to the terms ‘developed countries’ and ‘developing countries’, there are no definitions of developed and developing countries in the WTO. According to a recent UNCTAD report, Japan and Israel in Asia, Canada and the US in America, Australia and New Zealand in Oceania, and the EU Member States, Iceland, Norway and Switzerland in Europe are considered as developed countries.2 The other countries, including LDCs, are classified as developing countries for the purpose of this book, unless otherwise stated. Note also that the terms ‘competition law’ and ‘antitrust law’ are used equivalently. All of the websites indicated in this book were revisited and double-checked for the last time on 22 September 2009. This book is an updated and revised version of my doctoral dissertation which I successfully defended on 10 June 2009 at the Faculty of Law, Lund University, Sweden. It would not have been accomplished without the advice, help, encouragement and inputs of several people. I would like to express my sincere gratitude to all of them, particularly: Hans Henrik Lidgard, Bengt Lundell, Christina Moëll, Jeffery Atik, Katarina Olsson, Lars Göran Malmberg, Xavier Groussot, Timo Minssen, Mats Tjernberg, Hans Liepack, Helena Josefsson, Marcus Glader, Jens Schovsbo, Elbert L. Robertson, Annette Kur, Marina Lao, Hannu Wager, Jayashree Watal, Thu-Lang Tran Wasescha, Nguyen Van Luyen, Phan Huy Hong, Le Thi Bich Tho, Mai Hong Quy, Nguyen Thai Phuc, and the editors of Edward Elgar Publishing. Furthermore, I thank my parents, my siblings and my sister’s son for their unlimited, fullest and warmest support, care and love. Mother and father, Châu-Thành, this book is dedicated to you. Last but not least, all constructive comments and criticism on this book are welcome. I can be reached at
[email protected] or
[email protected]. Lund, September 2009 Tu Thanh Nguyen [Nguyeˆ˜n Thanh Tú]
1 2
It coincides with the definition in Article 1.1 of the TTBER 2004. UNCTAD (2009), ‘Trade and Development Report 2009’, UNCTAD/TDR/2009, p. xi. The list of developed countries used in this report (except Iceland and Israel) is similar to the list of countries having submitted reports to the TRIPS Council in pursuance of developed country Members’ commitments under Article 66.2 of the TRIPS Agreement. See WTO (2008), ‘Submissions under Article 66.2 of the TRIPS Agreement’, IP/C/W/522.
1. Technology transfer and competition rules under the TRIPS Agreement 1.1
INTRODUCTION
1.1.1
Overview
The TRIPS Agreement is one of the most important agreements of the WTO, which itself has its origin in the GATT 1947. The GATT 1947 provided the legal framework governing world trade in goods between the ‘contracting parties’ until the emergence of the WTO on 1 January 1995, the GATT 1947 being now incorporated into the GATT 1994. Although the GATT 1947 aims at trade in goods, it does contain some provisions on IPRs.1 However, no special attention was paid to these IPR-related provisions until the end of the Tokyo Round (1973–1979), where the question of counterfeit goods was examined in 1978–1979. A draft of the Agreement on Measures to Discourage the Importation of Counterfeit Goods was then circulated in 1982.2 This draft was discussed in the Uruguay Round (1986–1994) but in the broader context: trade-related aspects of IPRs, including trade in counterfeit goods.3 Negotiations in the Uruguay Round were gradually focused on trade-related aspects of IPRs.4 Finally, the TRIPS Agreement was concluded as part of a WTO package in 1994. As a result, IP protection has become an integral part of the WTO multilateral trading system. The TRIPS Agreement establishes minimum standards of protection for a globalized IP regime instead of creating a uniform or deeply harmonized one.5 It can be regarded as a multilateral rule of law to the extent to which WTO Members must now protect the IP of other Members’ nationals. The conclusion
1 2 3
See Articles XX(d), XII.3(iii), XVIII.10 and IX.6 of the GATT 1947. GATT document L/5382, 18 Oct. 1982. See the Punta del Este Declaration in 1986 launching the Uruguay Round, MIN.DEC, 20 Sept. 1986. 4 See the drafts of the TRIPS Agreement: Anell Draft (MTN.GNG/NG11/W/76, 23 July 1990), Brussels Draft (MTN.TNC/W/35/Rev.1, 3 Dec. 1990), and Dunkel Draft (MTN.TNC/W/FA, 20 Dec. 1991). 5 Article 1(1) of the TRIPS Agreement. 1
2
Competition law, technology transfer and the TRIPS Agreement
of the TRIPS Agreement brought four major changes to the development of global IP protection, in terms of both substantive and procedural law. First, unlike previous international agreements concerning IPRs, the TRIPS Agreement is part of a global rules-based multilateral trading system, the WTO. Consequently, disputes between WTO Members relating to IPRs may be settled under the DSU.6 Second, the scope of the TRIPS Agreement is very broad, although the initial aim of the TRIPS Agreement negotiations was to develop a multilateral framework ‘dealing with international trade in counterfeit goods’.7 It encompasses almost all types of IPRs, ranging from copyright and related rights, trademarks, geographic indications, industrial designs, patents, layout designs (topographies) of integrated circuits, and protection of undisclosed information.8 Furthermore, the TRIPS Agreement incorporates various WIPO conventions by reference.9 Its scope may, therefore, be interpreted very broadly.10 Third, the TRIPS Agreement enumerates detailed rules on enforcement, one of the most difficult aspects of an IP regime, which include civil and administrative procedures and remedies, provisional measures, border measures, and criminal procedures.11 Fourth, the TRIPS Agreement clearly confirms the adverse effect of IPR abuses and IPR-related anti-competitive practices. It contains some provisions, albeit discretionary, to prevent and control such anti-competitive practices.12 The TRIPS Agreement is, to some extent, based on a balance between the interests of innovators (inventors/creators) and users. It also aims to create a proper balance between competition and appropriation.13 It is consistent with a move towards more open and market-based economic policies. It contains flexibilities, which give leeway for WTO Members’ variations and different approaches, because certain issues are not covered or defined under the TRIPS
6 7 8
The TRIPS Agreement is one of the agreements covered by the DSU. Punta del Este Declaration, supra note 3. See Articles 9–39 of the TRIPS Agreement. However, authors’ moral rights, utility model protection, and protection against unfair competition are excluded. 9 They are the Paris Convention (1967), the Berne Convention (1971), the Rome Convention (1961), and the Treaty on Intellectual Property in Respect of Integrated Circuits (1989). 10 Although trade names are not explicitly mentioned in the TRIPS Agreement, the WTO Appellate Body stated that ‘Members do have an obligation under the TRIPS Agreement to provide protection to trade names’. United States – Section 211 Omnibus Appropriation Acts of 1998, WT/DS176/AB/R, circulated on 2 Jan. 2002 (US – Havana Club), para. 341. 11 Articles 41–61 of the TRIPS Agreement. 12 See infra Section 1.3.3. 13 Cottier, Thomas and P. Véron (eds) (2008), Concise International and European IP Law: TRIPS, Paris Convention, European Enforcement and Transfer of Technology, Alphen aan den Rijn: Kluwer Law International, p. 2.
Technology transfer and competition rules
3
Agreement, and some are prescribed by providing alternative choices for the Members. Four types of flexibilities may be identified. They are flexibilities concerning: (i) methods of implementing TRIPS Agreement obligations; (ii) substantive standards of protection; (iii) mechanisms of enforcement; and (iv) areas not addressed by the TRIPS Agreement. 14 There are divergent narratives on how the TRIPS Agreement was created.15 The most acceptable one is that the TRIPS Agreement was part of a package deal linked to significant divergences on types, scope, and length of IP protection between developed and developing countries. From the perspective of developed countries, strengthening of IPRs as part of the process of trade liberalization, as well as the emergence of the TRIPS Agreement during the Uruguay Round, derived from three fundamental considerations. They are: (i) the increasing economic importance of, and the need for, IP protection, (ii) the deficits in, and weaknesses of, traditional international IP protection, and (iii) the deficits in both unilateral measures and bilateral agreements concerning IPRs.16 In this view, a uniform set of high standard IP protection promotes innovation and creativity, attracts trade and investment, and encourages technology transfer; strong domestic IP rules are indeed considered to be essential to economic growth and development. The TRIPS Agreement, therefore, has been, and continues to be, defended by its strongest proponents: the US, the EU, Japan, and their respective high-tech industries.17 However, developing countries, as late-comers in technological fields, often have limited types, scope, and length of IP protection as part of their catching-up strategies. This was also the case in the history of IP protection in the US, Japan, and newly
14 WIPO (2008), ‘Report on the International Patent System’, Standing Committee on the Law of Patents, SCP/12/3, para. 146. 15 There are four narratives of the TRIPS Agreement, namely the bargain narrative, the coercion narrative, the ignorance narrative, and the self-interest narrative. Yu, Peter K. (2006), ‘TRIPS and its Discontents’, Marquette IP L. Rev., 10, 371–379; Gervais, Daniel J. (2008), ‘Trade and Development’, in Daniel J. Gervais (ed.), Intellectual Property, Trade and Development: Strategies to Optimize Economic Development in a TRIPS-plus Era, Oxford: OUP, pp. 5–12. 16 Katzenberger, Paul and A. Kur (1996), ‘TRIPS and Intellectual Property’, in Fried-Karl Beier and G. Schricker (eds), From GATT to TRIPS: The Agreement on Trade Related Aspects of Intellectual Property Rights, Weinheim: VCH, pp. 7–17. According to Sell, the TRIPS Agreement is a ‘can do’ story about twelve men, who were CEOs representing pharmaceutical, entertainment and software industries. Sell, Susan K. (2003), Private Power, Public Law: The Globalization of Intellectual Property Rights, Cambridge: Cambridge University Press, p. 2. 17 Helfer, Laurence R. (2004), ‘Regime Shifting: The TRIPS Agreement and New Dynamics of International Intellectual Property Law Making’, Yale J. Int’l L., 29, 2.
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Competition law, technology transfer and the TRIPS Agreement
industrialized countries.18 They used IP regimes to ‘further what they perceive as their own economic interests’, and ‘have changed their regimes at different stages of economic development as their perception (and their economic status) has changed’.19 The Office of Technological Assessment of the US Congress affirmed: [T]here have been political tensions between nations whose role as producers of intellectual property allowed them greater access to such products and nations that imported intellectual property products, and had only limited access to them. When the United States was still a relatively young and developing country, for example, it refused to respect international intellectual property rights on the grounds that it was freely entitled to foreign works to further its social and economic development.20
Developing countries made the same argument before and during the negotiations on the TRIPS Agreement. Eventually, they agreed to receive freer access to the markets of developed countries in exchange for their agreement to protect IPRs of foreign nationals under the TRIPS Agreement as a quid pro quo.21 Moreover, developing countries accepted the TRIPS Agreement because of pressures from major powers threatening to impose unilateral trade sanctions.22 They also hoped that the TRIPS Agreement would, to some extent, encourage technology transfer inflows. Simply put, technology transfer was part of the bargain under which developing countries agreed to protect IPRs. In brief, the TRIPS Agreement was a Uruguay Round trade-off. It must be taken as a given; but there remain ongoing international and domestic debates on the scope of the flexibilities in the TRIPS Agreement and the abilities of WTO Members to apply these flexibilities.
18 See, e.g., Sell, supra note 16, pp. 60–67; Yusuf, Abdulqawi A (1998), ‘TRIPS: Background, Principles and General Provisions’, in Carlos M. Correa and A.Yusuf (eds), Intellectual Property and International Trade: The TRIPS Agreement, London: Kluwer Law International, pp. 4–5; Kim, Linsu (2003), Technology Transfer and Intellectual Property Rights: The Korean Experience, Issue Paper No. 2, Geneva: UNCTAD-ICTSD. 19 Commission on Intellectual Property Rights (2002), Integrating Intellectual Property Rights and Development Policy, London, p. 20. 20 US Congress – Office of Technology Assessment (1986), Intellectual Property Rights in an Age of Electronics and Information, OTA-CIT-302, Washington DC: US Government Printing Office, p. 228. 21 Yusuf, supra note 18, p. 8; Helfer, supra note 17, p. 3. 22 See Correa, Carlos M. (2007), Trade Related Aspects of Intellectual Property Rights: A Commentary on the TRIPS Agreement, Oxford: OUP, pp. 14–15.
Technology transfer and competition rules
1.1.2
5
Principles of the TRIPS Agreement
The three basic principles of the TRIPS Agreement, like those of other pillar agreements of the WTO, the GATT and GATS Agreements, are national treatment, most favoured nation treatment (MFN), and transparency.23 The national treatment principle has been recognized in the area of IPRs for a long time. It was, for the first time, established in the Paris Convention for the Protection of Industrial Property, which was initially adopted in 1883, and then stipulated in other IPR conventions prior to the TRIPS Agreement.24 However, the MFN and transparency principles were not found in the preTRIPS conventions on IPRs. They, as two of three basic principles of the GATT Agreement,25 were extended to IPRs in the TRIPS Agreement. The WTO Appellate Body in US – Havana Club stated that ‘national treatment obligation is a fundamental principle underlying the TRIPS Agreement’; and as a cornerstone of the world trading system, the MFN obligation ‘must be accorded the same significance with respect to intellectual property rights under the TRIPS Agreement that it has long been accorded with respect to trade in goods under the GATT’.26 In addition to those two principles, the principle of transparency is also very important. Without this principle, it is difficult to determine what IP protection rules are, and whether they are being regulated and enforced in an appropriate manner. The national treatment obligation of each WTO Member under Article 3 of the TRIPS Agreement is to treat nationals (rather than goods, as under the GATT Agreement) of other Members in a manner ‘no less favourable than’, or at least as favourable as, it treats its own nationals with regard to IP protection. A WTO Member violates this obligation if it, by its legislation or its application, creates a difference in treatment affecting effective equality of opportunities between nationals of other Members and its own nationals to the detriment of nationals of other Members. The evaluation of a de jure or de facto discrimination must be based on the ‘fundamental thrust and effect’ of the domestic legislation concerned.27 23 24
See Articles 3, 4, and 63 of the TRIPS Agreement. Article 2 of the Paris Convention, Article 5 of the Berne Convention, Article 2 of the Rome Convention, Article 5 of the Treaty on Intellectual Property in Respect of Integrated Circuits. 25 The Preamble to the TRIPS Agreement also recognizes ‘the applicability of the basic principles’ of the GATT Agreement to the TRIPS Agreement. See also Correa, supra note 22, p. 5. 26 US – Havana Club, supra note 10, paras 242 and 297. 27 European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs (EC – TM & GI), WT/DS174/R, circulated on 15 March 2005, paras 7.134, 7.137, and 7.176. See also EC – TM & GI, WT/DS290/R, circulated on 15 March 2005, paras 7.184 and 7.187
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Competition law, technology transfer and the TRIPS Agreement
Regarding MFN treatment, Article 4 of the TRIPS Agreement provides for the immediate and unconditional obligation of a Member to extend to nationals of all other Members any ‘advantage, favour, privilege or immunity’ granted by that Member to nationals of any other countries (including a nonWTO Member). This requires each Member to treat nationals of all other Members on an equivalent basis regarding IP protection. Two cumulative elements must be satisfied in order to prove an inconsistency with this obligation: (i) the measure at issue must apply with regard to IP protection; and (ii) nationals of other Members are not ‘immediately and unconditionally’ accorded any advantage, favour, privilege or immunity granted by a Member to nationals of any other country.28 Even though the principles of national treatment and MFN treatment do allow for some exceptions,29 their scope of application is very large. All matters affecting the availability, acquisition, scope, maintenance, and enforcement of IPRs, as well as matters affecting the use of IPRs specifically addressed in the TRIPS Agreement, are subject to these two principles.30 Regarding the principle of transparency, Article 63 of the TRIPS Agreement, together with Article X of the GATT Agreement and Article III of the GATS Agreement, articulate three core requirements: (i) to make information on relevant laws, regulations, and other policies publicly available; (ii) to notify interested parties of relevant laws and regulations and changes to them; and (iii) to ensure that laws and regulations are administered in a uniform, impartial, and reasonable manner.31 This principle serves as a basis for a rulesbased trade policy and for maintaining the stability and predictability of the trade laws and regulations of WTO Members. These three basic principles aim to establish and maintain non-discrimination and openness in the international market. However, as generally admitted, IP protection is not as an end in itself but a means to achieve further ends, since IPRs are of instrumental, not intrinsic, value. IP protection is just a tool; and private means cannot be valued higher than public ends.32 The TRIPS Agreement objectives are, therefore, to: (i) reduce distortions and impediments to international trade; (ii) ensure that measures and procedures to 28 29 30
Ibid., para. 7.698. See Articles 3.2 and 4 of the TRIPS Agreement. See note 3 of the TRIPS Agreement. See also UNCTAD-ICTSD (2005), Resource Book on TRIPS and Development, Cambridge: Cambridge University Press, pp. 61–91; Gervais, Daniel (1998), The TRIPS Agreement: Drafting History and Analysis, London: Sweet & Maxwell, pp. 46–59. 31 WTO (2002), ‘Transparency’, WT/WGTI/W/109. 32 Lamy, Pascal (2004), ‘Trade Related Aspects of Intellectual Property Rights: Ten Years Later’, J. World Trade, 38(6), 925–926, Drahos, Peter (1996), A Philosophy of Intellectual Property, Aldershot: Dartmouth Publishing, pp. 199–224.
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enforce IPRs do not themselves become barriers to legitimate trade; and (iii) recognize the underlying public policy objectives of domestic systems for IP protection, including developmental and technological objectives.33 Consequently, promoting international technology transfer and preventing IPR abuses and IPR-related anti-competitive practices are important issues of the TRIPS Agreement, in addition to the three basic principles mentioned above. 1.1.3 Effect of the TRIPS Agreement at the Domestic Law Level From an international law perspective, the TRIPS Agreement will prevail if it conflicts with domestic law.34 It is applied to solve IPR-related disputes between WTO Members before the WTO DSB. This means that as one of the three pillar agreements of the WTO, the TRIPS Agreement imposes international obligations on WTO Members. However, it cannot be interpreted to require Members to give direct effect to the TRIPS Agreement in their domestic law. The WTO Panel in US – Section 301 Trade Act held: Under the doctrine of direct effect … obligations addressed to States are construed as creating legally enforceable rights and obligations for individuals. Neither the GATT nor the WTO has so far been interpreted by GATT/WTO institutions as a legal order producing direct effect. Following this approach, the GATT/WTO did not create a new legal order the subjects of which comprise both contracting parties or Members and their nationals.35
Therefore, the question whether a party to a dispute before a domestic law court of a WTO Member can directly invoke provisions of the TRIPS Agreement to protect that party’s rights is answered only by the domestic law of that Member. Generally, there are two main approaches with regard to the effect of international agreements, the TRIPS Agreement in particular, at the domestic law level. They are monist and dualist. In a country with a monist approach, international agreements are incorporated directly into domestic law, i.e. they are self-executing. In a country with a dualist approach, international agreements
33 See Recitals 1, 5, and 6 of the Preamble; and Articles 7–8 of the TRIPS Agreement. 34 See Articles 26 (pacta sunt servanda) and 27 (internal law and observance of treatises) of the Vienna Convention on the Law of Treaties of 1969. See also Mexico – Measures Affecting Telecommunication Services, WT/DS204/R, adopted on 1 June 2004 (Mexico – Telecoms), para. 7.244. 35 United States – Sections 301–310 of the Trade Act of 1974, WT/DS152/R, circulated on 22 Dec. 1999, para. 7.72 (footnote omitted).
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Competition law, technology transfer and the TRIPS Agreement
are only transformed into national law by national legislation, i.e. they are not recognized as self-executing.36 In the US, the Uruguay Round Agreements Act states that ‘no provision of any of the Uruguay Round Agreements, nor the application of any such provision to any person or circumstance, that is inconsistent with any law of the United States shall have effect’.37 This means that the TRIPS Agreement is not self-executing in the US. Furthermore, Section 102(c)(1) of this Act also specifically precludes any person other than the US from using the TRIPS Agreement as a cause of action or a defence, and from challenging government action on the ground that such action is inconsistent with the Agreement. Accordingly, the TRIPS Agreement has no direct effect, has no domestic effect at all if it is inconsistent with US law, and does not create any private cause of action.38 This was confirmed by US courts of appeals.39 The ruling of the US Supreme Court in Medellin v. Texas40 in 2008, in particular, clarifies the point. In this case, the Court held that although international treaties signed by the US and decisions flowing from the treaties constitute international obligations of the US, they do not ‘automatically constitute binding federal law enforceable’ in US courts. Only an international treaty which: (i) itself contains an intention that it be self-executing, (ii) is ratified by Congress with this intention, and (iii) requires no legislation to make it operative has direct effect in the US. Otherwise, it is not enforceable unless Congress has enacted an implementing statute. In this context, the Supreme Court also stated that the Executive cannot unilaterally give a non-self-executing treaty domestic effect in order to make the treaty binding on domestic courts.41 From the Uruguay Round Agreements Act and Medellin v. Texas one can infer that neither the TRIPS Agreement nor WTO dispute settlement reports can be directly enforced in US courts. In the EU, the ECJ, in Develey v. OHIM,42 consistently confirmed the final
36
Dixon, Martin (2007), International Law, Oxford: OUP, pp. 88–90 and 94–97; Cottier, Thomas and K.N. Schefer (1998), ‘The Relationship between World Trade Organization Law, National and Regional Law’, J. Int’l Econo. L., 1(1), 83. 37 Section 102(a)(1) of the Uruguay Round Agreements Acts, Pub. L. 103–465, 108 Stat. 4809 (1994). 38 Reed, Patrick C. (2006), ‘Relationship of WTO Obligations to U.S. International Trade Law: Internationalist Vision Meets Domestic Reality’, Geo. J. Int’l L., 38, 212. 39 In re Rath, 402 F.3d 1207, 1209 note 2 (Fed. Cir. 2005); ITC Ltd v. Punchgini, Inc., 482 F.3d 135, 161–162 (2nd Cir. 2007). 40 Medellin v. Texas, 128 S.Ct. 1346 (2008). 41 Ibid., at 1356–1357, 1368–1369 and 1371. 42 Case C–238/06 P, Develey v. OHIM, [2007] ECR I–9375, paras 38–39 and 44.
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recital in the preamble to Council Decision No. 94/80043 and its previous judgments44 to the effect that the TRIPS Agreement cannot be directly invoked before Community Courts. Simply put, the provisions of the TRIPS Agreement are not directly applicable and do not create rights upon which individuals may rely directly before the Community Courts.45 Furthermore, the ECJ also held that a party ‘cannot plead before a court of a Member State that Community legislation is incompatible with certain WTO rules, even if the DSB has stated that that legislation is incompatible with those rules’. 46 This approach aims at protecting EU interests in the relations between the EU and other WTO Members.47 First, the WTO gives its Members discretion to decide whether WTO law is directly applicable at the domestic level. Further, the main trading partners of the EU, the US for instance as just shown, do not recognize the direct effect of WTO law in their domestic legal system. So the EU, on the basis of the principles of reciprocity and concession, does not recognize that direct effect either. Second, while the WTO dispute settlement mechanism aims at having a WTO law-inconsistent measure ended, it also allows disputing Members to negotiate another temporary solution, i.e. compensation and the suspension of concessions.48 The refusal of direct effect gives the EU legislature or executive opportunities to enter into negotiated arrangements for the benefits of the EU. Another reason, although not explicitly recognized by the ECJ, is that if the direct effect of WTO law were accepted, it would endanger the autonomy of the EU and move the decisive role of interpretation and application of EU law from the ECJ to the WTO.49 43 Council Decision No. 94/800/EC of 22 Dec. 1994 concerning the conclusion on behalf of the European Community, as regards matters within its competence, of the agreements reached in the Uruguay Round multilateral negotiations (1986–1994), OJ 1994 L 336/1. 44 See, e.g., Case C–149/96, Portugal v. Council, [1999] ECR I–8395, paras 42–48; Joined Cases C–300/98 and C–392/98, Dior and others, [2000] ECR I–11307, paras 44–45; Case C–245/02, Anheuser-Busch, [2004] ECR I–10989, para. 54. See also Tancredi, Antonello (2004), ‘EC Practice in the WTO: How Wide is the “Scope for Manoeuvre”?’, European J. Int’l L., 15(5), 933; Antoniadis, Antonis (2007), ‘The European Union and WTO Law: a Nexus of Reactive, Coactive, and Proactive Approaches’, World Trade Rev., 6(1), 45; Bronckers, Marco (2008), ‘From “Direct Effect” To “Muted Dialogue” – Recent Developments in the European Courts’ Case Law on the WTO and Beyond’, J. Int’l Econo. L., 11, 885. 45 Develey v. OHIM, supra note 44, para. 39. 46 Case C–377/02, Léon Van Parys NV v. Belgisch Interventie- en Restitutiebureau, [2005] ECR I–1465, para. 54. 47 Portugal v. Council, supra note 44, paras 39–40 and 42–46; Joined Cases C–120/06 P and C–121/06 P, Fabbrica italiana accumulatori motocarri Montecchio SpA v. Council (FIAMM), [2008] ECR I–6513, para. 108. 48 See Articles 19 and 22 of the DSU. 49 Bronckers, supra note 44, pp. 886–887.
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Since the Agreement Establishing the WTO was concluded by the European Community and all its Member States on the basis of joint competence, each EU Member State also remains competent on this issue. Therefore, the TRIPS Agreement may be directly applied by a national court of a Member State subject to the conditions provided by the national law of that state.50 In other words, although the TRIPS Agreement has no direct effect at the Community law level, EU Member States may be monist at the domestic law level. In any case, WTO law forms ‘an integral part of the Community legal order’.51 In this context, the EU is obliged to respect WTO law in the exercise of its powers. A measure adopted by virtue of those powers, i.e. secondary EU law, must be interpreted in the light of the relevant rules of international law.52 The ECJ has concluded that there are two exceptional circumstances in which WTO law may have direct effect at the EU legal system, i.e. an EU measure can be reviewed in the light of WTO law, where: (i) the EU has intended to implement a particular obligation assumed in the context of the WTO; or (ii) the EU measure refers expressly to the precise provisions of the WTO agreements.53 In all cases, the primacy of WTO law at the EU law level cannot extend to primary EU law (the EC Treaty for instance) or, above all, to the general principles of EU law. An EU measure intended to give effect to WTO law, or WTO dispute settlement reports, may be challenged under primary EU law. But this does not entail a challenge to WTO law.54 In Vietnam, the TRIPS Agreement is deemed self-executing. The law on signing, accession to and implementing international treaties of Vietnam classifies Vietnam as a monist country.55 In its Resolution ratifying Vietnam’s WTO accession protocol, Vietnam’s National Assembly clearly determined that WTO agreements, including the TRIPS Agreement, and Vietnam’s other commitments with the WTO are directly applied in Vietnam. In a case where a provision of the law of Vietnam is inconsistent with a provision of WTO
50
Case C–431/05, Merck Genéricos Produtos Farmacêuticos v. Merck & Co., [2007] ECR I–7001, para. 48. 51 Ibid., para. 31. 52 Joined Cases C–402/05 P and C–415/05 P, Yassin Abdullah Kadi v. Council and Commission (Kadi), [2008] ECR I–6351, para. 291. 53 See, e.g., FIAMM, supra note 47, paras 110 and 112; Portugal v. Council, supra note 44, para. 49; Case T–201/04, Microsoft v. Commission, [2007] ECR II–3601, paras 802 and 1190; Case C–308/06, International Association of Independent Tanker Owners (Intertanko) v. Secretary of State for Transport, [2008] ECR I–4057, para. 45. 54 Kadi, supra note 52, paras 286–288. 55 Article 6 of Law No. 41/2005/QH11 enacted by Vietnam’s National Assembly of 14 June 2005 on signing, accession to and implementing international treaties.
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agreements or Vietnam’s WTO accession protocol, the latter prevails.56 Many Latin American countries take the same approach as Vietnam.57 Whether or not the TRIPS Agreement is directly applied at the domestic law level, WTO Members must comply with their obligations.58 However, the TRIPS Agreement just provides for a set of minimum standards of IP protection, which may be differently implemented in WTO Members. It leaves many aspects of the discretion or flexibilities to domestic law, the competition rules as analysed below, for instance. Each WTO Member can establish and enforce its domestic IP regime so as to promote a competitive environment for innovation and/or diffusion of new products and technology provided that that Member respects the TRIPS minimum standards.59 Therefore, in order to take advantage of the flexibilities permitted in the TRIPS Agreement, each Member should promulgate domestic legislation or adopt case law addressing such flexibilities irrespective of whether it is a monist or dualist country. In any event, the minimum standards of IP protection and principles of the TRIPS Agreement must be complied with.
1.2
THE TRIPS AGREEMENT AND INTERNATIONAL TECHNOLOGY TRANSFER
It is generally accepted that the protection and enforcement of IPRs should encourage innovation and promote technology transfer. This is also the objective of the TRIPS Agreement. Therefore, before the relationship between IPRs and technology transfer in general, and in the context of the TRIPS Agreement in particular, is examined, the economic and legal justifications for IPRs and the legal regimes of IP protection should be reviewed. 1.2.1
Property Rules of IPRs
1.2.1.1 Economic and legal justifications for IPRs IP embodies information which is similar to a public good because it has the 56 Point 2 of the Resolution 71/2006/QH11 enacted by Vietnam’s National Assembly of 29 Nov. 2006 ratifying Vietnam’s WTO accession protocol. 57 Correa, Carlos M. (2008), ‘TRIPS and TRIPS-Plus Protection and Impacts in Latin America’, in Daniel J. Gervais (ed.), supra note 15, p. 239. 58 In the US, the Charming Betsy doctrine, which was established by the US Supreme Court in Murray v. Schooner Betsy, 6 U.S. 64, 118 (1804), affirms that domestic statutes should not be interpreted in a way that conflicts with international norms. This is also reflected in Medellin v. Texas, supra note 40, at 1356. In the EU see Kadi, supra note 52, para. 291. 59 Correa, supra note 22, p. vii.
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characteristics of non-rivalry in consumption and non-excludability in use.60 It is classed as non-rival since it is not consumed by its use. A person’s use of IP does not in itself restrict the ability of another person to benefit from that IP. It is non-excludable because unauthorized parties (freeriders) cannot be physically prevented from using the IP once it is released into the public domain. Consumption or use of IP by non-payers cannot be excluded. Furthermore, there is a very small (or almost no) marginal cost associated with the use of IP.61 The public good characteristics of IP were well articulated by Thomas Jefferson: [A]n individual may exclusively possess [an idea] as long as he keeps it to himself; but the moment [the idea] is divulged, it forces itself into the possession of every one, and the receiver cannot dispossess himself of it. Its peculiar character, too, is that no one possesses the less, because every other possesses the whole of it. He, who receives an idea from me, receives instruction himself without lessening mine; as he who lights his taper at mine, receives light without darkening me.62
On the one hand, IP may be easily and freely copied and used by a third party due to its public good characteristics. On the other hand, it takes time and money to create IP. Economically useful knowledge and culturally enriching works are likely to be costly and risky to produce and commercialize, as well as hard to control, in a competitive market. In the absence of IP protection to prevent ‘free riding’, people who are capable of providing such knowledge or works are likely to be discouraged not only from investing in innovation and commercialization but also from disclosing such knowledge and works.63 Therefore, in order to achieve optimal resource allocation for innovation, incentives for technological and cultural advancement should be in place, and early copying of innovation and free riding on innovators’ efforts prevented.
60 The term ‘public good’, or ‘collective consumption good’, was defined precisely by Samuelson in 1954 as the good of which each individual’s consumption ‘leads to no subtraction from any other individual’s consumption of that good’. Samuelson, Paul A. (1954), ‘The Pure Theory of Public Expenditure’, Rev. Econo. & Statistics, 36(4), 387. 61 Stiglitz, Joseph E. (2008), ‘Economic Foundations of Intellectual Property Rights’, Duke L. Rev., 57, 1699–1700; Maskus, Keith E. and J.H. Reichman (2005), ‘The Globalization of Private Knowledge Goods and the Privatization of Global Public Goods’, in Keith E. Maskus and J.H. Reichman (eds), International Public Goods and Transfer of Technology under a Globalized Intellectual Property Regime, Cambridge: Cambridge University Press, pp. 8–11. 62 Graham v. John Deere Co., 383 U.S. 1, 8–9 (1966) at note 2. 63 UNCTAD-ICTSD (2003), ‘Intellectual Property Rights: Implications for Development’, available at http://ictsd.net/i/publications/11531/.
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As a regulatory response to the complex market failures of the public good characteristics, IP law grants innovators IPRs. They are rights to exclude others in order to help a right holder profit from exclusive use of her IP. However, IP law does not aim exclusively to promote an individual innovator’s welfare. Its ultimate aim is to promote the progress of science and useful arts by securing to the innovator for a limited time and scope (length and breadth/strength) the exclusive rights to her creative, intellectual activities. This benefits the public through the development of new and improved goods and services, and spurs economic growth as a whole.64 There are four main arguments supporting IP protection.65 They are the natural law thesis, the reward thesis, the incentive thesis, and the disclosure thesis. First, the natural law thesis contends that an innovator has a natural property right in her own ideas and is morally entitled to have this property right recognized and protected by society and users. This thesis is based on Hegel’s theory of the IP spirit, which emphasizes the possession of property as a cornerstone of a free man.66 Property is, in essence, exclusive; exclusive rights granted to the innovator are the only appropriate way for society to recognize this IP. This natural right approach is referred to in both the UN Universal Declaration of Human Rights of 1948 and the UN International Covenant on Economic, Social and Cultural Rights of 1966. It is stated that everyone has the right to ‘the protection of the moral and material interests resulting from any scientific, literary or artistic production of which [she] is the author’.67 The European Court of Human Rights has confirmed that IP enjoys the protection of ‘possessions’ under the European Convention for the Protection of Human Rights and Fundamental Freedoms.68 64 Article 1, Section 8, Clause 8 of the US Constitution states that Congress shall have the power to ‘promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries’. 65 Machlup, Fritz (1958), An Economic Review of the Patent System, Study No. 15 of the Subcommittee on Patents, Trademarks, and Copyright of the Committee on the Judiciary – US Senate, 85th Congress, 2nd Session, Washington DC: US Government Printing Office, p. 21; Fisher, Matthew (2007), Fundamentals of Patent Law: Interpretation and Scope of Protection, Oxford: Hart Publishing, pp. 66–85. 66 Drahos, supra note 32, pp. 72–91; Landes, William M. and R.A. Posner (2003), The Economic Structure of Intellectual Property, Cambridge, MA: Belknap Press of Harvard University Press, p. 4. 67 Article 27 of the Universal Declaration of Human Rights, adopted by UN General Assembly Resolution 217 A (III) of 10 Dec. 1948; Article 15.1(c) of the International Covenant on Economic, Social, and Cultural Rights, adopted by UN General Assembly Resolution 2200A (XXI) of 16 Dec. 1966. 68 Helfer, Laurence R. (2008), ‘The New Innovation Frontiers? Intellectual Property and the European Court of Human Rights’, Harv. Int’l L. J., 49, 1. The TRIPS Agreement (the Preamble) recognizes that IPRs are ‘private rights’.
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Second, the reward thesis assumes that a person receives a reward for her services in proportion to the usefulness of the services to society. Society, in turn, has an obligation to intervene to secure that person such a reward. An innovator, through her innovation, renders useful services to society. The most appropriate way to secure her commensurate reward is by way of a temporary legal monopoly to exclude others from exploiting the innovation without her consent. This permits the innovator to manage and control her innovation which has already been created. The reward thesis is based on Locke’s theory concerning labour and the intellectual commons.69 It may be regarded as an ex post justification for IP protection. Third, the incentive thesis is founded on the assumption that in order to make it worthwhile for innovators and innovation investors to make their efforts and venture their time and money on innovation, society must intervene to increase their profit expectation. The simple, cheap and effective way for society to proffer these incentives is, therefore, to grant a temporary legal monopoly to innovators. The goal of IP protection, according to this thesis, is to influence innovators’ acts, which will take place before the rights come into being. The incentive thesis is thus considered as an ex ante justification for IP protection. And the incentives are currently regarded not only as being for innovation and its dissemination but also for the commercialization of innovation.70 Finally, the disclosure thesis presumes that in the bargain between an innovator and society, the former surrenders the possession of secret knowledge in exchange for the protection of a temporary exclusivity in its use. It is in the interest of society to bargain with the innovator and make her disclose her secret for the use of future generations. This can be best done by offering the innovator exclusive rights in return for public disclosure of the innovation. There is, to some extent, an overlap between these four theses. The natural law thesis and the reward thesis derive from what justice requires in a just and equitable society, namely that innovators shall enjoy their fair share of financial benefit from their innovation.71 Thomas Jefferson rejects a natural rights theory on IPRs. He just recognized the social and economic rationale of an IP system. He observed that IPRs are not designed to secure to the innovator her natural right in her innovation. They are, rather, ‘a reward, an inducement, to
69
Drahos (1996), supra note 32, pp. 72–91; Landes and Posner, supra note 66,
p. 4. 70
The US Antitrust–IP Guidelines of 1995 state that the IP laws ‘provide incentives for innovation and its dissemination and commercialization by establishing enforceable property rights for the creators’ (emphasis added). 71 Keeling, David T. (2003), Intellectual Property Rights in EU Law: Free Movement and Competition Law, Oxford: OUP, Vol. I, p. 244.
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bring forth new knowledge’.72 As for the reward and incentive theses, they are closely related. They are respectively ex post and ex ante approaches concerning innovators’ economic benefits.73 Based mainly on the encouragement purpose of an IP regime, Herbert Hovenkamp and others have highlighted the incentive thesis. They contend that the economic justification for IP protection is to ensure that innovators have appropriate incentives to engage in creative activities, instead of rewarding the innovator for their labour.74 Moreover, one may argue that both the reward and incentive theses aim at promoting not only innovation but also the commercialization of innovation.75 Besides, the disclosure thesis may be regarded as an additional consequence of the reward/incentive thesis. Regarding patent protection in particular, Valentine Korah also listed four reasons for its protection. In addition to the incentives to invest, the reward for creative efforts, and the price of disclosure, which are similar to the last three theses above-mentioned, she contends that the fourth reason is ease for negotiation of licences. She argues that exclusive patent rights make it easier for an innovator to negotiate licences, because once a patent has been applied for, the innovator can disclose the invention to potential licensees with less fear of plagiarism.76 Nevertheless, this reason seems to be part of the price of disclosure. Alan Gutterman presented three main justifications for IPRs: the ‘natural law’ or ‘moral rights’ argument, the ‘labour’ or ‘reward’ theory, and the ‘consequentialist’ theory. The first two justifications are similar to the first two of the four theses presented. The third one, the ‘consequentialist’ theory, attempts to justify IPRs on the basis of the desirable consequences following from their recognition. It also focuses on the incentives which IP law can establish.77 According to the recent WIPO report on the international patent system, there are three economic rationales for the patent system.78 They are: (i) incentive to innovate; (ii) disclosure of knowledge in the public domain; and (iii) technology transfer, commercialization and diffusion of knowledge.
72 73
Graham, supra note 62, at. 9. See Lemley, Mark A. (2004), ‘Ex Ante versus Ex Post Justifications for Intellectual Property’, U. Chi. L. Rev., 71, 129–132. 74 Hovenkamp, Herbert et al. (2007), IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, New York: Aspen, supp., p. 1(5). 75 Smith, Henry E. (2007), ‘Intellectual Property as Property: Delineating Entitlements in Information’, 116 Yale L. J., 116, 1815. 76 Korah, Valentine (2006), Intellectual Property Rights and the EC Competition Rules, Oxford: Hart Publishing, pp. 2–3. 77 Gutterman, Alan S. (1997), Innovation and Competition Policy: A Comparative Study of the Regulation of Patent Licensing and Collaborative R&D in the US and the European Community, London: Kluwer Law International, pp. 7–9. 78 WIPO, supra note 14, paras 28–46.
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The first two rationales coincide with the incentive and disclosure theses. The last rationale is a development of the reward thesis as well as the disclosure thesis. Having identified the above four theses for patent protection, Fritz Machlup, in 1958, admitted that it is not clear whether an IP system as a whole (not regarding its specific features) is good or bad. He highlighted a paradox: If we did not have a patent system, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend instituting one. But since we have had a patent system for a long time, it would be irresponsible, on the basis of our present knowledge of its economic consequences, to recommend abolishing it.79
Recently, there has been a significant amount of economic literature on IPRs which has improved the knowledge of the link between the economics of innovation and IPRs. But it cannot determine the appropriate scope of IP protection.80 Therefore, William Landes and Richard Posner have made an observation similar to Machlup’s. They recognize both powerful economic reasons, i.e. benefits, in favour of creating property rights in innovation and the considerable social costs of the protection of IPRs. However, according to them, an answer to the question whether benefits exceed costs cannot be confidently stated on the basis of present knowledge.81 The Supreme Court in the US and the ECJ in the EU have both tried to answer this question, at least in part. According to the US Supreme Court: The economic philosophy behind the clause empowering Congress to grant patents and copyrights is the conviction that encouragement of individual effort by personal gain is the best way to advance public welfare through the talents of authors and inventors in ‘Science and useful Acts’. Sacrificial days devoted to such creative activities deserve rewards commensurate with the services rendered.82
The Supreme Court also held that in return for the reward for innovation as the right of exclusion, IP law imposes upon the innovator a requirement of disclosure as the quid pro quo.83 This Court sometimes used the term ‘incen-
79 80
Machlup, supra note 65, p. 80. Lemley, Mark A. (2005), ‘Property, Intellectual Property, and Free Riding’, Tex. L. Rev., 83, 1065–1068. 81 Landes and Posner, supra note 66, p. 310. 82 Harper & Row Publishers v. National Enterprises, 105 S.Ct. 2218, 2229 (1985) (emphasis added). 83 Kewanee Oil Company v. Bicron Corporation, 94 S.C. 1879, 1886 (1974); Universal Oil Co. v. Globe Co., 322 U.S. 471, 484 (1944).
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tive’84 instead of ‘reward’, or combined both.85 The court has also held that the primary objective of IPRs is not to reward or encourage the efforts of innovators, but to promote the progress of sciences and useful arts.86 This is rooted in the US Constitution.87 In the EU, recognizing the natural law thesis of IPRs, the ECJ has held that fundamental rights to property, which includes IPRs, are regarded as one of the general principles of European Community law.88 Furthermore, this Court has also developed the concept of the ‘specific subject matter’ of IPRs in the light of which protection may be justified, albeit while applying the distinction between the existence of a right and its exercise. The ECJ has stated: In relation to patents, the specific subject matter of the industrial property is the guarantee that the patentee, to reward the creative effort of the inventor, has the exclusive right to use an invention with a view to manufacturing industrial products and putting them into circulation for the first time, either directly or by the grant of licences to third parties, as well as the right to oppose infringements.89
Regarding copyright, the ECJ in Magill confirmed that ‘the essential function of copyright is to protect the moral rights in the work and ensure a reward for the creative effort’.90 The TRIPS Agreement does not obligate WTO Members to provide protection of moral rights as provided under the Berne Convention.91 Consequently, economic rights have been fully recognized
84 85 86
Diamond v. Chakrabarty, 447 U.S. 303, 307 (1980). Kewanee Oil, supra note 85, at 1885–1886. See, e.g., Fogerty v. Fantasy, Inc., 510 U.S. 517, 524 (1994); Feist Publications v. Rural Telephone Service, 499 U.S. 340, 349 (1991); Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 167 (1989); Graham, supra note 62, at 9. See also Carrier, Michael A. (2004), ‘Cabining Intellectual Property through a Property Paradigm’, Duke L. J., 54(1), 84–85. 87 Article 1, Section 8, Clause 8 of the US Constitution, supra note 64. 88 Case C–275/06, Productores de Musica de España (Promusicae) v. Telefonica de España SAU, [2008] ECR I–271, para. 62; Case C–479/04, Laserdisken ApS v. Kulturministeriet, [2006] ECR I–8089, para. 65. The Charter of Fundamental Rights of the EU (Article 17.2), OJ 2000 C 364/1, states that IP ‘shall be protected’. 89 Case 15/74, Centrafarm v. Sterling Drug, [1974] ECR 1147, para. 9 (emphasis added). Regarding trademarks, see Case 16/74, Centrafarm v. Winthrop, [1974] ECR 1183, para. 8. 90 Joined Cases C–241/91 P and C–242/91 P, Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission (Magill), [1995] ECR I–743, paras 28 and 37 (emphasis added). The ECJ, in Joined Cases C–92/92 and C–326/92, Phil Collins, [1993] ECR I–5145, para. 20, contended that the specific subject mater of copyright is to ‘ensure the protection of the moral and economic rights of their holder’. 91 See Article 9.1 of the TRIPS Agreement.
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under the TRIPS Agreement, but the choice of conferring moral rights is left to the Members on a reciprocal basis. To sum up, from the economic perspective, the two main factors explaining the need to treat IPRs as intellectual assets are the prospect (reward or incentive) and disclosure effects. The prospect effect encourages investment and intellectual work by ensuring that an innovator may gain significant benefits from her innovation. The disclosure effect exchanges the useful information for exclusive rights to exploit it within a limited time. As a result, more will be invented and created and more innovations will be disclosed if those who invent, create and then disclose their innovations are rewarded with a temporary legal monopoly to exploit them.92 1.2.1.2 Intellectual property protection: property rules v. liability rules Obviously, IPRs constitute a temporary legal monopoly. They are rights given to right holders in order to exclude third parties from exploiting the IP without the holders’ consent, i.e. negative rights. A product patent, for example, gives its holder the exclusive rights to prevent third parties, without her consent, from the acts of making, using, offering for sale, selling or importing the patented product.93 In other words, IPRs confer on the right holder legal entitlements. However, there are still controversies over the enforcement of these private entitlements. In the taxonomy of the law and economics literature, such private entitlements can be enforced via either property rules or liability rules. Under the property rules, a third party who would like to use the entitlements must buy them from the holder. This must be done via a voluntary transaction at a price agreed upon by the holder. The property rules contain both injunctions preventing the use of entitlements without the holder’s consent and damages deterring such use. In contrast, under the liability rules, a third party can use the entitlements without the holder’s consent. But that third party has to pay the holder damages for the past, present and future use of the entitlements which are objectively determined by a court after a lawsuit. In brief, the property rules, by way of an injunctive approach, forbid access without the holder’s consent; while the liability rules, as a damages approach, require an infringer to compensate the holder for infringement.94 The property
92 93 94
Keeling, supra note 71, pp. 244 and 61–74. Article 28.1(a) of the TRIPS Agreement. See Calabresi, Guido and A.D. Melamed (1972), ‘Property Rules, Liability Rules, and Inalienability: One View of the Cathedral’, Harv. L. Rev., 85, 1092; Merges, Robert P. (1994), ‘Of Property Rules, Coase, and Intellectual Property’, Colum. L. Rev., 94(8), 2655; Nicita, Antonio and G.B. Ramello (2007), ‘Property, Liability and Market Power: The Antitrust Side of Copyright’, Rev. L. & Econo., 3(3), 768; Lemley, Mark A. and P.J. Weiser (2007), ‘Should Property or Liability Rules Govern Information’,
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and liability rules have different influences on future behaviour and on negotiated settlements to entitlements. Although IPRs are called property rights, the name may not correctly answer the question whether they should be enforced under property rules or liability rules. IPRs, as explained, are mainly granted in order to solve a prospect and disclosure problem, but not an allocation problem.95 In terms of economic efficiency on the basis of the Coase theorem,96 the question where IPRs should reside depends on the degree and nature of transaction costs, i.e. the costs of reaching a bargain between the holder and a third party. It is conventionally supposed that property rules are attractive in cases of low transaction costs, while liability rules are preferable in cases of high transaction costs (but low litigation costs). When transaction costs are low, a third party who is interested in using an entitlement is likely to bargain with the right holder for getting it. Both parties will agree a price which both sides find reasonable. In this case, the property rules encourage bargaining by prohibiting third parties from using the entitlement without the holder’s consent. In contrast, when transaction costs are high, bargaining is likely to be very difficult or even unfeasible. The law (and courts) should intervene to reallocate the risk of entitlement loss between the two parties. In this case, the liability rules will fulfil this task.97 However, this assumption may depend on the amount and accuracy of the information possessed by courts settling infringement litigation. It is also subject to enforcement and administrative costs.98 For those who support strong IP protection, there are three main arguments in favour of enforcing IPRs under the property rules. First, they contend that IP transaction costs are indeed low, because an IP transaction involves only two parties and reflects IP value accurately and quickly. In contrast, there are high costs for monitoring and detecting unauthorized access to IP. Once an infringement is detected, it takes time and considerable expense for courts to determine the IP value due to the specialized nature of IP, as well as the varied Tex. L. Rev., 85, 786; Kieff, F. Scott (2007), ‘Removing Property from Intellectual Property and (Intended?) Pernicious Impacts on Innovation and Competition’, p. 2, available at http://extranet.isnie.org/uploads/isnie2008/kieff.pdf. 95 Smith, supra note 75, p. 1745. 96 The Coase theorem says that if transaction costs (costs of reaching a bargain) are low, people will bargain to an efficient outcome; but otherwise the initial allocation of rights matters to efficiency. Coase, R. H. (1960), ‘The Problem of Social Cost’, J. L. & Econo., 3, 1–44. 97 See Calabresi and Melamed, supra note 94, at 1106–1108 and 1118; Merges, supra note 94, at 2664; Hylton, Keith N. (2006), ‘Property Rules and Liability Rules, Once Again’, Rev. L. & Econo., 2(2), 137; Sterk, Stewart E. (2008), ‘Property Rules, Liability Rules, and Uncertainty about Property Rights’, Mich. L. Rev., 106, 1290. 98 Posner, Richard A. (2007), Economic Analysis of Law, New York: Aspen, p. 69; Hylton, supra note 97, pp. 156–158.
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and complex business environment relating to them. This may increase the inefficient and wasteful use of judicial resources. Additionally, courts often lack information about both damages and benefits. Enforcing IPRs under property rules can mitigate such high information costs.99 Second, they argue that IP is just one kind of property.100 Therefore, IPRs, as property rights, should be protected by property rules in the absence of exceptional grounds for applying liability rules.101 Instead of offering incentives to infringe, as the liability rules do, the property rules further foster investment in innovation. They prevent free-riding and provide right holders with possibilities to recover their investment and make profits. This, in terms of economics, permits right holders to internalize the positive externalities of their IPRs.102 Third, treating IPRs under the property rules facilitates the coordination between the right holder and complementary users of IP, which can advance IP commercialization. Bringing IPR-embodied products to market needs the coordination of many persons in the process of innovation, development, capital mobilization, production, marketing, distribution and after-sale services. The threat of an injunction under the property rules for IPRs motivates all those interested in IPRs to interact with each other and with the right holder. It also assures them of the enforcement of IPRs where needed and motivates them to reach agreements with each other in order to use and deploy IPRs. As Scott Kieff argues: The key [for an IP regime] is to create an incentive for diverse complementary users of the asset to come together (the beacon effect) and transact with each other (the bargaining effect). Both effects are facilitated by the credibility of the threat of an injunction, which is the signature attribute of a legal entitlement that is backed up by a property rule, and frustrated by the alternative of a liability rule.103
Using the coordination viewpoint to support IP protection under property rules, this argument seems to take into account not only the incentives and efficiency for right holders but also those for all parties interested in IPRs.
99 100
Merges, supra note 94, pp. 2664–2667; Smith, supra note 75. See Easterbook, Frank H. (1990), ‘Intellectual Property is Still Property’, Harv. J. L. & Pub. Pol’y, 13, 109. 101 Haddock, David D. et al. (1990), ‘Ordinary Economic Rationale for Extraordinary Legal Sanctions’, Cal. L. Rev., 78, 17; Schoenhard, Paul M. (2008), ‘Who Took My IP? Defending the Availability of Injunctive Relief for Patent Owners’, Tex. IP L. J., 16, 200–201. 102 See Demsetz, Harold (1967), ‘Toward a Theory of Property Rights’, American Econo. Rev., 57(2), 348. 103 Kieff, F. Scott (2006), ‘Coordination, Property, and Intellectual Property: Unconventional Approach to Anticompetitive Effects and Downstream Access’, Emory L. J., 56, 346; US FTC (2003), To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, Chapter 2, pp. 7–8.
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In contrast, those who support development and public benefits through innovation are attracted by treating IPRs under liability rules. They criticize the ‘side effects’ of property rules treatment of IPRs such as excessive transaction costs, hold-ups, hold-outs, anti-commons, thickets, trolls, and unduly taxing and hindering innovation, competition and development.104 This criticism derives from a concern that being armed with rights to exclude, strengthened by injunctive relief, a right holder can abuse those rights to demand excessive benefits. It says that the choice of property rules, instead of liability rules, gives the right holder too strong a bargaining power. The right holder can use this power to force third parties interested in her entitlements to enter agreements at a price which is far beyond the actual value of the entitlements. If no agreements are reached and the third parties use the entitlements, the right holder will threaten or use litigation to obtain settlements significantly in excess of any harm she may suffer. Therefore, enforcing IPRs under property rules leads to the risk that innovation will be under-used and development will be blocked. The liability rules are preferable to the property rules when losses from blocking efficient development exceed the cost of expropriation of IPRs.105 Those who support the liability rules have an instrumental attitude rather than a proprietorial one towards IPRs.106
104 Anti-commons: if there are too many owners holding rights of exclusion relating to a scarce resource, the resource is prone to under-use. This creates a tragedy of the anti-commons. Applying this proposition to IPRs, one may argue that property rules-based treatment of IPRs can impede the development and marketing of new products where making the new product requires the use of rights from many different innovations. See Heller, Michael A. (1998), ‘The Tragedy of the Anticommons: Property in the Transition from Marx to Markets’, Harv. L. Rev., 111, 621. Thickets: IPR thickets may be described as a dense web of overlapping IPRs due to cumulative innovation and multiple blocking IPRs. Stronger IPRs under the property rules can have the perverse effect of stifling, rather than encouraging, innovation since a firm must clear the thickets. While the anti-commons analysis focuses on the need to aggregate fragmentary IPRs and the difficulty of assembling those fragments into a coherent product, the thickets analysis focuses on the overlap of existing rights. See Shapiro, Carl (2001), ‘Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard Settings’, in Adam B. Jaffe et al. (eds), Innovation Policy and the Economy, Vol. 1, Cambridge, MA: The MIT Press, p. 120; Calabresi and Melamed (1972), supra note 94, pp. 1106–1108. Trolls: this term refers to a group of right holders who do not actually use the rights to manufacture products but are alleged to earn money from IPRs disputes. See McDonough, James F. (2005), ‘The Myth of the Patent Troll: An Alternative View of the Function of Patent Dealers in an Idea Economy’, Emory L. J., 56, 189; Subramanian, Sujitha (2008), ‘Patent Trolls in Thickets: Who is Fishing Under the Bridge?’, European IP Rev., 30(5), 182. 105 Hylton, supra note 97, p. 184. 106 Drahos, supra note 32, pp. 199–224.
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Both property and liability rules enforcing IPRs aim to maximize efficiency through minimizing either the risk of conflict between a right holder and a third party interested in the IPRs before the conflict arises or any inefficiency once a dispute between these two parties has arisen, or even both.107 The property and liability rules are complementary for enforcing IPRs. Those who support the liability rules recognize the advantage of the property rules in certain cases, particularly where the negative effects of a property rules treatment of IPRs are not serious.108 Similarly, the use of property rules for IPRs is not absolute. Every kind of property is subject to a variety of limits.109 Protection of land under property rules is a typical example. There are some exceptions to the use of land, easements and public use for instance. The US Supreme Court in Kelo even supported an economic development purpose in order exceptionally to apply liability rules, instead of absolute property rules, to land. The Court held: [I]t has long been accepted that the sovereign may not take the property of A for the sole purpose of transferring it to another private party B, even though A is paid just compensation. On the other hand, it is equally clear that a State may transfer property from one private party to another if future ‘use by the public’ is the purpose of the taking.110
Property rights are also limited by competition law if the owners engage in conduct infringing competition law. AG Cosmas, in his opinion in Masterfoods, observed: [T]he right to property ownership is safeguarded in accordance with the principles found in the constitutions of the Member States; those fundamental national rules distinguish the core of the right in question, infringement of which is in principle prohibited, from the exercise of that right, which may be restricted on the ground of the general interest in so far as that is necessary. There is no doubt that [competition provisions of] the EC Treaty occupy an important position in the system of the Community legal order and serve the general interest which consists in ensuring undistorted competition. Consequently, it is perfectly comprehensible for restrictions to be placed on the right to property ownership pursuant to [competition law], to the degree to which they might be necessary to protect competition.111
107 108
Sterk, supra note 97, p. 1287. See Lemley and Weiser, supra note 94, p. 841; Nicita and Ramello, supra note 94, pp. 768–769. 109 There are limits based on development, necessity, and equity that ensure a finely calibrated equilibrium in property law. See Carrier, supra note 86, pp. 52–81. 110 Kelo v. City of New London, 545 U.S. 469, 477 (2005). 111 Opinion of AG Cosmas in Case C–344/98, Masterfoods Ltd. v. HB Ice Cream Ltd., [2000] ECR I–11369, para. 105 (citation omitted).
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Therefore, there remain exceptions to a pure property rules treatment of IPRs. The TRIPS Agreement well illustrates this conclusion. Articles 13, 17, 26.2, and 30 of the TRIPS Agreement, as well as WTO dispute settlements, recognize an exception/limitation relating respectively to copyright, trademarks, industrial designs and patents once a three-step test is satisfied: the exception must (i) be limited; (ii) not unreasonably conflict with a normal exploitation of the IP concerned; and (iii) not unreasonably prejudice the legitimate interests of the right holder, taking into account the legitimate interests of third parties.112 Furthermore, the compulsory licensing of patents is permitted under Article 31 of the TRIPS Agreement; and one of the grounds for granting such licences, as presented in Section 1.3.3 below, is to remedy anti-competitive conduct of right holders. Besides, the IP regime’s reliance on either property or liability rules does not, and need not, remain unchanged. Focusing over much on one side of this continuum may negatively affect the whole IP protection system. The Supreme Court of Canada has held: [C]opyright law is neither tort law nor property law in classification, but is statutory law. It neither cuts across existing rights in property or conduct nor falls between rights and obligations heretofore existing in the common law. Copyright legislation simply creates rights and obligations upon the terms and in the circumstances set out in the statute.113
This observation may be applied to other IP. As Mark Lemley argues, because of the uniqueness of IP in its characteristics and needs, IP law should be unique in terms of the applicability of property and liability rules.114 However, at least from the competition law perspective, IP should be treated as property.115 Most of the arguments in favour of the liability rules treatment of IPRs, as noted, are built on the alleged negative effects if the property rules treatment is applied. But an IP regime always consists of builtin limitations, which help minimize these negative effects.116 Such limitations 112 See Canada – Patent Protection of Pharmaceutical Products, WT/DS114/R, circulated on 17 March 2000, para. 7.20; US – Section 110(5) of the US Copyright Act, WT/DS160/R, circulated on 15 June 2000, para. 6.97; EC – TM & GI, WT/DS174/R, supra note 27, paras 7.649, 7.654 and 7.662. 113 Compo Co. Ltd. v. Blue Crest Music et al., [1980] 1 S.C.R. 357, 373–378. 114 Lemley, supra note 80, p. 1075. 115 See the Antitrust–IP Guidelines, Section 2.0; Hovenkamp, Herbert J. (2009), ‘Patents, Property and Competition Policy’, p. 6, available at http://ssrn.com/ abstract=1338899. 116 Limitations on IPRs reflect that the purpose of IPRs is to induce innovation and that too much IP protection can retard innovation. The US Supreme Court has recognized that patents, similarly to other property rights, have limitations because ‘[i]t
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within IP law itself may act as a primary filter. Further, competition law and IP law, as analysed in Section 1.3.1 below, are complementary. Competition law can prevent restrictions on competition and downstream access caused by these negative effects. This second filter, together with the limitations in IP law may, if well enforced, minimize all concerns about the property rules treatment of IPRs. Thus, IPRs should be protected under the property rules. Liability rules should be regarded as an exceptional response to exceptional circumstances under the limitations stipulated in IP law and/or requirements of competition law. Indeed, once the built-in limitations of IPRs and competition law minimize anti-competitive effects of the property treatment of IPRs, this property treatment, in turn, can foster innovation and competition. It may give right holders, particularly small new competitors, ‘IPR slingshots’117 to compete with incumbent firms. In brief, at least from the competition law perspective, IPRs should be treated under property rules; and there is no reason to treat them differently from, or more preferentially than, other forms of property.118 1.2.2
IPRs and Technology Transfer
IPRs are rights to exclude. Therefore, from the theoretical perspective, strong IP protection may lead to both market expansion and market power effects. The stronger IPRs are, the better the right holder can exclude others and the larger market for her technology she may reach. Stronger IPRs may also enable the right holder to charge monopoly prices.119 While market expansion goes in tandem with an increase in technology transfer, market power may create obstacles to technology transfer. Hence, there are two opposing views concerning the interaction between IPRs and international technology transfer. Those who favour strong IP protection argue that strengthening the protection will encourage and increase international technology transfer via the prospect is the public interest which is dominant in the patent system’; these limitations are ‘narrowly and strictly confined to the precise terms of the grant’. Mercoid Corp. v. MidContinental Investment Co., 320 U.S. 661, 665 (1944). 117 Picard v. United Aircraft Corp., 128 F. 2d 632, 643 (2nd Cir. 1942). See also Kieff, F. Scott (2001), ‘Property Rights and Property Rules for Commercializing Inventions’, Minn. L. Rev., 85, 744. 118 US DOJ and FTC (2007), Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, available at www.justice.gov/atr/ public/hearings/ip/222655.pdf, p. 21. 119 Park, Walter G. and D.C. Lippoldt (2008), ‘Technology Transfer and the Economic Implications for the Strengthening of Intellectual Property Rights in Developing Countries’, OECD Trade Policy Working Paper No. 62, TAD/TC/WP(2007)19/FINAL, p. 4; Maskus, Keith E and M. Penubarti (1995), ‘How Trade-Related Are Intellectual Property Rights’, J. Int’l Econo., 39, 229.
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(reward) and disclosure effects. On the other hand, those who oppose strong IP protection contend that the overall effect of IPRs hinders international technology transfer, because such protection enables right holders to maintain high prices and to prevent firms of developing countries from accessing their technology. With the adoption of the TRIPS Agreement, even though the second view seems to have been rejected as a matter of international law, discussions over its effect on international technology transfer continue to be polarized, and arguments concerning either ‘the more IPRs, the better’ or ‘the fewer IPRs, the better’ do not stop. However, the current focus of these discussions should be on how WTO Members can apply flexibilities in the TRIPS Agreement to foster international technology transfer, because: Although there are criticisms from those who believe that it goes too far in some of its requirements, especially for developing countries, and from those who believe that it does not go far enough, no general attempt has as yet been made to reopen it. It may be that both sides of the debate are unsure that seeking to renegotiate the Agreement would necessarily lead to an improvement from their perspective. Much of the ongoing international debate takes the TRIPS Agreement as a given and relates to the scope of the flexibilities that have been internationally recognized in it and the ability of countries to make unfettered use of them.120
From the economic return effects, it is logical to assume that the availability of IP protection would be a prerequisite for technology transfer, at least technology that can be easily copied. Indeed, many developed countries have negotiated and signed bilateral and plurilateral FTAs strengthening IP protection at a higher level, the so-called TRIPS-plus standards, than the minimum standards of the TRIPS Agreement.121 By contrast, due to the legal monopoly power effect, long-run innovation may slow down and technology transfer could be reduced.122 Carlos Correa contends that the strong IPRs under the TRIPS Agreement may increase the global market power of right holders,
120
Otten, Adrian (2007), ‘The TRIPS Agreement – Has It Served Its Purpose Twelve Years on?’, International Review of Intellectual Property and Competition Law (IIC), 38(6), 646. 121 For TRIPS-plus discussions see, e.g., Drahos, Peter (2001), ‘BITs and BIPs: Bilateralism in Intellectual Property’, J. World IP, 4, 791; Okediji, Ruth L. (2004), ‘Back to Bilateralism? Pendulum Swings in International Intellectual Property Protection’, U. Ottawa L. & Tech. J., 1, 127; Correa, Carlos M. (2004), ‘Bilateralism in Intellectual Property: Defeating the WTO System for Access to Medicines’, Case W. Res. J. Int’l L., 36, 79. See also infra Section 3.4.2.3. 122 Yang, Guifang and K.E. Maskus (2005), ‘Intellectual Property Rights and Licensing: An Econometric Investigation’, in Carsten Fink and K.E. Maskus (eds), Intellectual Property and Development: Lessons from Recent Economic Research, New York: WB and OUP, p. 114.
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permitting them to act in monopolistic and abusive ways that would decrease international technology transfer, especially to the poorest countries.123 However, the relationship between levels of IP protection and the volume and direction of inward technology transfer in practice is extremely complex. It doubtless involves many factors, the relative importance of which will vary widely from one country to another.124 The effect of IPRs on international technology transfer is primarily an empirical question. On the basis of empirical evidence from US firms, Lee Branstetter and others conclude that those firms have increased technology transfer to countries which have strengthened their IP regimes.125 As to developing countries, Sanjaya Lall and the World Bank observe that different countries may face different outcomes by strengthening their IP regimes.126 From the Korean experience, Linsu Kim contends that the effects of IPRs on inward technology transfer varied according to countries’ respective levels of economic development and to the technological nature of their economic activities. Strong IP protection tends to hinder rather than facilitate technology transfer in the early stage of industrialization; when a country has accumulated sufficient indigenous capacities with extensive science and technology infrastructures to undertake creative imitation, IP protection becomes an important element in technology transfer.127 According to Keith Maskus, ‘countries with inadequate investment climates and poor absorptive abilities are unlikely to receive much inward technology flows under any circumstances’.128 He remarks that although strengthening IPRs can be an effective means of attracting additional inward technology transfer, many other factors influence technology transfer, including liberalization and deregulation, technology development policy and
123 Correa, Carlos M. (2005), ‘Can the TRIPS Agreement Foster Technology Transfer to Developing Countries’, in Maskus and Reichman (eds), supra note 61, p. 254. 124 UNCTAD-ICTSD, supra note 64, p. 86; Falvey, Rod and N. Foster (2006), The Role of Intellectual Property Rights in Technology Transfer and Economic Growth: Theory and Evidence, Vienna: UNIDO, p. 59. 125 Branstetter, Lee G. et al. (2004), ‘Do Stronger Intellectual Property Rights Increase International Technology Transfer? Empirical Evidence from US Firm-Level Panel Data’, available at http://ssrn.com/abstract=610350. 126 Lall, Sanjaya (2003), ‘Indicators of the Relative Importance of IPRs in Developing Countries’, available at www.ictsd.org/pubs/ictsd_series/iprs/CS_lall.pdf; WB (2001), Global Economic Prospects and the Developing Countries, Washington DC: WB, pp. 129–149. 127 Kim, supra note 18. 128 Maskus, Keith E. (2004), ‘Encouraging International Technology Transfer’, p. 7, available at www.iprsonline.org/unctadictsd/docs/CS_Maskus.pdf.
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competition regimes.129 This observation coincides with the one drawn from recent empirical research by Alter Park and Douglas Lippoldt in 2008, which states: IPRs alone do not determine technological success or even increased access to technology … It is important to note that IPRs do not operate in a vacuum. There are complementary factors that help facilitate technology transfer, such as the quality of infrastructure, government policies and regulations, and market structure, among others. There are also complementary factors that specifically affect innovation and technology diffusion, such as the quality of knowledge institutions … the financial system … availability of trained human capital, and networks for research collaboration or interaction …130
IP protection is one out of many elements affecting decisions of private firms, especially MNCs, to transfer technology to a particular country. Although the facts indicate that enforceable IPRs are neither necessary nor sufficient to establish robust inflows of technology, they can be an important factor influencing the volume and quality of transferred technology.131 The globalization of IPRs under the TRIPS Agreement raises complex questions. But these all boil down to one major question, namely, how flexibilities in the TRIPS Agreement can be interpreted and applied to increase international technology transfer and boost economic development and social/consumer welfare. 132 As Sir Hugh Laddie observes: [F]or too long IPRs have been regarded as food for the rich countries and poisons for poor countries … it is not simple as that. Poor countries may find them useful provided they are accommodated to suit local palates.133
Developing country Members are entitled to use flexibilities in the TRIPS Agreement in order to establish an appropriate approach to gaining access to technology in general and advanced, modern technology in particular. However, there is no single correct recipe for using these flexibilities to ensure technology is indeed transferred into developing countries.
129
Maskus, Keith E. (2004), ‘The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology Transfer’, in Fink and Maskus (eds), supra note 122, pp. 70–71. 130 Park and Lippoldt, supra note 119, p. 29. 131 Maskus, supra note 128, p. 29; Falvey and Foster, supra note 124, pp. 23–42. 132 Lamy, supra note 32, p. 924. 133 Commission on Intellectual Property Rights, supra note 19, p. iv.
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1.2.3
Technology Transfer-oriented Provisions of the TRIPS Agreement
The key objective of the WTO is to promote trade and economic development.134 As a result, the TRIPS Agreement, in the first recital of its Preamble, indicates that its principal objective, which is to ‘reduce distortions and impediments to international trade’, consists of international technology transfer promotion. The effective and adequate IP protection by minimum standards provided by the TRIPS Agreement is just a means to achieve its principal objective. Furthermore, it also stresses that it is important that measures and procedures to enforce IPRs ‘do not themselves become barriers to legitimate trade’.135 Besides, the fifth recital of its Preamble recognizes ‘the underlying public policy objectives of national systems for the protection of intellectual property, including developmental and technological objectives’; and the sixth recital emphasizes the need for ‘maximum flexibility’ in favour of LDC Members.136 Thus, even though the Preamble to the TRIPS Agreement does not contain any direct reference to technology transfer, it indirectly encourages this activity. This is clearly confirmed in Article 7 of the TRIPS Agreement under the heading ‘objectives’: The protection and enforcement of intellectual property rights should contribute to the promotion of technological innovation and to the transfer and dissemination of technology, to the mutual advantage of producers and users of technological knowledge and in a manner conducive to social and economic welfare, and to a balance of rights and obligation.137
Article 7 explicitly affirms that IPRs are not an end in themselves. The protection and enforcement of IPRs are a means that ‘should contribute’ to objectives of social and economic welfare development, one of which is the transfer and dissemination of technology. Although an IP regime cannot by itself promote the transfer and dissemination of technology, it should be built to support such an objective. The word ‘should’ in this circumstance does not mean that Article 7 is a mere discretionary provision. WTO Members must, accordingly, implement their obligations under the TRIPS Agreement in a way that effectively contributes to the encouragement of the transfer and diffusion of technology. Even if Article 7 is not viewed as an operative provision, it provides 134 Preamble to the Marrakesh Agreement Establishing the WTO, available at www.wto.org. 135 Preamble to the TRIPS Agreement; Canada – Pharmaceutical Patent, supra note 112, para. 4.30. 136 See UNCTAD-ICTSD, supra note 30, pp. 10–11. 137 Article 7 of the TRIPS Agreement (emphasis added).
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guidance for the interpretation of the TRIPS Agreement.138 The WTO Panel in Canada – Pharmaceutical Patent stated: Obviously, the exact scope of Article 30’s authority [on exceptions to rights conferred] will depend on the specific meaning given to its limiting conditions. The words of those conditions must be examined with particular care on this point. Both the goals and the limitations stated in Articles 7 and 8.1 must obviously be borne in mind when doing so as well as those of other provisions of the TRIPS Agreement which indicate its object and purposes.139
In addition to Article 7, Article 8 of the TRIPS Agreement also establishes principles in favour of transfer and dissemination of technology. Article 8.1 permits WTO Members to adopt necessary measures ‘to promote the public interests in sectors of vital importance to their socio-economic and technological development’. Article 8.2 recognizes the need to take appropriate measures to prevent the resort to practices which ‘adversely affect the international transfer of technology’. Consequently, encouraging technology transfer is one of the most important objectives of the TRIPS Agreement. It should be taken into account and invoked when this agreement is interpreted. Paragraph 5(a) of the Doha Declaration on the TRIPS Agreement and Public Health reaffirms that ‘each provision of the TRIPS Agreement shall be read in the light of the object and purpose of the Agreement as expressed, in particular, in its objectives and principles’.140 However, flexibilities in encouraging technology transfer must be consistent with other provisions of the TRIPS Agreement, the principle of nondiscrimination with respect to patents in Article 27.1 for instance. The Panel in Canada – Pharmaceutical Patent also noted: [T]o the extent the prohibition of discrimination does limit the ability to target certain products in dealing with certain of the important national policies referred to in Articles 7 and 8.1, that fact may well constitute a deliberate limitation rather than a frustration of purpose.141
Although encouraging and promoting technology transfer is one of the objectives of the TRIPS Agreement, one essential concern has been raised, and continues to be raised. It is whether international technology transfer, especially the technology transfer from developed country Members to developing
138 139 140
Correa, supra note 123, p. 234. Canada – Pharmaceutical Patent, supra note 112, para. 7.26. WTO (2001), ‘Doha Declaration on the TRIPS Agreement and Public Health’, WT/MIN(01)/DEC/2. 141 Canada – Pharmaceutical Patent, supra note 112, para. 7.92.
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country Members, actually takes place when IP protection merely provides a platform for technology transfer but does not guarantee the transfer in practice. Technology transfer, as noted, varies from one country to another and depends on many factors. However, within the scope of an IP regime, to some extent the existing provisions of the TRIPS Agreement can provide some possible solutions to this issue. The TRIPS Agreement provides limitations and exceptions to the exclusive rights conferred on right holders if a three-step test is satisfied.142 Furthermore, Article 31 of the TRIPS Agreement regulates compulsory licensing. It permits a third party other than the holder of a patent on an invention to use that invention without the consent of the patent holder, by the authorization of a competent authority. While exceptions such as the ones relating to research and experimentation, early working, individual prescriptions, prior use, parallel import, etc. establish general effects on right holders and authorized parties, compulsory licensing is specifically authorized on a case-by-case basis. It is directed to an identified patent and authorized party. Article 31 does not specify or limit in any way the grounds upon which such compulsory licences may be granted. This is confirmed in the Doha Declaration on the TRIPS Agreement and Public Health, which states that ‘each Member has the right to grant compulsory licences and the freedom to determine the grounds upon which such licences are granted’.143 However, national competent authorities must fulfil certain conditions and follow the procedures regulated in Article 31 before granting compulsory licences, which cover such issues as individual merits, prior negotiations, specific scope and duration, non-exclusive and non-assignable licences, predominant supply for the domestic market, adequate remuneration, and review by judicial or distinct higher authority.144 Such conditions are criticized as ‘flawed with a number of unclear notions, which have created tensions regarding when and how compulsory licensing may be applied’,145 especially the requirement in Article 31(f) that compulsory licensing ‘shall be authorized predominantly for the supply of the domestic market’ of a WTO
142 143
See supra note 112. WTO, supra note 140, para. 5(b). See also Correa, Carlos M. (1999), Intellectual Property Rights and the Use of Compulsory Licenses: Options for Developing Countries, Geneva: South Center; Reichman, Jerome H. and C. Hasenzahl (2003), Non-voluntary Licensing of Patented Inventions: Historical Perspective, Legal Framework under TRIPS, and an Overview of Practice in Canada and the United States of America, Geneva: UNCTAD-ICTSD. 144 See UNCTAD-ICTSD, supra note 30, pp. 460–488. 145 Lidgard, Hans Henrik and J. Atik (2006), ‘Facilitating Compulsory Licensing under TRIPS in Response to the AIDS Crisis in Developing Countries’, in Boel Flodgren (ed.), Corporate and Employment Perspective in a Global Business Environment, Alphen aan den Rijn: Kluwer Law International, p. 54.
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Member authorizing such compulsory licensing. This requirement prevents WTO Members with no production capacity from relying on importation. As a result, on 30 August 2003, the General Council of the WTO adopted the Decision on Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health. According to this decision, the obligations of an exporting Member under Article 31(f) shall be waived with respect to the grant by that Member of a compulsory licence to the extent necessary for the purposes of production of pharmaceutical products and export of those products to an eligible importing Member.146 On the basis of the substance of this decision, the General Council on 6 December 2005 adopted a protocol amending the TRIPS Agreement (proposed Article 31bis) and submitted it to WTO Members for acceptance.147 By reasonably invoking the compulsory licensing rules of the TRIPS Agreement or the threat thereof, developing countries, at least those where potential recipients have enough technological and entrepreneurial capacities, can make technology transfer a reality. With respect to LDCs, the desirability of technology transfer to LDC Members arises in Article 66(2), which states: Developed country Members shall provide incentives to enterprises and institution in their territories for the purpose of promoting and encouraging technology transfer to least-developed country Members in order to enable them to create a sound and viable technological base.
This provision places a mandatory obligation on developed country Members to promote and encourage technology transfer to LDC Members.148 However, the scope and nature of the obligation are not defined in any detail. In order to establish a mechanism for ensuring the monitoring and full implementation of the obligation, the TRIPS Council requires developed country Members to submit annual reports on actions taken or planned in pursuance of their commitments under Article 66.2. On the basis of these submissions, which are reviewed by the Council annually, WTO Members discuss ‘the effectiveness of the incentives provided in promoting and encouraging technology transfer to least-developed country Members’.149 Nevertheless, it is important to see
146 WTO (2003), ‘Decision of the General Council of 30 August 2003 on Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health’, WT/L/540. 147 WTO (2005), ‘Amendment of the TRIPS Agreement’, WT/L/641. 148 Para. 7 of the Doha Declaration on the TRIPS Agreement and Public Health, supra note 140; WTO (2001), ‘Decision on Implementation-Related Issues and Concerns’, WT/MIN(01)/17, para. 11.2. 149 WTO (2003), ‘Decision of the Council for TRIPS on Implementation of Article 66.2 of the TRIPS Agreement’, IP/C/28.
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what can be done to make sure that those incentives are not only adopted but actually implemented; and such incentives must actually promote and encourage not only the transfer of non-proprietary technology, such as knowledge provided by consultants, machinery manufacturers and other suppliers, but also the transfer of IPR-intensive technology such as patent and know-how licensing.150 In addition, Article 67 obligates developed country Members, on request and on mutually agreed terms and conditions, to provide technical and financial cooperation in favour of developing country and LDC Members. To sum up, the TRIPS Agreement establishes a legal framework for promoting and encouraging technology transfer, especially technology transfer from developed country Members to developing country Members. Nevertheless, how technology transfer takes place in reality partly depends on how developing country Members use flexibilities in the TRIPS Agreement in order to promote inflows of technology transfer. There is no one-size-fits-all approach for all Members. Furthermore, proper implementation of the developed country Members’ obligations relating to technology transfer also plays an important role. Even if right holders, especially MNCs, agree to transfer technology, technology transfer agreements may contain restrictive clauses that harm the socio-economic interests and consumer welfare of host countries. That is why competition rules are contained in the TRIPS Agreement.
1.3
THE TRIPS AGREEMENT AND COMPETITION RULES
The TRIPS Agreement, which contains some competition provisions, appeared in 1994. However, the intersection of IPRs and competition has been under discussion for a long time. This intersection and its history are reviewed first, after which the provisions concerned in the TRIPS Agreement are analysed. 1.3.1
IPRs and Competition Law
The relationship between IPRs and competition law has been at the centre of debate for many years.151 The temporary legal monopoly granted by IP law to 150 Correa, supra note 123, pp. 252–253; Forey, Dominique (2009), Technology Transfer in the TRIPS Age – The Need for New Types of Partnerships between the Least Developed and Most Advanced Economies, Geneva: ICTSD. 151 WTO (1998), ‘Communication from the European Community and Its Member States: On the Relationship between the Trade-Related Aspects of Intellectual Property Rights and Competition Policy, and between Investment and Competition Policy’, WT/WGTCP/W/99, para. 1.
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a right holder may, depending on the availability of substitutes in the relevant market, lead to market power and even economic monopoly, both as defined under competition law. This has raised an alleged source of conflict between competition law and IP law, and a claim that competition law takes away what IP law provides.152 Exclusive rights granted by IP law seek to protect IPRs and, in doing so, limit competition. Thus, IP protection may be criticized, under the competition perspective, for creating monopoly rights which will be against consumer interests. In contrast, competition law generally reflects the premise that consumer welfare is best served by removing impediments to competition. From the perspective of IPRs, competition law may be considered as an interventionist instrument, which infringes right holders’ entitlements and thereby affects the very foundations of IP law. Consequently, IP law may endanger competition law and vice versa. From the perspective of economic efficiency,153 the relationship between competition law and IP law can be reflected by the relationship between static efficiency and dynamic (or innovation) efficiency. Both of them measure the efficiency of the market either at a particular point of time (for static efficiency) or over time (for dynamic efficiency). 154 Static efficiency refers to the reduction of costs and prices, and the increase of quantity (and/or quality to some extent) at given prices. On the other hand, dynamic efficiency involves the increase of novelty and improvement through new products, processes, services or ways of doing business. Static efficiency reflects a ‘tendency of a marketplace to reduce costs by refining existing products and capacities’.155 It
152
Peeperkorn, Luc (2003), ‘IP Licences and Competition Rules: Striking the Right Balance’, World Comp., 26(4), 539–564. 153 Economic efficiency reflects ‘a decision or event that increases the total value of all economically measurable assets in the society or total welfare’. Brodley, Joseph F. (1987), ‘The Economic Goals of Antitrust: Efficiency, Customer Welfare, and Technology Progress’, N.Y.U. L. Rev., 62, 1025. This efficiency ‘is a measure of how much wealth is created in proportion to the inputs used: the more efficient a process, the more output it can create or the more inputs it can save for other uses, and the more wealth results’. Barnett, Thomas O. (2008), ‘Maximizing Welfare through Technological Innovation’, Geo. Mason L. Rev., 15, 1194. 154 Anderman, Steven D. and J. Kallaugher (2006), Technology Transfer and the New EU Competition Rules: Intellectual Property Licensing after Modernization, Oxford: OUP, pp. 70–72; Evenett, Simon J. (2005), ‘What Is the Relationship between Competition Law and Policy and Economic Development’, in Douglas H. Brooks and S.J. Evenett (eds), Competition Policy and Development in Asia, Basingstoke: Palgrave Macmillan, p. 3. 155 Masoudi, Gerald F. (2006), ‘Intellectual Property and Competition: Four Principles for Encouraging Innovation’, available at www.usdoj.gov/atr/public/ speeches/215645.pdf.
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requires the maximization of the use of a given amount of resources. Static efficiency consists of productive efficiency and allocative efficiency. Productive efficiency is achieved when products are produced cost-effectively under existing technology, i.e. at the lowest possible cost-level. Allocative efficiency occurs when the prices of products are driven down to a level close to production costs, i.e. marginal cost. This means that static efficiency is expressed mainly through the competition parameters of price and quantity. Competition law protects static efficiency by eliminating artificial restraints, i.e. collusion and monopolization (or abuse of a dominant position), and promoting the entry of new competitors in order to leave more benefits and surplus in the hands of consumers. However, static efficiency alone is not sufficient to ensure economic efficiency and competition welfare.156 The major impetus to growth and welfare comes from dynamic (or innovation) efficiency, which refers to the gains that result from entirely new ways of doing business through investments in innovation, aiming at both creating new or improved products and reducing the costs of existing ones.157 Dynamic efficiency provides consumers with ‘a wider choice of new or improved goods and services’.158 As Josef Schumpeter observed: The fundamental impulse that sets and keeps the capitalist engine in motion comes from the new consumers, goods, the new methods of production or transportation, the new markets, the new forms of industrial organization that capitalist enterprise creates … [It is] the competition from the new commodity, the new technology, the new source of supply, the new type of organization … which commands a decisive cost or quality advantage and which strikes not at the margins of the profits and the outputs of the existing firms but at their foundations and their very lives. This kind of competition [which] is much more effective than the other [is] the powerful lever that in the long run expands output and brings down prices …159
156 Competition welfare includes economic efficiency (dynamic, productive, and allocative efficiency), consumer welfare and inter-firm rivalry. Consumer welfare may be defined as the maximization of consumer surplus, which is reflected in lower prices, more quantity, better quality and a wider choice of new or improved goods and services. See Brodley, supra note 1535, p. 1023; Article 82 EC Guidance, paras 5 and 19; Cseres, K.J. (2006), ‘The Controversies of the Consumer Welfare Standard’, Comp. L. Rev., 3(2), 121–173; Werden, Gregory J. (2009), ‘Essays on Consumer Welfare and Competition Policy’, available at http://ssrn.com/abstract=1352032. 157 See Masoudi, supra note 155. 158 Article 82 EC Guidance, para. 5. 159 Schumpeter, Josef (1976), Capitalism, Socialism and Democracy, New York: Harper & Row, pp. 83–85.
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The essential impact of dynamic efficiency on economic growth, or ‘technological change’160 or ‘technological progress’ in the terms of Robert Solow’s contribution to the theory of economic growth, was ultimately expressed in his Nobel prize lecture in 1987 where he claimed that the permanent rate of growth ‘depends entirely on the rate of technological progress in the broadest sense’.161 Innovation furthers economic efficiency more than any policy that drives prices to marginal cost or reduces production costs. However, many risky investments must be made in order to achieve dynamic efficiency. If competitors can rapidly free-ride a new innovation and drive production costs and prices to their lowest levels, this adversely affects the chances to recoup and get benefits from such investments as carried out by innovators and investors. This in turn impairs growth and competition welfare. Dynamic efficiency, therefore, cannot be gained without more concentrated markets. Concentrated markets may, nevertheless, lead to static efficiency losses. However, as mentioned, the meaning of ‘monopoly’ conferred on a right holder is the right to exclude others. It is merely a legal monopoly. It is not equivalent to economic monopoly under competition law, which gives a monopolist the power over prices enabling him to ‘set a price significantly above the competitive level and to sustain such a price for a substantial period of time’.162 Accordingly, the short-term approach has been replaced by a longer-term view, which acknowledges some restrictions of competition today in order to promote competition in new products and processes tomorrow.163 Almost all scholars and practitioners now concur that the goals of competition law and IP law are complementary and mutually reinforcing. They share the common purpose of promoting innovation and commercialization, and enhancing and benefiting consumer welfare as well as efficiently allocating economic resources.164
160
Solow, Robert M. (1956), ‘A Contribution to the Theory of Economic Growth’, Quarterly J. Econo., 70(1), 65. 161 Solow, Robert M. (1987), ‘Growth Theory and After’, available at http://nobelprize.org/nobel_prizes/economics/laureates/1987/presentation-speech. html. 162 Sullivan, Lawrence A. and W.S. Grimes (2006), The Law of Antitrust: an Integrated Handbook, St. Paul, MN: Thomson West, p. 98; Guidelines on the treatment of intellectual property rights of the CCS, June 2007, para. 2.5. 163 Gallini, Nancy T. and M. Trebilcock (1998), ‘Intellectual Property Rights and Competition Policy: A Framework for Analysis of Economic and Legal Issues’, in OECD, ‘Competition Policy and Intellectual Property Rights’, DAFFE/CLP(98)18, pp. 325–326. 164 See, e.g., Carrier, Michael A. (2009), Innovation for the 21st Century:
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Competition authorities of the three largest and most innovative countries/regions in the world have accepted this view. The US Antitrust Guidelines for the Licensing of Intellectual Property in 1995 state: The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare. The intellectual property laws provide incentives for innovation and its dissemination and commercialization by establishing enforceable property rights for the creators of new and useful products, more efficient processes, and original works of expression … The antitrust laws promote innovation and consumer welfare by prohibiting certain actions that may harm competition with respect to either existing or new ways of serving consumers.165
In other words, both law systems ‘work in tandem to bring new and better technologies, products, and services to consumers at lower prices’.166 The European Commission Guidelines on the application of Article 81 EC to technology transfer agreements in 2004 express themselves similarly: Both bodies of law share the same basic objective of promoting consumer welfare and an efficient allocation of resources … Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new or improved products and processes. So does competition by putting pressure on undertakings to innovate. Therefore, both intellectual property rights and competition are necessary to promote innovation and ensure a competitive exploitation thereof.167
In its Guidelines for the Use of Intellectual Property under the Anti-monopoly Act promulgated in 2007, the Fair Trade Commission of Japan, after confirming the pro-competitive effects of the IP system as well as the negative effects suffered by competition in technology, contends that: [In] applying the Anti-monopoly Act, it is important for competition policy to insulate competition in technologies and products from any negative effect caused by any restrictions deviating from the purposes of the intellectual property systems, with fully activating the effect of promoting competition.168
Harnessing the Power of Intellectual Property and Antitrust Law, New York: OUP; Bowman, Ward S. (1973), Patent and Antitrust Law: A Legal and Economic Appraisal, Chicago, IL: University of Chicago Press, p. 1; European Commission Evaluation Report on the Transfer of Technology Block Exemption Regulation No. 240/96, COM(2001)786 final, 20 Dec. 2001, paras 28–35 and 190. 165 Antitrust–IP Guidelines, Section 1.0 (emphasis added). See also Atari Games Corp. v. Nintendo of Am., 897 F. 2d 1572, 1576 (Fed. Cir. 1990). 166 US DOJ and FTC, supra note 118, p. 1. 167 EU TT Guidelines, OJ 2004 C 101/2, para. 7 (emphasis added). 168 Japan’s Fair Trade Commission Guidelines for the Use of Intellectual Property under the Anti-monopoly Act, 28 Sept. 2007, Section 1.1.
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The complementarity between competition law and IP law is also explicitly confirmed by competition authorities in other countries. The Competition Commission of Singapore enacted in 2007 the Guidelines on the treatment of IPRs under competition law, which read: Both [IP] and competition laws share the same basic objective of promoting economic efficiency and innovation. IP law does this through the provision of incentives for innovation and its dissemination and commercialisation, by establishing enforceable property rights for the creators of new and improved products and processes. Competition law does this by helping to promote competitive markets, thereby spurring firms to be more efficient and innovative.169
In discussions within the WTO Working Group on the Intersection between Trade and Competition Policy, in addition to the minority approach emphasizing the dichotomy between IP law and competition law, which requires ‘a careful meshing’ between these two legal systems, the majority takes the view that there is ‘a basic complementarity’. It is argued that while IP law establishes the market in which IPRs are created, valued and exchanged, competition law ensures that the market assigns a fair and efficient value to this property.170 Although both competition and IP laws aim to promote innovation, both will discourage it if they are pursued either too strongly or too weakly. From the IP perspective, if it is too easy to obtain IPRs, patents for instance, potential innovators may be discouraged from innovating because there are too many parties with too many patents. This leads to a situation where it is too difficult and expensive to determine which licences are needed and from whom. From the competition perspective, if competition law enforcement is pursued so strongly that competitors are allowed easy access to their competitor’s innovation, there will be few incentives to innovate and commercialize innovation.171 Still, the fact that IP law grants exclusive rights of exploitation does not imply that IPRs are immune from the intervention of competition law.172 IPRs
169 170
The Guidelines of the CCS, supra note 162, para. 2.1. WTO (1998), ‘Report (1998) of the Working Group on the Interaction between Trade and Competition Policy to the General Council’, WT/WGTCP/2, paras 113–122; WTO (1998), ‘Report on the Meeting of 28–29 September 1998’, WT/WGTCP/M/6, paras 4 and 17–18. See also infra Section 4.1.3.1. 171 OECD (2005), ‘Intellectual Property Rights’, DAD/COMP(2004)24, pp. 17–18. 172 See EU TT Guidelines, paras 6–7; Joined Cases 56/64 and 58/64, Consten & Grundig v. Commission, [1966] ECR 299.
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‘do not confer a privilege to violate’ competition law.173 The existence of legal monopoly rights conferred by IP law does not in itself infringe competition law; but such rights could be exercised and exploited in such a way, and to such an extent, that competition law could be infringed. Competition law should be applied to ensure that consumers can benefit from the best quality products at the lowest prices. That is why, despite the fact that the exercise of IPRs is already extensively regulated by IP law by way of scope and duration rules and various exceptions,174 an extra filter of regulation is added by competition law. This second filter aims at ensuring that the grant of exclusivity by IP law is not abused, or misused, by anti-competitive licensing agreements, monopolistic conduct, or other anti-competitive practices, which deny parties access to a market and harm consumer welfare.175 Competition law, nevertheless, cannot be an excuse for bad IP law that cannot establish an internal balance within itself as the first filter.176 To conclude, IPRs should be regarded as being in themselves pro-competitive unless unilateral or concerted practices transformed them into an anticompetitive tool. From the competition law perspective, as noted, IPRs are regarded as private property rights which could, therefore, be abused.177 Both IP law and competition law, which are regarded as respectively the first filter
173
In US v. Microsoft Corp., 253 F.3d 34, 63 (DC Cir. 2001), the Federal Circuit confirmed that the proposition that the exercise of IPRs lawfully acquired cannot give rise to antitrust liability ‘is no more correct than the [one] that use of one’s personal property, such as a baseball bat, cannot give rise to tort liability’. 174 Under the TRIPS Agreement, an invention is patentable if it is new, nonobvious and useful (Article 27.1). Further, there are conditions concerning sufficiently clear and complete disclosure of invention on patent applicants (Article 29). Even if the invention meets those criteria, it may be excluded from patentability if it is contrary to ordre public, or morality, or other specific circumstances (Article 27.2 and 27.3). The monopoly rights of the patent holder are limited to a specific period of time, but at least twenty years counted from the filing date (Article 33), with some exceptions and other use not needing authorization of the patent holder (Articles 30 and 31). 175 Anderman, Steven D. (1998), EC Competition Law and Intellectual Property Rights, Oxford: Clarendon Press, p. 5. According to Ghosh, competitive baselines for IP systems can be developed in many ways: through competition law, through administrative agencies, through limits within IP law itself, or a combination of these and other means. See Maskus and Reichman (eds), supra note 123, p. 811. 176 The US Supreme Court observed that patent law ‘itself reflects a balance between the need to encourage innovation and the avoidance of monopolies which stifle competition without any concomitant advance in the “Progress of Science and useful Act”’. Botino Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 146 (1989). See also Recital 47 of Directive 96/9/EC of the European Parliament and of the Council of 11 March 1996 on the legal protection of databases, OJ 1996 L 77/20. 177 WIPO (2008), ‘Draft Report of the Second Session of the CDIP’, CDIP/2/4 Prov., paras 342 and 348.
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and the second filter, should control and prevent IPR-related abuses. They are both seen as part of competition policy178 in which IP law creates the market for innovations and their commercialization, while competition law controls and corrects malfunctions of that market. 1.3.2
Pre-TRIPS Agreement
Along with the trend towards international trade liberalization through agreements among countries for the removal of state-raised tariff and non-tariff barriers, the control of barriers raised by private firms through anticompetitive practices which hindered such trade has long been under review. In 1926, in a study submitted to the Preparatory Committee for the World Economic Conference under the auspices of the League of Nations (the predecessor of the UN), a multilateral convention for the unification of national laws on restrictive business practices was proposed.179 After World War II, the idea of a restrictive business practice code was widely supported. Consequently, the Havana Charter for an International Trade Organization (ITO), which was drafted in 1948 under the auspices of the Economic and Social Council of the UN, contained a separate chapter (Articles 46–52) dealing with restrictive business practices.180 Article 46 of the Havana Charter required members to take appropriate measures and cooperate with the ITO in order to prevent restrictive business practices affecting international trade, which restrained competition, limited access to markets, or fostered monopolistic control. ITO country members could make complaints relating to specific kinds of anti-competitive practices to the ITO, which would be subject to its investigation and dispute settlement procedures. Of the restrictive business practices listed in Article 46.3, there were two types of IPR-related practices, namely: (e) preventing by agreement the development or application of technology or invention whether patented or unpatented; (f) extending the use of rights under patents, trademarks or copyrights granted by any Member to matters which, according to its laws and regulations, are not within the scope of such grants, or to products or conditions of production, use or sale which are likewise not the subject of such grants.
178 Ghosh, Shubha (2009), ‘Intellectual Property Rights: The View from Competition Policy’, Nw. U. L. Rev. Colloquy, 103, 344–348. 179 Furnish, Dale B. (1970), ‘A Transnational Approach to Restrictive Business Practices’, Int’l L., 4, 318–319. 180 Final Act of the UN Conference on Trade and Employment: Havana Charter for an International Trade Organization, available at www.worldtradelaw.net/misc/ havana.pdf.
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These practices reflected the intention of the Charter’s drafters to control anticompetitive practices relating to IPRs. However, the Havana Charter was never ratified. In 1980, the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices was adopted by the UN by a consensus resolution – which creates voluntary guidelines – with the objective: To ensure that restrictive business practices do not impede or negate the realization of benefits that should arise from the liberalization of tariff and non-tariff barriers affecting world trade, particularly those affecting the trade and development of developing countries.181
More importantly, in order to promote, set forth principles on, and eliminate restrictive business practices in technology transfer, negotiations on a draft of the International Code of Conduct on the Transfer of Technology (ToT Code) took place under the aegis of the UNCTAD from the 1970s to 1985 as a result of the growing influence of developing countries within the UN system. The 1985 version of the ToT Code listed fourteen restrictive practices which it was forbidden to incorporate in a technology transfer agreement. They were: exclusive grant-back provisions, challenges to validity, exclusive dealing, restrictions on research, restrictions on use of personnel, price fixing, restrictions on adaptations, exclusive sales or representation agreements, tying agreements, export restrictions, patent pools or cross-licensing agreements and other arrangements, restrictions on publicity, payments and other obligations after expiration of industrial property rights, and restrictions after expiration of arrangement.182 Due to dissension between developed countries and developing countries and changes in the world economic and political situation, the ToT Code negotiations never became an international legal document.183 However, those negotiations have been, and continue to be, ‘a point of reference for negotiators and policy makers’ in the international law and policy on technology transfer-related competition issues.184 181 The United Nations Set of Principles and Rules on Competition, TD/RBP/ CONF/10/Rev.2, p. 8, available at www.unctad.org/en/docs/tdrbpconf10r2. en.pdf. 182 Chapter 4 of the 1985 version of the ToT Code, in UNCTAD (2001), Compendium of International Arrangements on Technology Transfer: Selected Instruments, Geneva: UNCTAD, pp. 266–269. 183 See Patel, Surendra et al. (eds) (2001), International Technology Transfer: The Origins and Aftermath of the United Nations Negotiations on a Draft Code of Conduct, The Hague: Kluwer Law International; Sell, Susan K. (1998), Power and Ideas: North–South Politics of Intellectual Property and Antitrust, New York: State University of New York Press. 184 Touscoz, Jean (2001), ‘A Changing Policy Landscape’, in Patel et al. (eds), supra note 183, p. 293. See also infra Section 3.1.1.
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Next, with the aim of establishing competition rules by way of a plurilateral trade agreement in a post-GATT trade organization, a draft of an International Antitrust Code (Munich Code) was submitted to the GATT General Director by a group of distinguished scholars in 1993.185 The Munich Code was built upon five principles, namely application of substantive national law for the solution of international cases, national treatment, minimum standards for national law, international procedural initiatives (establishing an international antitrust agency), and cross border situations. Regarding restraints in connection with IPRs, the Munich Code recognized that the exercise of IPRs within the limits of the legal content of such rights would not restrain competition; but when their exploitation exceeds the limits of their legal content, any resulting restraint of competition may be illegal. It stated: It is part of the legal content of an intellectual property right to grant, during the life of the right, licences which may be exclusive and territorially restricted and to impose on a licensee justified obligations and restrictions.186
In addition to the above-mentioned international proposals, there have been some regional proposals or agreements containing IPR-related competition issues. For example, the North American Free Trade Agreement (NAFTA) contains one chapter (Chapter 15) regulating competition policy, monopolies and state enterprises. Furthermore, the NAFTA Agreement stipulates: Nothing … shall prevent a Party from specifying in its domestic law licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. A Party may adopt or maintain, consistent with the other provisions of this Agreement, appropriate measures to prevent or control such practices or conditions.187
However, it is regrettable that no party to the NAFTA Agreement may have recourse to dispute settlement for matters relating to competition law.188 It is worth noting that the Paris Convention for the Protection of Industrial Property also addresses patent abuses. Article 5.A(2) states:
185 International Antitrust Code Working Group (1993), ‘Draft International Antitrust Code’ (Munich Code), Antitrust & Trade Regulation Report, Special Supplement, Issue No. 1628. 186 Article 6 (and also Article 4) of the Munich Code, ibid. (emphasis added). 187 Article 1704 of the NAFTA Agreement (emphasis added). It is similar to Article 40 of the TRIPS Agreement. 188 Article 1501.3 of the NAFTA Agreement. In this respect, many other competition rules contained in FTAs have a similar provision.
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Competition law, technology transfer and the TRIPS Agreement Each country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work.189
However, the prevention of patent abuses was incorporated into the Paris Convention only at the Revision Conference in The Hague in 1925.190 It initially aimed to give each contracting party the right to grant compulsory licences, instead of patent forfeiture, in a case of failure to work. The patent abuses in the Paris Convention are most probably to be interpreted narrowly; they involve only a local working requirement, rather than anti-competitive practices relating to patents in general. On the other hand, they may perhaps be interpreted broadly, the failure to work merely providing a specific example of patent abuses. To be then read together with other provisions of Article 5.A, such abuses may include refusal to license on reasonable terms and conditions that impedes industrial development, insufficient supply or excessive pricing of patented products.191 On the basis of this interpretation, one may say that the incorporation of such patent abuses ‘could be seen as a timid early step in the internationalization of the law of the intellectual property/antitrust interface’.192 However, Article 5.A(2) merely provides contracting parties with ‘the right to take legislative measures’, rather than the obligation to do so. Such an obligation was not seriously considered at the international level until the adoption of the WIPO Development Agenda in 2007.193 1.3.3
Competition Rules in the TRIPS Agreement
1.3.3.1 Introduction The negotiating history of the TRIPS Agreement reflects the serious concerns of the developing countries regarding the adverse effects of IPR-related anticompetitive practices after the unsuccessful negotiations on the ToT Code in the 1970s–1980s. In contrast, developed countries with established rules for
189 Article 5.A(2) of the Paris Convention as revised at Stockholm in 1967 and as amended in 1979 (emphasis added). For a historical overview of the evolution of Article 5.A of the Paris Convention see Reichman and Hasenzahl, supra note 143, pp. 28–29. 190 Bodenhausen, G.H.C. (1968), Guide to the Application of the Paris Convention for the Protection of Industrial Property, Geneva: BIRPI, p. 68. 191 Ibid., pp. 67–73. See also the interpretation of Article 5.A(2) of the Paris Convention made by the Supreme Court of the Philippines in infra Section 3.1.2.2. 192 Hovenkamp et al., supra note 74, supp., pp. 40(2)–40(41). 193 See infra Section 4.1.3.5.
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control of these practices were initially uninterested in having such rules in the TRIPS Agreement.194 As a result of mutual concessions, even though the TRIPS Agreement is an international convention dealing with IPRs, it also contains a modicum of competition rules, namely Articles 8.2, 31(k), and 40.195 Under the heading ‘principles’, Article 8.2 states: Appropriate measures, provided that they are consistent with the provision of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders or the resort to practices which unreasonably restrain trade or adversely affect the international transfer of technology.
This Article recognizes WTO Members’ power in formulating or amending their domestic legislation to adopt appropriate measures in order to prevent three inter-dependent kinds of IPR-related practices: (i) IPR abuses by right holders; (ii) practices that unreasonably restrain trade; and (iii) practices that adversely affect international technology transfer. Such restrictive practices cover both unilateral abuse by a firm and contractual restraints on IPR-related trade. Article 8.2, read in conjunction with Article 48.1, which regulates compensation for the injury of a third party caused by abuses of IPR enforcement procedure,196 can apply to anti-competitive abuses of IPR enforcement procedures, sham litigation for instance. However, due to the scope of the TRIPS Agreement, Article 8.2 does not apply to other potentially anti-competitive arrangements, the primary object of which does not directly relate to IPRs, such as mergers and acquisitions as well as joint ventures.197 Regarding anti-competitive practices in contractual licences, Article 40, as a lex specialis provision in the relation with Article 8.2, provides:
194 195
UNCTAD-ICTSD, supra note 30, pp. 543–546. Articles 6, 31(c), and 37.2 of the TRIPS Agreement, to some extent, may be also regarded as competition rules. Section 1.3.3 above draws on two articles, namely Nguyen, Tu T. (2008), ‘Competition Rules in the TRIPS Agreement – The CFI’s Ruling in Microsoft v. Commission and Implications for Developing Countries’, IIC, 39(5), 559–567; and Nguyen, Tu T. and H.H. Lidgard (2008), ‘The CFI Microsoft Judgment and TRIPS Competition Flexibilities’, Currents: Int’l Trade L. J., 16(3), 44–47. 196 Article 48.1 of the TRIPS Agreement says that ‘[t]he judicial authorities shall have the authority to order a party at whose request measures were taken and who has abused enforcement procedures to provide to a party wrongfully enjoined or restrained adequate compensation for the injury suffered because of such abuse’. 197 UNCTAD-ICTSD, supra note 30, p. 547; Ullrich, Hanns (2005), ‘Expansionist Intellectual Property Protection and Reductionist Competition Rules: A TRIPS Perspective’, in Maskus and Reichman (eds), supra note 61, pp. 730–731; Roffe, Pedro (1998), ‘Control of Anti-competitive Practices in Contractual Licences under the TRIPS Agreement’, in Correa and Yusuf (eds), supra note 18, pp. 279–280.
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Competition law, technology transfer and the TRIPS Agreement 1. Members agree that some licensing practices or conditions pertaining to intellectual property rights which restrain competition may have adverse effects on trade and may impede the transfer and dissemination of technology. 2. Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. As provided above, a Member may adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.198
In addition to the substantive rules in Article 40.1 and 40.2, Article 40.3 and 40.4 also stipulate procedural rules for consultations and cooperation between a WTO Member enforcing its measures of licensing-related competition control and another Member the national or domiciliary of which is alleged, under the former’s competition law, to undertake licensing-related anticompetitive practices. Regarding unilateral conduct of IPR abuses, Article 31(k) acknowledges that compulsory licensing is a remedy available to correct such unilateral anticompetitive practices. It waives certain conditions in the event of compulsory patent licensing to remedy anti-competitive practices. It stipulates: Members are not obliged to apply the conditions set forth in subparagraphs (b) and (f) where such use is permitted to remedy a practice determined after judicial or administrative process to be anti-competitive. The need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases. Competent authorities shall have the authority to refuse termination of authorization if and when the conditions which led to such authorization are likely to recur …199
Consequently, if, after judicial or administrative process, the conduct of a patent holder is judged as involving anti-competitive practices, the competent authorities of a WTO Member can authorize compulsory licensing without (i) prior negotiations with the patent holder and (ii) a requirement to supply predominantly patent-embodied products on the domestic market. Furthermore, the amount of remuneration in this case can be smaller than in the case of a commercial licence transaction. This is often regulated and applied under domestic legislation.200 198 199 200
Article 40.1 and 40.2 of the TRIPS Agreement (emphasis added). Article 31(k) of the TRIPS Agreement (emphasis added). For example, the US FTC in Rambus, after finding that Rambus’ deceptive conduct at a standard setting body constituted exclusionary conduct by unlawfully monopolizing the markets for four technologies, granted compulsory licences and set
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In addition to Article 31(k) as a general provision, Articles 31(c) and 37.2 mention the possibility of authorizing compulsory licensing, with respect to semi-conductor technology patents and layout designs respectively, as a remedy correcting relevant anti-competitive practices. In addition, the TRIPS Agreement, at an indirect level, also contains some other pro-competitive provisions. For example, Article 6 gives WTO Members the right to stipulate in their domestic legislation an IPR exhaustion regime (international, regional or national exhaustion), which is fundamentally directed at maintaining competitive markets. Furthermore, the first recital of the Preamble requires that IPRs should not be used to distort and impede trade as well as technology transfer. 1.3.3.2 Interpretation Rights The competition rules in the TRIPS Agreement, as the result of the concessions of developed and developing countries, have an open-ended nature.201 They do not stipulate precise obligations subjecting the exercise of IPRs to the application of competition law principles. They just provide WTO Members with substantial discretion to enact and enforce domestic competition legislation.202 In other words, Articles 8.2, 31(k), and 40 of the TRIPS Agreement recognize the interventionist power of Members over controlling IPR-related anti-competitive practices. Article 40.1 acknowledges that some licensing practices or conditions are anti-competitive, but it does not list them. Meanwhile, Article 40.2 lists certain anti-competitive practices in contractual licences, namely exclusive grantback conditions, conditions preventing challenges to validity, and coercive package licensing. However, that listing is not exhaustive. The wording of Article 40.2 clearly expresses that those anti-competitive practices are mere examples of anti-competitive licensing practices, which are regarded as IPR abuses with an maximum royalty rates that Rambus could charge firms implementing standards embodying Rambus’ patents. These rates would not exceed 0.25 per cent to 0.5 per cent for three years, after which the rates would drop to zero, although Rambus claimed that average rates were 1–2 per cent. The FTC contended that ‘[r]oyalty rates unquestionably are better set in the marketplace, but [anti-competitive conduct of the IPR holder] has made that impossible. Although we do not relish imposing a compulsory licensing remedy, the facts presented make that relief appropriate and indeed necessary to restore competition.’ In the Matter of Rambus Inc., Docket No. 9302, available at www.ftc.gov/os/adjpro/d9302/index.shtm. However, the DC Circuit Court in Rambus Inc. v. FTC, 522 F.3d 456 (DC Cir. 2008), cert. denied, 129 S.Ct. 1318 (2009), held that the FTC had failed to demonstrate Rambus’ conduct was exclusionary as required under Section 2 of the Sherman Act; and the court remanded the decision of the FTC. 201 UNCTAD-ICTSD, supra note 30, p. 546. 202 WTO, supra note 151, para. 22.
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adverse effect on competition in the relevant market. Furthermore, in the negotiation history of the TRIPS Agreement, the parties concerned listed in the Brussels Draft fourteen anti-competitive licensing practices which had been listed in the 1985 version of the ToT Code.203 The term ‘anti-competitive practices’ was interpreted very broadly by the WTO Panel in Mexico – Telecoms,204 the first real competition case heard by the WTO DSB, although there is no definition of this term in WTO laws. Section 1.2 of the GATS Reference Paper on Basic Telecommunications (Telecoms Reference Paper) merely lists three anti-competitive practices.205 But the Panel referred to the dictionary meaning to contend that this term was broad in scope, including ‘actions that lessen rivalry or competition in the market’. The list in the Telecoms Reference Paper is, therefore, likewise not exhaustive and does not represent all anti-competitive practices within the scope of the provision. Furthermore, considering WTO Members’ competition laws, the failed 1948 Havana Charter, the UN Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, the OECD Council Recommendation Concerning Effective Action Against Hardcore Cartels, the work of the WTO WGTCP, as well as the object and purpose of the Telecoms Reference Paper, the Panel concluded that the term ‘anti-competitive practices’ includes ‘horizontal price-fixing and marketsharing agreements by suppliers which, on a national or international level, are generally discouraged or disallowed’.206 This broad interpretation of the term ‘anti-competitive practices’ in the Telecoms Reference Paper can be applied mutatis mutandis to the term ‘anti-competitive practices’ or ‘anti-competitive abuse’ in the TRIPS Agreement. Moreover, if similarly interpreted, Articles 8.2, 31(k), 40.1 and 40.2, taken together, can be largely applicable to any anti-competitive practices relating to all the different IPRs covered by the TRIPS Agreement. This observation is supported by the fact that Article 37.2 recognizes that Article 31(k) can be applied mutatis mutandis to layout designs, while Article 8.2 establishes principles, and Article 40 is applied to all contractual licences. Regarding compulsory licensing as a remedy correcting anti-competitive practices, as noted in Section 1.2.3, the TRIPS Agreement does not stipulate the ground for compulsory licensing in general and compulsory licensing in
203 Compare Article 43.2B of the Brussels Draft of the TRIPS Agreement, supra note 4, with Chapter 4 of the 1985 version of the ToT Code, supra note 182. 204 Mexico – Telecoms, supra note 34. This case is also analysed in infra Section 4.2.3. 205 Telecoms Reference Paper, available at www.wto.org/english/tratop_e/ serv_e/telecom_e/tel23_e.htm. 206 Mexico – Telecoms, supra note 34, para. 7.237.
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the case of the existence of IPR-related anti-competitive practices in particular. A WTO Member can enact its laws and regulations (or case law) on this issue. Then based on such laws and regulations, after due process, judicial or administrative competent authorities can grant compulsory licensing. In addition to compulsory licensing, Members can provide for and apply other remedies such as injunctions, damages, fines, etc. Reading Article 40.1 on its own or in conjunction with the objectives of the TRIPS Agreement as stipulated in Article 7, one might argue that WTO Members are obliged to control all anti-competitive practices relating to technology licensing. This view is supported by the fact that, according to Article 40.1, Members clearly and unanimously recognize the adverse effects and impediments of some licensing practices or conditions on trade and the transfer and dissemination of technology.207 However, the overall purpose of the TRIPS Agreement is to protect IPR-related international trade by establishing minimum standards of IP protection under domestic law. The competition provisions in the TRIPS Agreement, as a concession between developed and developing countries, are one kind of exception or reservation for IP protection.208 If the minimum standards of the protection under the TRIPS Agreement are ensured, WTO Members (and nationals of these Members) hardly succeed in complaining that IPRs of the nationals of these Members are, under another WTO Member’s IP law, adversely affected by the anticompetitive practices of other right holders in that Member. Indeed, in order to complain to the WTO DSB that IPR-related anti-competitive practices in a WTO Member adversely affect trade and/or impede transfer and dissemination of technology (restrictions of outflows or inflows of technology transfer, for instance), the other Member must prove that such anti-competitive practices are the effects of an action, i.e. direct involvement, rather than non-action, of the first Member upon its private firms’ anti-competitive conduct. This can be inferred from WTO Panel reports in Japan – Film209 and Argentina – Hide and Leather.210 Accordingly, Article 40.1 cannot be interpreted as an affirmative obligation of WTO Members. This article is only ‘non-committal, a non-binding chapeau’.211 It is up to domestic law to determine which practices are, and to what extent such practices are regarded as, forbidden anti-competitive ones.
207 208 209
UNCTAD-ICTSD, supra note 30, p. 555. Ullrich, supra note 197, pp. 733–734. Japan – Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R, adopted on 22 Apr. 1998. 210 Argentina – Measures Affecting the Export of Bovine Hide and the Import of Finished Leather, WT/DS155/R, adopted on 16 Feb. 2001, paras 11.49 and 11.51. 211 Correa, supra note 22, p. 399.
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Further, the competition rules in the TRIPS Agreement, particularly Articles 8.2 and 40.2, also limit WTO Members’ sovereign power to adopt their competition legislation concerning IPRs, by requiring that measures adopted to control IPR-related anti-competitive practices must be ‘consistent’ with the TRIPS Agreement (consistency requirement), and ‘appropriate’ (appropriateness requirement). Obligations Regarding the consistency requirement, this limitation has two implications: (i) domestic competition laws and regulations and their enforcement must comply with the fundamental principles of the TRIPS Agreement, and (ii) they must not deprive other Members’ nationals of the minimum standards of IP protection established by the TRIPS Agreement. First, as noted in sections 1.3.1 and 1.3.2 above, the anti-competitive practices of right holders may affect the use of IPRs and hinder the transfer and dissemination of technology. That is precisely why competition rules preventing such practices are specifically addressed in the TRIPS Agreement. Note 3 of the TRIPS Agreement states: For the purpose of Articles 3 and 4, ‘protection’ shall include matters affecting the availability, acquisition, scope, maintenance and enforcement of intellectual property rights as well as matters affecting the use of intellectual property rights specifically addressed in this Agreement.212
Additionally, Article 63.1, which deals with transparency, also lists the subject matter of the TRIPS Agreement. One item is ‘prevention of the abuse’ of IPRs.213 Therefore, the issue of IPR-related competition is part of the subject matter of the TRIPS Agreement. This leads to the result that WTO Members’ domestic competition laws and regulations must comply with the fundamental principles of the TRIPS Agreement in particular, and WTO laws in general. Put differently, the overriding WTO/TRIPS principles of national treatment, MFN treatment and transparency are to be applied to domestic competition laws and regulations concerning IPRs. If a Member fails to respect these principles when adopting and enforcing measures to prevent and
212 213
Note 3 for Article 3.1 of the TRIPS Agreement (emphasis added). Article 63.1 of the TRIPS Agreement reads that ‘[l]aws and regulations, and final judicial decisions and administrative rulings of general application, made effective by a Member pertaining to the subject matter of this Agreement (the availability, scope, acquisition, enforcement and prevention of the abuse of [IPRs]) shall be published, or where such publication is not practicable made publicly available, in a national language, in such a manner as to enable governments and right holders to become acquainted with them’.
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control IPR-related anti-competitive practices, it may itself be subject to the WTO dispute settlement mechanism.214 Secondly, measures to prevent and control IPR-related anti-competitive practices cannot be a mere pretext for undermining the minimum standards of IP protection guaranteed by the TRIPS Agreement. Domestic competition laws and regulations have to contribute to ‘a balance of rights and obligations’215 for right holders and the public. In other words, a WTO Member’s exercise of its rights to adopt and enforce domestic IPR-related competition legislation must be consistent with the principle of good faith. The WTO Appellate Body in United States – Shrimps,216 as well as the WTO Panel in United States – Havana Club,217 observed: This principle, at once a general principle of law and a general principle of international law, controls the exercise of rights by states. One application of this general principle, the application widely known as the doctrine of abus de droit, prohibits the abusive exercise of a state’s rights and enjoins that whenever the assertion of a right “impinges on the field covered by [a] treaty obligation, it must be exercised bona fide, that is to say, reasonably.”An abusive exercise by a Member of its own treaty right thus results in a breach of the treaty rights of the other Members and, as well, a violation of the treaty obligation of the Member so acting.
This limitation reflects a concern, observable in the negotiation history of the TRIPS Agreement, that some Members, in particular some advanced developing countries, may use their domestic competition laws and regulations to limit concessions under the TRIPS Agreement.218 It aims at preventing the excessive application of domestic competition law, which may harm the regular exercise and exploitation of IPRs covered by the TRIPS Agreement. It also confirms the observation presented in Section 1.3.1 that competition law and IP law are in pari materia, and that competition law is the second filter that helps to establish the balance of rights and obligations relating to IPRs. Competition law is supposed to safeguard the dynamic competition that should result from, and is the basis for, IP protection.219 214 Ehlermann and Ehring contend that ‘not only competition laws of WTO Members but also their application in individual cases already today are subject to the dispute settlement system’. Ehlermann, Claus-Dieter and L. Ehring (2005), ‘Can the WTO Dispute Settlement System Deal with Competition Disputes?’, in Ernst-Ulrich Petersmann (ed.), Reforming the World Trading System: Legitimacy, Efficiency, and Democratic Governance, Oxford: OUP, p. 544. 215 Article 7 of the TRIPS Agreement. 216 United States – Import Prohibition of Shrimp and Certain Shrimp Products, WT/DS58/AB/R, circulated on 12 Oct. 1998, para. 158 (note omitted). 217 US – Havana Club, supra note 10, para. 8.57. 218 UNCTAD-ICTSD, supra note 30, p. 551. 219 Ibid., p. 551.
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Regarding the appropriateness requirement, Articles 8.2 and 40.2 require that measures adopted to prevent and control IPR-related anti-competitive practices be ‘appropriate’ and ‘needed’. This imposes a negatively defined limitation on domestic remedial action against IPR-related anti-competitive practices. It prohibits ‘clearly excessive remedies, which unnecessarily put the intellectual property altogether in jeopardy’.220 In WTO agreements, the terms ‘appropriate’, ‘necessary’ and ‘reasonable’ are often used where Members are given a right to decide an issue as an exception to WTO obligations.221 They aim at: (i) reflecting a balance in WTO agreements between preserving the freedom of Members to determine and achieve regulatory objectives through measures chosen by themselves; and (ii) discouraging Members from adopting and maintaining measures that unduly restrict trade.222 The WTO DSB has elaborated on the appropriateness requirement, the socalled ‘necessity test’, in some GATT/GATS related disputes,223 which may be applied mutatis mutandis to disputes relating to the competition rules in the TRIPS Agreement. In Korea – Beef, the WTO Appellate Body confirmed the right of South Korea to choose the level of enforcement of its Unfair Competition Act that it desired. However, the Appellate Body held: [W]e accept Korea’s argument that the dual retail system facilitates control and permits combating fraudulent practices ex ante. Nevertheless, it must be noted that the dual retail system is only an instrument to achieve a significant reduction of violations of the Unfair Competition Act. Therefore, the question remains whether other, conventional and WTO-consistent instruments cannot reasonably be expected to be employed to achieve the same result … We are not persuaded that Korea could not achieve its desired level of enforcement of the Unfair Competition Act … by using conventional WTO-consistent enforcement measures, if Korea would devote more resources to its enforcement efforts on the beef sector.224 220 221
Ibid., p. 554. See, e.g., Articles 3.2, 8, 27.2, and 40.2 of the TRIPS Agreement; Articles VI, XII, and XIV of the GATS Agreement; Articles XI and XX of the GATT Agreement; Article 2 of the Agreement on Technical Barriers to Trade; Articles 2 and 5 of the Agreement on the Application of Sanitary and Phytosanitary Measures. 222 WTO (2003), ‘Necessity Tests in the WTO’, S/WPDR/W/27, para. 4. 223 See, e.g., Korea – Measures Affecting Import of Fresh, Chilled and Frozen Beef (Korea – Beef), WT/DS161/AB/R and WT/DS169/AB/R, circulated on 11 Dec. 2000; European Communities – Measures Affecting Asbestos and Asbestos-containing Products (EC – Asbestos), WT/DS135/AB/R, circulated on 12 March 2001, paras 168–175; European Communities – Trade Description of Sardines, WT/DS231/AB/R, circulated on 26 Sept. 2002, paras 286–291; United States – Measures Affecting the Cross-Border Supply of Gambling and Betting Services, WT/DS285/AB/R, circulated on 7 April 2005, paras 309–311; European Communities – Measures Affecting the Approval and Marketing of Biotech Products, WT/DS291/R, WT/DS292/R, and WT/DS293/R, circulated on 29 Sept. 2006, para. 7.1423. 224 Korea – Beef, supra note 223, paras 178 and 180.
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Consequently, in order to comply with the appropriateness requirement, competent authorities must weigh and balance a series of factors, including: (i) the contribution made by the compliance measure to the enforcement of the law or regulation in question, (ii) the importance of the common interests or values protected by that law or regulation, and (iii) the accompanying impact of the law or regulation on trade, and, in the case of the enforcement of domestic competition law, the impact on IPRs, IPR-related trade, and the transfer and dissemination of technology.225 Therefore, a three-pronged test, or a proportionality test, should be satisfied: suitability, necessity and balancing. However, the reasonable availability of less trade-restrictive measures is often applied as an alternative test.226 In addition to the consistency and appropriateness requirements, WTO Members also have consultation and cooperation obligations, at least where control of anti-competitive practices in contractual licences under Article 40.3 and 40.4 is concerned. However, as analysed in Section 4.1.2 below, these obligations are basic ones, and it is difficult to apply them in practice. At the moment, there are also many bilateral cooperation agreements relating to competition enforcement between Members which are at a higher level than these obligations. It is, nevertheless, impossible to apply the MFN principle in this case because, according to the TRIPS Agreement itself, any advantage, favour, privilege or immunity accorded by a Member ‘deriving from international agreements on judicial assistance or law enforcement of a general nature and not particularly confined to the protection of intellectual property’ is exempted from the consultation and cooperation obligations.227 Besides, developed country Members are obliged, according to Article 67, to assist developing country and LDC Members in ‘the preparation of laws and regulations on the protection and enforcement of intellectual property rights as well as on the prevention of their abuse’. One may interpret this as meaning that developed country Members have the obligation to assist developing country and LDC Members in the prevention of the abuse of laws and regulations on the protection and enforcement of IPRs, rather than in the 225 Ibid., para. 164; EC – Asbestos, supra note 223, para. 172. See also Neumann, Jan and E. Türk (2003), ‘Necessity Revisited: Proportionality in World Trade Organization Law After Korea – Beef, EC – Asbestos and EC – Sardines’, J. World Trade, 37(1), 199. 226 See EC – Asbestos, supra note 223, paras 168–175. 227 Article 4(a) of the TRIPS Agreement. In discussion at the WTO WGTCP, the US and the EU opposed a proposal from some developing country Members that would extend the MFN treatment to bilateral and/or multinational cooperation agreements relating to competition enforcement. See Report on the Meeting of 1–2 July 2002, WT/WGTCP/M18, para. 74; Report on the Meeting of 26–27 September 2002, WT/WGTCP/M19, para. 22.
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preparation of laws and regulations on the prevention of IPR abuse.228 However, in the context of the TRIPS Agreement as clearly shown in Articles 8.2 and 40.2, the term ‘abuse’ indicates ‘abuse of intellectual property rights’. Furthermore, three drafts of the TRIPS Agreement, namely the Annel Draft, the Brussels Draft and the Dunkel Draft,229 used the term ‘domestic legislation’, instead of ‘laws and regulations’, while they also used the term ‘their’ in ‘their abuse’.230 This means that the term ‘their abuse’ in this context expresses the abuse of IPRs, not the abuse of domestic legislation. Additionally, in theory, if the adoption and enforcement of domestic IPRrelated competition law of a WTO Member, even if not inconsistent with the TRIPS Agreement, nullify or impair benefits accruing to another Member under the TRIPS Agreement, such adoption and enforcement may be challenged under non-violation complaints before the DSB.231 If such a challenge is successful, the Member whose competition law measures have been challenged will often pay compensation to the complaining Member.232 However, non-violation complaints are temporarily not being applied; whether nonviolation complaints are available for competition law enforcement-related disputes under the TRIPS Agreement in practice or not is a matter that remains to be determined by the TRIPS Council.233 1.3.3.3 Overview of application and disposition The competition rules in the TRIPS Agreement give WTO Members the right
228 229 230
UNCTAD-ICTSD, supra note 30, p. 730. See supra note 4. Article 67 of the Dunkel Draft, supra note 4, states that technical cooperation provided by developed country Members ‘shall include assistance in the preparation of domestic legislation on the protection and enforcement of [IPRs] as well as on the prevention of their abuse’. 231 See Article 64 of the TRIPS Agreement Article XXIII.1(b) of the GATT Agreement, and Article 26 of the DSU. 232 See Article 26.1(d) of the DSU. The WTO Appellate Body held that ‘[u]nder Article XXIII:1(b) of the GATT 1994, a Member can bring a “non-violation” complaint when the negotiated balance of concessions between Members is upset by the application of a measure, whether or not this measure is inconsistent with the provisions of the covered agreement. The ultimate goal is not the withdrawal of the measure concerned, but rather achieving a mutually satisfactory adjustment, usually by means of compensation’. India – Patents Protection for Pharmaceutical and Agricultural Chemical Products, WT/DS50/AB/R, circulated on 19 Dec. 1997, para. 41. 233 See Article 64.2 of the TRIPS Agreement; WTO, supra note 148, para. 11.1; WTO (2004), ‘Doha Working Program: Decision Adopted by the General Council on 1 August 2004’, WT/L579, para. 1(h); WTO (2005), ‘Hong Kong Ministerial Declaration’, WT/MIN(05)/DEC, para. 45. See also India – Patents, supra note 232, para. 42; WTO (2004), ‘Non-violation and Situation Complaints’, IP/C/W/349/Rev.1.
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to adopt and apply domestic competition laws and regulations so as to control and prevent IPR-related anti-competitive practices, provided the consistency and appropriateness requirements are satisfied. However the current mechanisms aiming at controlling and preventing such anti-competitive practices in most developing countries are non-existent, weak or under-utilized.234 In the research of the Commission on Intellectual Property Rights in eight selected developing and least-developed countries, there is no record of any cases related to IPRs being taken to courts under these countries’ competitionrelated legislation.235 At the moment, around sixty developing countries have adopted specific competition laws.236 Other developing countries may stipulate IPR-related competition provisions within their existing IP laws. However, the existence of IPR-related competition legislation in developing and least-developed countries does not mean that competent authorities in those countries can deal with complicated IPR-related anti-competitive practices efficiently. This is for many reasons, especially their limited capacity to monitor and discourage such practices.237 Thus, one of the proposals for increasing inward technology transfer into developing countries which has been made by the Commission on Intellectual Property Rights, as well as by many scholars, is that developing countries should effectively establish a competition policy concerning IPRs. Furthermore, developed countries, in addition to providing assistance for the development of IP protection in developing countries, have an obligation to provide assistance with regard to the development of appropriate IPR-related competition laws, regulations and institutions.238 Developing country Members should be in a position where they can invoke competition rules and other flexibilities under the TRIPS Agreement in order to control IPR-related anti-competitive practices and promote inward technology transfer. However, concerns have been raised about the IPR-related competition law standards which are most appropriate for promoting inward technology transfer and the economic development objectives of developing countries.
234 235
In detail see infra Chapter 3. Leesti, Mart and T. Pengally (2002), ‘Institutional Issues for Developing Countries in Intellectual Property Policymaking, Administration and Enforcement’, p. 37, available at www.iprcommission.org/papers/pdfs/study_papers/sp9_pengelly_ study.pdf. 236 Mehta, Pradeep S. (ed.) (2006), Competition Regimes in the World: A Civil Society Report, Jaipur: Jaipur Printers, pp. xxviii–xxxi. 237 See infra Section 3.4. 238 Commission on Intellectual Property Rights, supra note 19, pp. 26 and 149; WTO (2005), ‘Steps That Might Be Taken Within the Mandate of the WTO to Increase Flows of Technology to Developing Countries’, Submission by India, Pakistan and the Philippines, WT/WGTTT/W/10.
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At the moment, there are varying opinions on the competition flexibilities in the TRIPS Agreement and how to apply them in the context of a developing country Member. Frederick Abbott contends that the substantial discretion for WTO Members in the design and application of their domestic IPR-related competition laws and regulations under the current competition rules in the TRIPS Agreement serves the best interests of both developed and developing country Members. He also recommends developed country Members stop tolerating or even encouraging their firms to engage in technology transferrelated anti-competitive practices in foreign markets.239 Robert Anderson, to some extent, agrees with Abbott with respect to the view that neither amendment of the competition rules in the TRIPS Agreement nor development of parallel binding IPR-related competition rules is desirable or feasible in the current circumstances. However, he suggests that due to the lack of guidance provided by the TRIPS Agreement, WTO Members should have guidance based on experience provided by the WTO WGTCP.240 But what the content of such guidance may be is not clear. Meanwhile, those legal scholars who have drafted a proposal for the Amendment of the TRIPS Agreement in the framework of the project titled ‘Intellectual Property Rights in Transition’ (IPT Proposal) contend that it is in need of special and concrete rules reflecting IPR-related competition law at both international and domestic levels. As to the international level, they propose a new TRIPS-competition article (Article 8b) to solve the interface between IPRs and competition law, which states: For the purposes of maintaining a fair balance between intellectual property rights and free competition, Members shall provide for adequate remedies in the form of statutory or compulsory licences, or other forms of statutory limitations, if: (a) the use of the product protected by an intellectual property right is indispensable for competition in the relevant market, unless the application of such remedies would have a significantly negative effect on the incentives to invest in research and development; or (b) the use of an intellectual property right results in the abuse of a dominant position on the relevant market.241 239 Abbott, Frederick M. (2005), ‘Are the Competition Rules in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights Adequate?’, in Petersmann (ed.), supra note 214, pp. 333–334. 240 Anderson, Robert D. (2008), ‘Competition Policy and Intellectual Property in the WTO: More Guidance Needed?’, in Josef Drexl (ed.), Research Handbook on Intellectual Property and Competition Law, Cheltenham: Edward Elgar, pp. 449–450. 241 See ‘Synopsis of Original Version and Proposals for Amendment of the TRIPS Agreement’, and Kur, Annette (2006), ‘TRIPS Amendments (work in progress): Background and Explanation’, available at www.atrip.org//25.htm; Schovsbo, Jens (2009), ‘Fire and Water Make Steam: Redefining the Role of Competition Law in TRIPS’, available at http://ssrn.com/abstract=1339346.
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In line with the new Article 8b, the IPT Proposal contains an amendment of Article 40.2 in order to have a rule which is ‘binding’ in purpose but ‘flexible’ as to national execution.242 The amended Article 40.2 proposal reads: Members shall adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of the Member concerned. Members may specify in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market.243
According to this IPT proposal, the discretionary competition provisions in the TRIPS Agreement should be replaced by mandatory ones, which force Members to adopt and apply statutory or compulsory licences/limitations to prevent IPR-related anti-competitive practices blocking competition. The proposal to convert discretionary competition provisions in the TRIPS Agreement into mandatory ones is not new.244 However, after the failure of the WTO Ministerial Conference in Cancun in 2003 on the Singapore issues, competition policy was dropped from the current WTO Doha Round negotiations.245 It will not be easy, as explained in Chapter 4, for such mandatory competition clauses to be accepted at the WTO. Furthermore, as stated in Chapter 3 below, implementation of such clauses in developing countries would in practice depend very heavily on their economic, political, social and institutional conditions. Having such mandatory competition provisions in the amended TRIPS Agreement is difficult enough; but applying them in practice in developing countries may be even more so. In addition, it seems that the combination of both the ‘binding’ and ‘flexible’ characters in the amended Article 40.2 proposal is not reasonable. Jens Schovsbo explains that the combination would prevent IPR-related competition flexibilities at the domestic level from being waived by free trade
242 243 244
Ibid., p. 43. ‘Synopsis of Original Version and Proposals’, supra note 241. See Odman, N. Ayse (2000), ‘Using TRIPS to Make the Innovation Process Work’, J. World IP, 3(3), 343. To some extent, the EPA between the EU and CARIFORUM states (Article 142.2), OJ 2008 L 289/I/3, follows this approach. See infra Section 4.3. 245 See, e.g., Jenny, Frédéric (2004), ‘Competition, Trade and Development Before and After Cancun’, in Tzong-Leh Hwang and C. Chen (eds), The Future Development of Competition Framework, The Hague: Kluwer Law International, pp. 13–35; Stewart, Taimoon (2004), ‘The Fate of Competition Policy in Cancun: Politics or Substance’, Legal Issues of Economic Integration, 31(1), 7; Marsden, Philip (2003), A Competition Policy for the WTO, London: Cameron May.
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agreements.246 However, the TRIPS Agreement and even the IPT proposal aim to establish minimum standards of IP protection. If the amended Article 40.2 proposal gives all WTO Members discretion in the control of anticompetitive practices in contractual licences, it cannot simultaneously prevent Members from waiving such discretion through bilateral or regional agreements. In contrast to the above-mentioned proposals, Hanns Ullrich contends that ‘referral to TRIPS competition rules as a model for domestic antitrust might contribute to deepening rather than overcoming the technology dependence of developing countries’.247 He argues, on the basis of US and EU experience, that a shift is currently taking place from a development/dissemination perspective to an innovation perspective. It appears that he clearly distinguishes between an innovation-oriented competition policy, which minimizes as much as possible the impact of competition law enforcement on IPRs, and a development-oriented competition policy, which supports the extensive application of competition law to IPRs in order to encourage technology transfer.248 He observes that a development-oriented competition policy is effective only at a domestic level. Further, developed country Members holding market power will have considerable leverage/power to pressure developing country Members into giving up development-oriented competition rules in favour of innovation-oriented competition ones in exchange for market access. All of this may lead to the obsoleteness of the competition flexibilities in the TRIPS Agreement.249 It appears that Ullrich supports an absolute property regime for IPRs. His view, however, is not consistent with the basic rule, at least from the developing country perspective, that no absolute monopoly of IPRs should exist ‘unless it is shown to be objectively justified’.250 It is not consistent either with the view that national competition law ‘should complement other
246 247 248
Schovsbo, supra note 241, p. 43. Ullrich, supra note 197, p. 727. There are three perspectives of competition law and policy, namely the development, innovation and systemic perspectives. The development-based perspective ‘focuses on the ability of the competition rules to further the special interests of developing countries’. The innovation-based one ‘focuses on whether traditional competition law is relevant and adequate to deal with the challenges from new patterns of innovation, notably in the [high-tech] industries’. And the systemic one ‘focuses on the interrelationship between the competition rules and the IPR rules and discusses whether competition law can be used to “soften up” the substantive IPR obligations’ in the TRIPS Agreement. Schovsbo, supra note 241, p. 24. 249 Ullrich, supra note 197, pp. 752–754. 250 Laddie, Hugh (1997), ‘Copyright: Over-Strength, Over-Regulated, OverRated’, Hume Papers on Public Policy, 5(3), 15.
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national development objectives’251 such as access to technology and industrial development. A strong innovation-oriented competition policy is not by itself sufficient to guarantee any degree of competitive openness. When a monopoly is established, it may be very hard for it to be dislodged, and easy for it to be perpetuated. And monopolists may have much less incentive to innovate than they would if they had to compete.252 Consequently, if ‘expansionist intellectual property protection’ goes together with ‘reductionist competition rules’, as Ullrich argues, this trend may threaten both the long-term efficiency of the global economy and the opportunities of developing countries to gain access to technology, especially cutting-edge technology. All this contradicts the current view that IP law and competition law should work in tandem to favour both innovation and competition. That is why Marco Ricolfi contends that adopting IPR-related competition rules, in combination with measures targeting restrictions on international technology transfer, ‘seems to be apt to bring to developing countries’ economies many of the predictable benefits associated with competition policies without incurring most of the perceived risks’.253 Nevertheless, due to difficulties in applying the ex post, ad hoc intervention of competition law, he suggests that the best choice for dealing with restrictive behaviours in international technology transfer is to fine-tune the domestic IP laws of WTO Members by incorporating pro-competitive features into them in ways that comply with the TRIPS Agreement. WTO Members should take advantage of flexibilities under the TRIPS Agreement concerning IPR-related exemptions and limitations in order to establish generalized pro-competitive ex ante intervention by the fine-tuning of their IP regime.254 This proposal is, to some extent, similar to the recommendations of the US FTC in its report on how to promote innovation by balancing competition with IP law and policy; this too focuses more on revising IP law.255 But one may argue that due to the complexity of IPR-related anti-competitive practices, they cannot be adequately controlled by IP law itself. In addition to the internal balance established by IP law, each WTO Member also needs its own IPR-related competition laws and regulations as a second filter to control IPRrelated anti-competitive practices. If a Member does not have such competition laws and regulations, it deprives itself of an important public safeguard against IPR abuses.
251 Stiglitz, Joseph E. and A. Charlton (2005), Fair Trade for All: How Trade can Promote Development, Oxford: OUP, p. 268. 252 Stiglitz, supra note 61, p. 1705. 253 Ricolfi, Marco (2006), ‘Is There an Antitrust Antidote Against IP Overprotection within TRIPS’, Marquette IP L. Rev., 10, 339. 254 Ibid., pp. 354–355. 255 US FTC, supra note 103, Executive Summary, pp. 4–18.
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CONCLUDING REMARKS
International technology transfer and international technology transfer-related anti-competitive practices have been, and continue to be, discussed in many international and regional forums. After the failure of the ToT Code, the competition provisions in the TRIPS Agreement are the first important cornerstone giving developing country Members the right to create their own optimal solutions for the control of anti-competitive practices in international technology transfer. These provisions give WTO Members a broad discretion to enact and apply domestic competition law addressing anti-competitive contractual restraints in technology transfer agreements and unilateral abuses of right holders, provided the consistency and appropriateness requirements are satisfied. Additionally, compulsory licensing and other sanctions can be ordered by competent authorities of Members in order to correct such abuses. However, these competition flexibilities do not provide guidance on how they are to be applied in practice. As shown in detail in Chapter 3 below, many developing country Members have not yet adequately adopted and/or applied IPR-related competition laws and regulations. Even if developing country Members have adopted these laws and regulations, it is very difficult to enforce them due to the limited capacity of enforcement authorities and other obstacles in the very complex and sensitive area of the intersection of competition law and IPRs. Each developing country Member should find its own solution, because strong competition policy in general and technology transfer-related competition law in particular are ‘not just a luxury to be enjoyed by rich countries, but a real necessity for those striving to create democratic market economies’.256 There is certainly no one-size-fits-all approach concerning technology transfer-related competition law. However, studying and profiting from the experience of developed countries and other advanced developing countries in this area are very important. Based on such experience, developing country Members may find a suitable answer for themselves as they seek to balance the rights and obligations of right holders from the competition perspective in order to serve national interests and consumer welfare. On the basis of the competition flexibilities in the TRIPS Agreement, the next two chapters will examine the application of competition law to technology transfer in both developed and developing countries.
256 Stiglitz, Joseph (2001), ‘Competing over Competition Policy’, Project Syndicate, available at www.project-syndicate.org/commentary/stiglitz5.
2. Application of competition law to technology transfer in developed countries – US and EU perspectives 2.1
BACKGROUND
2.1.1
Introduction
2.1.1.1 Development of the IP–antitrust law intersection in the US In response to growing public concern over the oppressive use of the economic power of business trusts, the US Congress enacted the Sherman Act in 1890.1 Section 1 of the Act, aiming at concerted (or multiple-firm) actions, prohibits ‘every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations’. Meanwhile, Section 2, aiming at unilateral (or single-firm) actions, prohibits conduct which is implemented to ‘monopolize, or attempt to monopolize, or combine or conspire … to monopolize any part of the trade or commerce’. In 1914, the Clayton Act and the Federal Trade Commission Act were enacted to ensure that particular allegedly anti-competitive practices, mergers for instance, would also be efficiently addressed by antitrust law, and to grant antitrust jurisdiction to the FTC in addition to that already possessed by the DOJ.2 These antitrust laws, which have been refined through various amendments over the years, in general, and the Sherman Act in particular, are regarded as ‘the Magna Carta of free enterprise’,3 having as they do the aim of preserving competition, i.e. economic freedom and a free-enterprise system.
1 2
26 Sta. 209 (1890), codified as amended, 15 U.S.C. 1–7. Clayton Act, 38 Sta. 730 (1914), codified as amended, 15 U.S.C. 12–27; Federal Trade Commission Act, 38 Sta. 717 (1914), codified as amended, 15 U.S.C. 41–58. In addition to Sections 1 and 2 of the Sherman Act, Section 7 of the Clayton Act prohibits acquisitions of the stock or assets, including IPRs in exclusive licences, of any firm engaged in commerce or in any activity affecting commerce, where ‘the effect of such acquisition may be substantially to lessen competition, or to tend to create a monopoly’. 3 US v. Topco Associates, Inc., 405 U.S. 596, 610 (1972). 59
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At the time of the passage of the Sherman Act, the first US patent law, which was enacted in 1790, had existed for exactly one hundred years.4 As briefly mentioned in Section 1.3.1, a possible conflict between antitrust law and IP law was noticed. To begin with, IP law prevailed over antitrust law when they were found to conflict.5 US courts generally refused to condemn IPR-related conduct under antitrust law. This early view was elaborated in National Harrow,6 relating to a patent pooling arrangement that set uniform price schedules and required pool members not to use technology other than the one assigned to the pool. The US Supreme Court held: [T]he general rule is absolute freedom in the use or sale of rights under the patent laws of the United States. The very object of these laws is monopoly, and the rule is, with few exceptions, that any conditions which are not in their very nature illegal with regard to this kind of property, imposed by the patentee and agreed to by the licensee for the right to manufacture or use or sell the article, will be upheld by the courts. The fact that the conditions in the contracts keep up the monopoly or fix prices does not render them illegal.7
This meant that the legal prerogatives of right holders could be broadly interpreted as giving a right to establish and maintain a price-fixing cartel despite the fact that such a cartel would otherwise be considered as a naked violation of antitrust law.8 This was confirmed in 1926 in US v. General Electric,9 where the Supreme Court again held that a licence containing a price-fixing clause between competitors was compatible with antitrust law: One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold. The higher the price, the greater the profit, unless it is prohibitory … It would seem entirely reasonable that he should say to the licensee, ‘Yes, you may make and sell articles under my patent but not so as to destroy the profit that I wish to obtain by making them and selling them myself.’ He does not thereby sell outright to the licensee the articles the latter may make and sell or vest absolute ownership in them. He restricts the property and interest the licensee has in the goods he makes and proposes to sell.10 4
See Halpern, Sheldon W. et al. (2007), Fundamentals of United States Intellectual Property Law: Copyright, Patent, Trademark, Alphen aan den Rijn: Kluwer Law International, p. 196. 5 ABA Section of Antitrust Law (2002), The Federal Antitrust Guidelines for the Licensing of Intellectual Property: Origins and Applications, ABA Publishing, p. 3; US FTC (2003), To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, Chapter 1, p. 15. 6 E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 72–73 (1902). 7 Ibid., at 91 (emphasis added). 8 See US v. Socony-Vacuum Oil Co., 310 U.S. 150, 223 (1940); US v. Trenton Potteries Co., 273 U.S. 392, 338 (1927). 9 US v. General Electric Co., 272 U.S. 476 (1926). 10 Ibid., at 490 (emphasis added).
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Furthermore, it was even legitimate for a right holder to sell her patented products on the condition that buyers had to buy other articles from her. The Supreme Court upheld such a tying in Henry v. A.B. Dick.11 The Court, basing itself on the patent holder’s ‘exclusive right to make, use, and vend the invention’, held that the use of the patented machine could be conditioned. Thus, the Sherman Act seemingly could not constitute a defence to a patent infringement action.12 However, such a favouring of IP law over antitrust law could well lead to right holders abusing their IPRs to lessen competition, foreclose competitors, and create or maintain a monopoly.13 But it could not reduce or eliminate the conflict between IP law and antitrust law as perceived at the time. With the increasing importance of antitrust law to the economy, the US antitrust law enforcement authorities changed their attitude; and antitrust law gradually gained an ascendancy over IP law. In Motion Picture Patents14 in 1917 concerning a firm’s attempt to tie its films to its patented projectors, the Supreme Court conclusively overruled the Henry v. A.B. Dick judgment. It held that IPRs could not go beyond ‘the general law’ and might be subject to antitrust law.15 Following Motion Picture Patents, a misuse doctrine has been established as an affirmative defence to an accusation of patent/IPR infringement.16 This doctrine is applicable if a right holder (i) has impermissibly broadened the scope of the IPR grant (ii) with anti-competitive effects.17 Because of the second requirement of the two-pronged test of misuse, i.e. anti-competitive effects, Judge Posner regards patent misuse as an antitrust violation. He contends:
11 12
Henry v. A.B. Dick Co., 224 U.S. 1 (1912). Sullivan, Lawrence A. and W.S. Grimes (2006), The Law of Antitrust: An Integrated Handbook, St. Paul, MN: Thomson West, p. 425. 13 IBM Corp. v. US, 298 U.S. 131, 136 (1936). 14 Motion Picture Patents Co. v. Universal Film Manufacturing Co., 243 U.S. 502 (1917). 15 Ibid., at 510 and 513. See also Standard Sanitary Manufacturing Co. v. US, 226 U.S. 20, 49 (1912). 16 See Hovenkamp, Herbert et al. (2007), IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law, New York: Aspen, supp., pp. 3(2)–3(64); ABA Section of Antitrust Law (2007), Intellectual Property and Antitrust Handbook, ABA Publishing, pp. 78–84. 17 Blonder-Tongue Laboratories, Inc. v. University of Illinois Foundation, 402 U.S. 313, 343 (1971); Princo Corp. v. ITC, 563 F.3d 1301, 1307 (Fed. Cir. 2009). However, if ‘the restriction is reasonably within the patent grant, the patent misuse defence can never succeed’. Monsanto Co. v. McFarling, 363 F.3d 1336, 1341 (Fed. Cir. 2004), cert. denied, 545 U.S. 1139 (2005).
62
Competition law, technology transfer and the TRIPS Agreement If misuse claims are not tested by conventional antitrust principles, by what principles shall they be tested? Our law is not rich in alternative concepts of monopolistic abuse; and it is rather late in the day to try to develop one without in the process subjecting the rights of patent holders to debilitating uncertainty.18
In contrast, one may argue that antitrust law and the doctrine of patent/IPR misuse are not the same although there remains substantial overlap between them.19 IPR-related practices which do not violate Sections 1 and 2 of the Sherman Act may still be classed as IPR misuse. But this is still debatable. When antitrust law dominated and IPRs were disfavoured, as was the case from the 1930s to the beginning of the 1980s, the Supreme Court in many cases found a tying of IPR-unrelated products to the use of IPR-incorporated products or processes to be an unlawful extension of the monopoly granted to IPRs. The Court said that the use of a tying ‘to suppress competition in the sale of an unpatented article may deprive the patentee of the aid of a court of equity to restrain an alleged infringement by one who is a competitor’.20 In International Salt v. US,21 the Court held that misuse of a patent was prima facie evidence of an antitrust violation, even in the absence of proof of market power or anti-competitive effects. Although International Salt owned patents on machines for utilization of salt products, the Court stated: [T]he patents confer no right to restrain use of, or trade in, unpatented salt. By contracting to close this market for salt against competition, International has engaged in a restraint of trade for which its patents afford no immunity from the anti-trust laws … Not only is price-fixing unreasonable, per se… but also it is unreasonable, per se, to foreclose competitors from any substantial market.22
According to the trend supporting antitrust law over IP law, the Antitrust Division of the US DOJ in 1970 unofficially listed nine licensing practices, the so-called ‘Nine No-No’s’, which were viewed as per se violations of antitrust law.23
18 19
USM Corp. v. SPS Technologies, Inc., 694 F.2d 505, 512 (7th Cir. 1982). Myers, Gary (2007), The Intersection of Antitrust and Intellectual Property: Cases and Materials, St. Paul, MN: Thomson West, pp. 55–56. 20 Morton Salt Co. v. G.S. Suppiger Co., 314 U.S. 488, 491 (1942). See also Carbice Corporation of America v. American Patents Development Corp., 283 U.S. 27 (1931); Leitch Manufacturing Co. v. Barber Co., 302 U.S. 458 (1938); Mercoid Corp. v. Mid-Continental Investment Co., 320 U.S. 661 (1944). 21 International Salt Co. v. US, 332 U.S. 392 (1947). 22 Ibid., at 395–396 (emphasis added). 23 They were: (i) tying, (ii) exclusive/assignment grantbacks, (iii) post-sale restraints on resale, (iv) restriction of licensees’ freedom to deal in products/services not within the scope of patent (tie-out), (v) licensee veto power over grants of further
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This list was almost entirely based on precedents in the case law.24 However, together with the development and growing influence of the economic analysis of the Chicago School on antitrust scrutiny25 and the strengthening of the IP regime in the US,26 the pendulum governing the relationship between antitrust and IP law swung back again. In 1980, the Supreme Court held that ‘the policy of competition runs deep in our law’, but ‘the policy of stimulating invention that underlines the entire patent system runs no less deep’.27 Justice O’Connor, in her concurring opinion in Jefferson Parish Hospital28 in 1984, questioned the validity of a presumption that IPRs always give their holders market power. This presumption was reversed in the Antitrust–IP Guidelines in 1995, and was finally declared to be wrong in Illinois Tool Works29 in 2006. According to this new trend, antitrust law and IP law are perceived as ‘actually complementary, as both are aimed at encouraging innovation, industry and competition’.30 This is made clear in the Antitrust–IP Guidelines 1995.31 According to the Guidelines, there are three general principles in antitrust analyses, namely: (i) IPRs are regarded as being comparable to any other form of property; (ii) IPRs do not by themselves create market power; and (iii) technology transfer is generally pro-competitive.32 The Guidelines also establish a licences, (vi) mandatory package licensing, (vii) royalties not reasonably related to sales of the patented products, (viii) restraints on sales of unpatented products made by a patented process, and (ix) setting prices on resale of the patent products. Wilson, Bruce (1970), ‘Patent and Know-How License Arrangements: Field of Use, Territorial, Price and Quantity Restrictions’, in Sara-Ann Danders (ed.), Antitrust Primer: Patents, Franchising, Treble Damage Suits, Boston, MA: Warren, Gorham & Lamont, pp. 11–21. 24 Tom, Willard K. and J.A. Newberg (1997), ‘Antitrust and Intellectual Property: From Separate Spheres to Unified Field’, Antitrust L. J., 66, 178–184; ABA Section of Antitrust Law, supra note 16, pp. 8–13. 25 See Posner, Richard A. (1979), ‘The Chicago School of Antitrust Analysis’, U. Pa. L. Rev., 127, 925; Page, William H. (1989), ‘The Chicago School and the Evolution of Antitrust: Characterization, Antitrust Injury, and Evidentiary Sufficiency’, Va. L. Rev., 75, 1221; Hovenkamp, Herbert (2005), Federal Antitrust Policy: The Law of Competition and Its Practice, St. Paul, MN: Thomson West, pp. 61–64. 26 See US FTC, supra note 5, Chapter 1, pp. 18–23. 27 Dawson Chemical Co. v. Rohm and Hass Co., 448 U.S. 176, 221 (1980). 28 Jefferson Parish Hospital District No. 2 v. Hyde, 466 U.S. 2, 37–38 (1984), at note 7. 29 Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006). 30 Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); Loctite Corp. v. Ultraseal Ltd., 781 F.2d 861, 876–877 (Fed. Cir. 1985). 31 Antitrust–IP Guidelines, Section 1.0. This new approach to some extent was already reflected in the US Antitrust Enforcement Guidelines for International Operations 1988. See ABA Section of Antitrust Law, supra note 16, pp. 13–14. 32 Antitrust–IP Guidelines, Section 2.
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safety zone so that a restraint in a technology transfer agreement, in the absence of extraordinary circumstances, will not be challenged by the competition authorities if: (i) the restraint is not prima facie anti-competitive, and (ii) the licensor and its licensees account for no more than 20 per cent of each relevant goods market affected. If the agreement affects technology or innovation markets, it is also required that there are at least four independent technologies substitutable for the transferred technology at a comparable cost to users, or four independent entities possessing the conditions required to engage in R&D that is a close substitute for the R&D activities of the parties involved in the agreement.33 2.1.1.2 Development of the IP–competition law intersection in the EU For the purpose of ‘ensuring that competition in the internal market is not distorted’,34 competition provisions were incorporated into the Treaty Establishing the European Community (Treaty of Rome) in 1957. The equivalents of Section 1 and Section 2 of the Sherman Act respectively, Article 81 EC prohibits agreements or concerted practices between undertakings affecting trade between Member States and restraining competition, while Article 82 EC regulates the unilateral conduct of undertakings by prohibiting the abuse of a dominant position. Although the harmonization of certain aspects of IPRs at the Community level has been achieved,35 the legislation governing IPRs is still predominantly national.36 However, IPRs must be exercised in a way compatible with EU competition law. In Consten & Grundig37 and its progeny, the ECJ has made a distinction between IPR existence (grant) and IPR exercise (exploitation). IPRs are Member State-granted property rights that are protected by
33 34
Ibid., Section 4.3. Article 3.1(g) EC. According to the Treaty of Lisbon amending the Treaty on European Union and the EC Treaty, signed on 13 Dec. 2007, OJ 2007 C 306/1, the EC Treaty will be replaced by the Treaty on the Functioning of the European Union (TFEU), in which Article 3.1(g) EC is removed. However, the objective of establishing a single market on the basis of undistorted competition is still addressed in the Protocol on the internal market and competition annexed to the TFEU. By interpreting Articles 101 and 102 of the TFEU, i.e. Articles 81 and 82 EC, in combination with the Protocol, one can say that they reflect the status quo, and there is no substantive change to EU competition law in the TFEU. 35 See European Commission (2008), ‘An Industrial Property Rights Strategy for Europe’, Communication from the Commission to the European Parliament, the Council and the European Economic and Social Committee, COM(2008)465 final; European Commission (2008), ‘Copyright in the Knowledge Economy’, Green Paper, COMP(2008)466/3. 36 See Articles 30 and 295 EC. 37 Joined Cases 56/64 and 58/64, Consten & Grundig v. Commission, [1966] ECR 299.
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Article 295 EC, which requires the Community to respect national systems of property ownership. As ‘a matter for national rules’,38 the existence of IPRs, therefore, neither relates to nor conflicts with EU competition law. But the exercise of IPRs may be caught by Article 81 or 82 EC. Nevertheless, Community Courts often state that the mere or normal IPR exercise does not automatically constitute an infringement of EU competition law. The exercise of these rights, as part of their ‘specific subject-matter’, or ‘essential function’,39 cannot of itself fall under Article 81(1) EC in the absence of any agreement, decision or concerted practice prohibited by that provision. And that exercise cannot infringe Article 82 EC in the absence of any abuse of a dominant position. In other words, a right holder does not abuse a dominant position within the meaning of Article 82 EC merely by exercising her exclusive rights.40 Still, the demarcation between permitted exercises of IPRs and prohibited ones is not clear and varies over time. In the period prior to Consten & Grundig, particularly after the adoption of the Notice on Patent Licensing Agreements of 1962,41 the Commission adopted a very favourable approach to restrictions in technology transfer arrangements. This notice listed five groups of restrictions in licensing agreements which did not violate Article 81(1) EC, including limitations on fields of use, technical applications, quantity of products to be manufactured, time and territory. The notice also permitted an exclusive licensing agreement which would prevent a patent holder from authorizing the exploitation by not only any third party other than the licensee but also the patent holder herself of the patent at issue in the territory given to the licensee.42 Besides, Regulation 17, the first regulation laying down rules for the implementation of Articles 81 and 82 EC, did not require notification regarding bilateral licensing agreements which imposed restrictions on the exercise of IPRs by licensees.43 However, in Consten & Grundig the ECJ held that the attempt by a licensor and a licensee to use IPRs to separate a national market within the Community was an attempt to distort competition in the common market, and 38
Joined Cases C–241/91 P and C–242/91 P, Radio Telefis Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission, [1995] ECR I–743 (Magill), para. 49. 39 Opinion of AG Gulmann in ibid., para. 36. 40 See, e.g., Case 24/67, Parke, Davis and Co. v. Probel, [1968] ECR 55, p. 72; Case 40/70, Sirena v. Eda, [1971] ECR 69, paras 5 and 16; Case 78/70, Deutsche Grammophon v. Metro, [1971] ECR 487, paras 11 and 16. 41 The so-called ‘Christmas Message’, OJ 1962 139/2922. 42 Ibid., Parts I/A to I/E; See also Anderman, Steven D. (1998), EC Competition Law and Intellectual Property Rights, Oxford: Clarendon Press, pp. 52–55. 43 Article 4.2 of Regulation 17,OJ 1962 13/204.
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as such prohibited under Article 81(1) EC.44 Consequently, the Commission, with growing awareness of the potential for restrictions on technology transfer to hinder the common market and limit inter-Member State competition, changed its attitude to a much more restrictive one.45 In 1984 and 1988, the Commission enacted the patent licensing block exemption regulation and the know-how licensing block exemption regulation respectively.46 These two regulations, as well as cases47 decided by the ECJ during this period, demonstrated an interventionist approach, under which the ECJ and the Commission tended to focus much more on per se restrictions than on an analysis of anticompetitive effects. In the light of the EU’s need for increasing technological competitiveness in world trade, and in response to the US Antitrust–IP Guidelines – which tend to support technology transfer within the US antitrust framework – the Commission merged the two earlier block exemption regulations into a unified technology transfer block exemption regulation (Regulation 240/96).48 Although Regulation 240/96 was intended to play a pivotal role in the development of innovation within the EU economy and in contributing to the competitiveness of business operating there, it caused concerns about the effectiveness of the purported modernization of EU competition rules.49 First, Regulation 240/96 worked as a ‘straitjacket’. It divided standard clauses in licensing agreements into four categories: (i) exempted clauses, (ii) ‘white’ clauses, which generally do not violate Article 81(1) EC and can safely be included in licensing agreements, (iii) ‘black’ or ‘no-no’ clauses, which fall under Article 81(1) EC and do not benefit from block exemptions, and (iv) ‘grey’ clauses, which are neither exempted nor expressly excluded and the competitive effects of which have to be analysed on a case-by-case basis. This 44 45
Consten & Grundig, supra note 37, at 345–346. See, e.g., Decision 72/25/CEE, IV/5 400, Burroughs-Delplanque, OJ 1972 L 13/50; Decision 73/238/EEC, Raymond & Co and Nagoya Rubber Co. Ltd, OJ 1972 L 143/39; Decision 72/237/EEC, Davidson Rubber Co., OJ 1972 L 143/31; Decision 76/29/EEC, IV/26.949, AOIP/Beyrard, OJ 1976 L 6/8. 46 Commission Regulation 2349/84/EEC on the application of Article 85(3) [now 81(3)] of the Treaty to certain categories of patent licensing agreements, OJ 1984 L 219/15; Commission Regulation 556/89/EEC on the application of Article 85(3) of the Treaty to certain categories of know-how licensing agreements, OJ 1989 L 61/1. 47 See, e.g., Case 258/78, Nungesser KG & Kurt Eisele v. Commission, [1982] ECR 2015; Case 262/81, Coditel v. Ciné-Vog Films, [1982] ECR 3381; Case 193/83, Windsurfing International Inc. v. Commission, [1986] ECR 611. 48 Commission Regulation (EC) No. 240/96 of 31 Jan. 1996 on the application of Article 85(3) EC to certain categories of technology transfer agreements, OJ 1996 L 31/2. 49 European Commission’s Evaluation Report on the Transfer of Technology Block Exemption Regulation No. 240/96, 20 Dec. 2001, COM(2001)786 final.
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classification of clauses is thought to be formalistic and rigid. It focused mainly on intra-technology competition and market integration. Second, it was inconsistent. It treated various clauses differently despite their similar effects. For example, territorial restrictions and customer restrictions were treated in a different way even though both types of restrictions could serve the purpose of the prevention of freeriding, even if they also had the potential to create concerns regarding foreclosure and market separation. Third, the Regulation was both too restrictive and too liberal. It was criticized for blacklisting certain restrictive clauses such as customer restrictions, non-compete obligations, tying clauses from the block exemptions without valid economic justification or an effects-based approach. But it exempted agreements containing clauses such as ongoing passive sales restrictions protecting territories allocated to other licensees, active sales restrictions, reciprocal field of use restrictions between competitors, active sales bans for territories not exclusively granted to other licensees as well as arrangements between competitors which might lead to collusion, all of which might well restrict competition. The Commission therefore enacted the TTBER 2004 together with the TT Guidelines in April 2004, both aiming at ensuring effective competition and providing adequate legal security for undertakings in technology transfers. The TTBER 2004 signifies a shift, in line with the modernization of EU competition law, from a legalistic and form-based approach to a more economic and effects-based one. It focuses more on inter-technology competition issues and on analyses of the possible efficiency of certain restrictions, and makes a distinction between agreements between competitors and those between non-competitors.50 The TTBER 2004 has been extended to cover software copyright licensing agreements in addition to patent and know-how ones.51 It merely stipulates (i) a limited list of hard-core restrictions (black clauses), which cannot be severed from the rest of an agreement,52 and (ii) a limited list of excluded restrictions, which do not affect the application of the TTBER 2004 to the rest of the agreement.53 All other clauses in technology transfer agreements are exempted on condition that either the combined market share of the competing undertaking parties in the relevant market does not exceed 20 per cent, where horizontal licences are at issue, or the market share of each of the non-competing parties
50 51 52
See Recital of the TTBER 2004. Article 1.1(b) of the TTBER 2004. Article 4.1 and 4.2 of the TTBER 2004. For further details see TT Guidelines, OJ 2004 C 101/2, paras 74–106. 53 Article 5 of the TTBER 2004. For further details see TT Guidelines, paras 107–116.
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does not exceed 30 per cent, for vertical licences, in either case the share being of the affected relevant technology or product market.54 Apart from the market share thresholds, the TTBER 2004 also imposes greater scrutiny on licences between competitors than on licences between non-competitors.55 In brief, the EU IP–competition pendulum did not swing as intensively as the US pendulum; but it did reflect some similar changes. The TTBER 2004 and the TT Guidelines represent significant improvements showing an important degree of convergence, at least in theory, between the EU and US competition/antitrust law approach to technology transfer.56 2.1.2
Principles
The complexity of the economic, political and cyclical nature of the IP–competition intersection ‘makes it difficult to know exactly what the law is’.57 However, on the basis of legislation and settled cases, certain principles are respected when US or EU authorities apply competition law in general or to technology transfer in particular. 2.1.2.1 Anti-competitive agreements: per se rule and rule of reason The language of Section 1 of the Sherman Act appears to prohibit every agreement which is ‘in restraint of trade’. But the US Supreme Court has interpreted this Section to outlaw agreements constituting ‘unreasonable restraints’ only.58 In the early years of US antitrust enforcement, Justice Peckham observed that ‘the effect of most business contracts or combinations is to restrain trade in some degree’.59 A restraint, therefore, should be evaluated as to whether ‘it is merely ancillary to the main purpose of a lawful contract’,60 or whether its
54 55 56
Article 3 of the TTBER 2004. Article 4.1 and 4.2, Article 5.1 and 5.2 of the TTBER 2004. Lowe, Phillip and L. Peeperkorn (2005), ‘Singing in Tune with Competition and Innovation: the New EU Competition Policy towards Licensing’, in Barry E. Hawk (ed.), International Antitrust Law and Policy, Huntington, New York: Juris Publishing, pp. 265–285; Dolmans, Maurits and A. Pillola (2004), ‘The New Technology Transfer Block Exemption: A Welcome Reform, After All’, World Comp., 27(3), 351. 57 Hovenkamp et al., supra note 16, p. 1.17. 58 Leegin Creative Leather Products, Inc. v. PSKS, Inc., 127 S.Ct. 2705, 2712 (2007); State Oil Co. v. Khan, 522 U.S. 3, 10 (1997); Arizona v. Maricopa County Medical Society, 457 U.S. 332, 342–343 (1982). 59 US v. Joint-Traffic Ass’n, 171 U.S. 505, 567 (1898). Justice Brandeis, in Chicago Board of Trade v. US, 246 U.S. 231, 238 (1918), noted that to bind, to restrain, is of the ‘very essence’ of every agreement concerning trade. 60 US v. Addyston Pipe & Steel Co., 85 F. 271, 282 (6th Cir. 1898), affirmed, 175 U.S. 211 (1899).
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effect is direct (and immediate) or indirect (and remote).61 The Supreme Court has gradually established a rule of reason and a per se rule which are used to analyse the legality of restraints. A restraint in an agreement is treated as illegal per se without elaborate inquiry into its precise harm or its likely competitive effect if that restraint has a ‘pernicious effect on competition’ and ‘lack of any redeeming virtue’.62 Put differently, if a restraint is prima facie anticompetitive and not justified by plausible efficiency, antitrust authorities can apply the per se rule to declare that it violates Section 1 of the Sherman Act. The per se treatment is appropriate only where ‘experience with a particular kind of restraint enables the Court to predict with confidence that the rule of reason will condemn it’.63 However, it is impossible simply to isolate a restraint within an overall agreement and then argue that the restraint falls within the scope of the per se illegality. The Supreme Court has rejected this improvident approach in order to avoid formalistically sorting alleged anticompetitive practices into a particular category and then mechanically applying the per se rule.64 A restraint is deemed unlawful per se only where a court, taking into account the whole agreement incorporating the restraint, determines that the restraint prima facie appears to be of a kind which ‘always or almost always tend[s] to restrict competition and decrease output’.65 In any case, courts ‘should not throw labels like per se around loosely, without some appreciation for the economic arrangement’ which courts are evaluating.66 The application of the per se approach should itself be based on self-evident economic effects, rather than on formalistic categories.67 If a restraint is not subject to per se condemnation, it will be evaluated under the rule of reason. In such case, the pro-competitive benefits and anticompetitive effects of the restraint will be assessed and compared by analysing ‘the facts peculiar to the business, the history of the restraint, and the reasons
61 62
Joint-Traffic Ass’n, supra note 59, at 568. Northern Pacific Railway Co. v. US, 356 U.S. 1, 5 (1958); National Society of Professional Engineers v. US, 435 U.S. 679, 692 (1978); FTC v. Superior Court Trial Lawyers Ass’n., 493 U.S. 411, 433 (1990). 63 Leegin, supra note 58, at 2708; State Oil v. Khan, supra note 58, at 10; Maricopa County Medical Society, supra note 58, at 342–343; Broadcast Music, Inc. v. Columbia Broadcasting System, Inc. (BMI) 441 U.S. 1, 19 (1979). 64 See, e.g., ibid., at 8–9 and 20; FTC v. Indiana Federation of Dentists, 476 U.S. 447, 458 (1986). 65 Leegin, supra note 58, at 2713; Business Electronics Corp. v. Sharp Electronics Corp., 485 U.S. 717, 723–731 (1988); BMI, supra note 63, at 7–10 and 19–20. 66 Generac Corp. v. Caterpillar, Inc., 172 F.3d 971, 977 (7th Cir. 1999). 67 Leegin, supra note 58, at 2713; Continental T.V., Inc. v. GTE Sylvania Inc., 433 U.S. 36, 58–59 (1977).
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why it was imposed’.68 A broad range of factors should be taken into account in order to assess the reasonableness of the restraint, including: (i) specific information about the relevant product market; (ii) the history, nature and effect of the restraint; and (iii) the market power of the firms involved.69 Consequently, a thorough, comprehensive inquiry into market conditions is generally required under the rule of reason.70 However, if an observer with a rudimentary understanding of economics can conclude that a restraint is sufficiently anti-competitive on its face, it may be condemned under Section 1 of the Sherman Act without the elaborate analysis called for by the full-blown rule of reason inquiry. In this case, because of the intuitive obviousness of anticompetitive effects, the so-called abbreviated (truncated or quick look) rule of reason may be applied.71 In the EU, while Article 81(1) EC prohibits anti-competitive agreements,72 Article 81(3) EC exempts such agreements if they cumulatively satisfy four requirements, namely: (i) efficiency gains – improving the production or distribution of goods or promoting technical or economic progress; (ii) a fair share for consumers – allowing consumers a fair share of the resulting benefit; (iii) indispensability – not imposing on the undertakings concerned restrictions which are not indispensable to the attainment of the objectives; and (iv) no elimination of competition – not affording the parties the possibility of substantially eliminating competition.73 The assessment of an anti-competitive agreement under Article 81 EC thus consists of two steps: (i) determining whether or not there are appreciable restrictions on competition under Article 81(1) EC, and (ii) balancing anticompetitive effects and pro-competitive benefits of the agreement found to be restrictive, under Article 81(3) EC.74 Consequently, if an agreement falls under Article 81(1) EC, a rule of reason is effectively applied under Article 81(3) EC. 68 National Society of Professional Engineers v. US, 435 U.S. 679, 687–692 (1978); BMI, supra note 62; Maricopa County Medical Society, supra note 58, at 343; National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (NCAA), 468 U.S. 85 (1984); 69 Leegin, supra note 58, at 2712–2713. 70 Antitrust–IP Guidelines, Section 3.4. 71 California Dental Association v. FTC, 526 U.S. 756 (1999); Indiana Federation of Dentists, supra note 64, at 459–461; NCAA, supra note 68, at 109–110; See also Brunet, Edward (2009), ‘Antitrust Summary Judgment and the Quick Look Approach’, available at http://ssrn.com/abstract=1358610. 72 Article 81(1) EC requires that four criteria, namely the undertaking criterion, the agreement criterion, the effect on trade criterion, and the competition criterion, be met in the actual (economic and legal) context of the restraint. 73 See European Commission Guidelines on the application of Article 81(3) of the Treaty, OJ 2004 C 101/97. 74 Ibid., para. 11.
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But when accessing an agreement under Article 81(1) EC, although the rule of reason is not applied,75 the competent authorities must consider the economic and legal conditions (the actual context), in which the agreement is to be applied,76 even if the agreement consists of a hard-core restriction which is excluded from the benefit of block exemption regulations. This means that ‘account should be taken of the economic context in which the undertakings operate, the products or services covered by the agreements, the structure of the market concerned and the actual conditions in which it functions’77 in order to determine whether or not the agreement does indeed fall under Article 81(1) EC.78 A number of factors are to be taken into account in the assessment of a technology transfer agreement under Article 81(1) EC, none of which is considered determinative. These include the nature of the agreement; the market position of the parties, of competitors, and of buyers of the licensed products; entry barriers; and maturity of the market.79 At first glance, technology transfer is pro-competitive because, generally, it will facilitate the integration of technology with complementary factors of production and distribution. It can stimulate innovation, disseminate technology, and save costs in production or distribution. Indeed, most restraints in technology transfer agreements are evaluated under the rule of reason under both US and EU law.80 2.1.2.2
Monopolization or abuse of a dominant position: a two-pronged test Section 2 of the Sherman Act makes it unlawful for a firm, or combination of
75
See Case T–112/99, Métropole Télévision (M6) v. Commission, [2002] ECR II–2459, paras 72 and 76–78; Case T–65/98, Van den Bergh Foods v. Commission, [2003] ECR II–2707, para. 106; Case T–328/03, O2 (Germany) GmbH & Co. OHG v Commission, [2006] ECR II–1231, paras 69–70. 76 See, e.g., Case 56/65, Société La Technique Minière v. Maschinenbau Ulm GmbH, [1966] ECR 235, pp. 248–250; Case 22/71, Béguelin Import Co. v. S.A.G.L. Import Export, [1971] ECR 949, para. 13; Case C–309/99, Wouters and others v. Algemene Raad van de Nederlandse Orde van Advocaten, [2002] ECR I–1577, para. 97. 77 Case C–399/93, H.G. Oude Luttikhuis and others v. Verenigde Coöperatieve Melkindustrie Coberco BA, [1995] ECR I–4515, para. 10. 78 Some legal scholars contend that ‘limited application of the rule of reason’ should also be made under Article 81(1) EC. See Opinion of AG Léger in Wouter, supra note 76, paras 103–104; Nazzini, Renato (2006), ‘Article 81 EC between Time Present and Time Past: A Normative Critique of “Restriction of Competition” in EU Law’, Common Market L. Rev., 43, 497. 79 TTBER 2004, paras 8 and 12 of the Preamble; TT Guidelines, paras 132–140. 80 Antitrust–IP Guidelines, Sections 2.3 and 3.4; TT Guidelines, paras 9 and 17. See also US Philips Corp. v. ITC, 424 F.3d 1179, 1193 (Fed. Cir. 2005), cert. denied, 547 U.S. 1207 (2006).
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firms, to monopolize or attempt to monopolize. However, the ultimate purpose of the US antitrust law is to protect competition, not competitors.81 Thus, after being urged to compete and innovate, successful competitors are not to be condemned when they gain monopoly power through legitimate competition and innovation.82 A two-pronged test must be satisfied for competent authorities to find the offence of monopolization: (i) possession of monopoly power in the relevant market, and (ii) wilful acquisition or maintenance of that power as distinguished from growth or development as a consequence of a superior product, business acumen, or historic accident.83 This two-pronged test indicates that to ‘safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anti-competitive conduct’.84 The anti-competitive conduct to be condemned under Section 2 thus must be found to have an anti-competitive effect that harms the competitive process, and thereby consumers. An ‘anti-competitive’ effect or ‘an act of pure malice’ that harms only competitors does not meet the requirements of Section 2.85 Microsoft III86 provides a good example of the two-pronged test of Section 2. In this case, Microsoft was found to have monopoly power in the Intelcompatible operating system market mainly because of the fact that it accounted for more than a 95 per cent share (over 80 per cent if Mac operating systems were included) in the relevant market, and there remained high barriers to entry due to network effects.87 It had also implemented many anti81 Brown Shoe Co. v. US, 370 U.S. 294, 320 (1962). US DOJ (2008), Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act, pp. 11–12. 82 US v. Aluminum Co. of America, 148 F.2d 416, 430 (2nd Cir. 1945). 83 Pacific Bell Telephone Co. v. Linkline Communications, Inc., 129 S.Ct. 1109, 1118 (2009); Verizon Communications Inc v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 407 (2004) (this case will be analysed in detail in infra Section 2.4.1); US v. Grinnell Corp., 384 U.S. 563, 570–571 (1966). 84 Trinko, supra note 83, at 407. 85 Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 458 (1993); Brooke Group Ltd. v. Brown and Williamson Tobacco Corp., 509 U.S. 209 (1993). 86 US v. Microsoft Corp., 253 F.3d 34, 50–80 (DC Cir 2001) (Microsoft III). In addition to Microsoft III, Microsoft antitrust litigation includes US v. Microsoft Corp., 56 F.3d 1448 (DC Cir. 1995) (Microsoft I), and US v. Microsoft Corp., 147 F.3d 935 (DC Cir. 1998) (Microsoft II). 87 Network effects reflect a market phenomenon in which the consumption of a product by one consumer has a positive impact on the value of that product’s consumption by another consumer, i.e. positive consumption externalities. The network of telephones is a classic example: the more people who have telephones, the greater the number of possible phone calls one can make, and the more valuable telephones become. See, e.g., Schanzenbach, Max (2002), ‘Network Effects and Antitrust Law: Predation, Affirmative Defenses, and the Case of U.S. v. Microsoft’, Stan. Tech. L. Rev.,
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competitive practices so as to exclude competitors and maintain its monopoly position. The DC Circuit rejected Microsoft’s justifications based on IPRs. The court ruled that IPRs ‘do not confer a privilege to violate the antitrust laws’.88 Both prongs of the test were held to be satisfied, and Microsoft was condemned for the offence of monopolization under Section 2 of the Sherman Act. An antitrust violation regarding an attempt to monopolize is established if three requirements are all met. They are: (i) the alleged violator has engaged in anti-competitive conduct with (ii) a specific intent to monopolize and (iii) a specific probability of achieving monopoly power.89 However, from the economic perspective of antitrust law, the intent requirement is not welcome. It can be argued that only the effect of anti-competitive conduct, i.e. the specific probability of success, is essential. This is reflected in Microsoft III, where the DC Circuit said that there was no evidence of barriers to entry in the web browser market. The third prong, therefore, was not proved; and Microsoft did not commit the offence of attempting to monopolize. The recent decision of the Supreme Court in Weyerhaeuser90 reflects the general trend in applying Section 2 of the Sherman Act on the basis of objective criteria, which focus on actual effects, instead of intent and other subjective standards. Similarly, Federal courts of appeals have held that the US antitrust law focus is upon the effect of conduct, ‘not upon the intent behind it’.91 Unilateral conduct that does not potentially/actually lead to a threat of monopolization will not be subject to antitrust prohibition. Like Section 2 of the Sherman Act, Article 82 EC is ‘intended to prohibit a dominant undertaking from strengthening its position by recourse to means other than those based on competition on the merits’.92 In order to prove a
2002, 4; Katz, Michael L. and C. Shapiro (1985), ‘Network Externalities, Competition, and Compatibility’, American Econo. Rev., 75(3), 424. 88 Microsoft III, supra note 86 at 63. 89 Spectrum Sports, supra note 85, at 456; Times-Picayune Pub. Co. v. US, 345 U.S. 594 (1953); Lorain Journal Co. v. US, 342 U.S. 143 (1951); Microsoft III, supra note 86, at 50–80. 90 Weyerhaeuser Co. v. Ross-Simmons Hardware Lumber Co., Inc., 127 S.Ct. 1069 (2007) (upholding a decision that predatory pricing/bidding infringes Section 2 only if two requirements are satisfied: (i) below-cost pricing, and (ii) a dangerous probability of recouping investment in below-cost pricing). 91 Microsoft III, supra note 86, at 59. The DC Circuit even held, in Rambus Inc. v. FTC, 522 F.3d 456, 464 (DC Cir. 2008), cert. denied, 129 S.Ct. 1318 (2009), that the antitrust focus is ‘properly placed on the resulting harms to competition rather than the deception itself’. 92 Case T–201/04, Microsoft v. Commission, [2007] ECR II–3601, para. 1070; Van den Bergh Foods, supra note 75, para. 157; Case T–229/94, Deutsche Bahn v. Commission, [1997] ECR II–1689, para. 78; Case C–62/86, AKZO v. Commission, [1991] ECR I–3359, paras 69–70.
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violation of Article 82 EC, two requirements must both be satisfied: (i) the existence of a dominant position,93 and (ii) the abuse of that dominant position. The abuse of a dominant position by an undertaking, as an objective concept, is defined as conduct capable of restricting competition.94 Such conduct must: influence the structure of a market where, as a result of the very presence of the undertaking in question, the degree of competition is weakened and which, through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators, has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.95
There are three main types of abusive conduct under Article 82 EC, although there is no clear-cut distinction between them, because Article 82 EC ‘is not only aimed at practices which may cause damage to consumers directly, but also at those which are detrimental to [consumers] through their impact on an effective competition structure’.96 They are: (i) exclusionary abuses – conduct directed against competitors by unlawfully limiting competitors’ ability to compete that indirectly causes a loss to consumer welfare;97 (ii) exploitative abuses – conduct, such as excessive pricing and applying unfair terms and conditions, which results in a direct loss of consumer welfare;98 and (iii) reprisal abuses – conduct carried out by a dominant firm which directly or indirectly limits ‘production, markets, technical development, or investment’ of its competitors, customers or suppliers by harming, punishing or disciplining the latter in any significant way for
93 Regarding the definition of dominance, see Case C–202/07 P, France Télécom v. Commission, Judgment of 2 April 2009, not yet reported, para. 103; Case C–52/07, Kanal 5 Ltd, TV 4 AB v. Föreningen Svenska Tonsättares Internationella Musikbyrå, Judgment of 11 Dec. 2008, not yet reported, para. 25; Article 82 EC Guidance, paras 9–12. 94 Microsoft v. Commission, supra note 92, para. 867. 95 France Télécom, supra note 93, para. 104; Kanal 5, supra note 93, para. 25; Case 85/76, Hoffmann-La Roche v. Commission, [1979] ECR 461, paras 6 and 91. 96 France Télécom, supra note 93, para. 105; Case 6/72, Europemballage Corporation & Continental Can Company Inc. v. Commission, [1973] ECR 215, para. 26. 97 Kroes observed that ‘Article 82 enforcement should focus on behavior that had actual or likely restrictive effects on the market, which harms customers’, but ‘it is sound for [EU] enforcement policy to give priority to so-called exclusionary abuses, since exclusion is often at the basis of later exploitation of customers’. Kroes, Neelie (2005), ‘Tackling Exclusionary Practices to Avoid Exploiting of Market Power: Some Preliminary Thoughts on the Policy Review of Article 82’, Fordham Int’l L. J., 29, 593–600. See also Article 82 EC Guidance. 98 Para. 7 of the Article 82 EC Guidance.
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competing strongly or for complaining to a competition authority, or which discourages other firms from doing so.99 Generally, monopolization or attempts to monopolize under Section 2 of the Sherman Act is comparable to abuses of a dominant position under Article 82 EC. But in some specific cases the determination of a monopoly/dominant position, anti-competitive conduct or anti-competitive effects may differ. It seems that Section 2, which prohibits ‘monopolization’, focuses more on exclusionary conduct.100 Article 82 EC, which prohibits ‘abuse of a dominant position’, deals not only with exclusionary abuses but also exploitative and reprisal abuses. This is also reflected in the application of US antitrust or EU competition law to technology transfer. In addition, it appears that both US and EU courts are tending to move towards a rule of reason, or a more economic and effects-based approach, in antitrust/competition scrutiny of unilateral conduct. In the US, Trinko exemplifies this observation. The Supreme Court held that ‘[a]ntitrust analysis must always be attuned to the particular structure and circumstances of the industry at issue’.101 The application of the two-pronged test under Section 2 of the Sherman Act ‘can readily result in “false positive” mistaken inferences that chill the very conduct the antitrust laws are designed to protect’; thereby, courts adjudicating Section 2 claims need to weigh and balance a realistic assessment of antitrust scrutiny’s costs against the benefits of antitrust intervention.102 In Microsoft III, the DC Circuit articulated a ‘general rule’ containing three main steps for evaluating the legality of unilateral conduct under Section 2. First, the plaintiff ‘must demonstrate that the monopolist’s conduct indeed has the requisite anticompetitive effect’ that ‘must harm the competitive process and thereby harm consumers’. Second, the defendant (monopolist) may rebut this prima facie accusation by providing a ‘procompetitive justification’, which is not a mere pretext, to prove that ‘its conduct is indeed a form of competition on the merits’ because of, e.g., the conduct’s ‘greater efficiency or enhanced consumer appeal’. This will shift the burden back to the plaintiff to rebut the justification. Finally, if the defendant’s pro-competitive justification is not rebutted, ‘the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the pro-competitive benefit’.103 99 See Temple Lang, John (2008), ‘Reprisals and Overreaction by Dominant Companies as Anti-competitive Abuse under Article 82(b)’, European Comp. L. Rev., 29(1), 15; O’Donoghue, Robert and A.J. Padilla (2006), The Law and Economics of Article 82 EC, Oxford: Hart Publishing, pp. 174–175. 100 Elhauge, Einer and D. Geradin (2007), Global Competition Law and Economics, Oxford: Hart Publishing, p. 301 (contending that ‘[m]uch of the US caselaw focuses on whether the conduct excludes rivals from the market’). 101 Trinko, supra note 83, at 399. 102 Ibid., at 399–400 and 414. 103 Microsoft III, supra note 86, at 58–59.
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This rule is in line with the rule of reason under Section 1 as presented above. Thus, by invoking the rule of reason, which was articulated for the first time by the Supreme Court in Standard Oil v. US,104 the DC Circuit concluded that the rule of reason, or balanced analyses, is applied to both sections of the Sherman Act.105 This is supported by the DOJ, which has recently stated that ‘both the perceived procompetitive and anticompetitive aspects of a dominant firm’s conduct’ should be carefully analysed, and these aspects would be weighed in order to ‘determine whether on balance the net effect of this conduct harms competition and consumers’.106 In the EU, the case law of the ECJ shows that a dominant firm’s refusal to supply an existing customer may be a per se violation of Article 82 EC.107 But the ECJ possibly accepts ‘objective economic justifications’ to rebut such a per se analysis.108 Recently, the Court, in Sot. Lelos kai Sia, has held that a refusal to supply by a dominant firm which aims at preventing parallel trade infringes Article 82 EC unless the dominant firm can prove that its refusal proportionately protects its legitimate commercial interests in response to excessive, or out of the ordinary, orders from its customers.109 AG Ruiz-Jarabo Colomer listed three ways for a dominant firm to justify its alleged abuse: (i) grounds relating to the market in which they are operating, (ii) the legitimate protection of their business interests, and (iii) proof of net positive economic effects.110 In any event, he observes that ‘Article 82 EC does not provide a basis for attributing conduct which is abusive per se to undertakings in a dominant position’ although ‘there is intent and an anticompetitive effect caused by that conduct’.111
104 Standard Oil Co. v. US, 221 U.S. 1, 31 (1911) (holding that ‘when [Section 2] is thus harmonized with and made, as it was intended to be, the complement of [Section 1], it becomes obvious that the criteria to be resorted to in any given case for the purpose of ascertaining whether violations of [Section 2] have been committed is the rule of reason guided by the established law’). 105 Microsoft III, supra note 86, at 59. 106 Varney, Christine A. (2009), ‘Vigorous Antitrust Enforcement in this Challenging Era’, p. 13, available at www.usdoj.gov/atr/public/speeches/245711.pdf. 107 See, e.g., Case 27/76, United Brands v. Commission, [1978] ECR 207, para. 183; Joined Cases 6/73 and 7/73, Istituto Chemioterapico Italiano and Commercial Solvents v. Commission, [1974] ECR 223, para. 25. 108 United Brands, supra note 107, para. 184; Case C–95/04 P, British Airways v. Commission, [2007] ECR I–2331, para. 69. 109 Joined Cases C–468/06 and 478/06, Sot. Lelos kai Sia EE v. GlaxoSmithKline AEVE, [2008] ECR I–7139, paras 71 and 77; Kanal 5, supra note 93, para. 26. See also Nguyen, Tu T. et al. (2009), ‘The Rule of Reason under Article 82 EC after Sot. Lelos kai Sia’, available at http://ssrn.com/abstract=1431010. 110 Opinion of AG Ruiz-Jarabo Colomer in Sot. Lelos kai Sia, supra note 109, para.79. 111 Ibid., para. 123.
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This reflects a trend whereby the EU is moving to a more flexible approach where anti-competitive conduct is scrutinized under Article 82 EC. It is supported by the Article 82 EC Guidance, which states: [A] dominant undertaking may also justify conduct leading to foreclosure of competitors on the ground of efficiencies that are sufficient to guarantee that no net harm to consumers is likely to arise. In this context, the dominant undertaking will generally be expected to demonstrate, with a sufficient degree of probability, and on the basis of verifiable evidence, that the following cumulative conditions are fulfilled: [i] the efficiencies have been, or are likely to be, realised as a result of the conduct … [ii] the conduct is indispensable to the realisation of those efficiencies: there must be no less anti-competitive alternatives to the conduct that are capable of producing the same efficiencies, [iii] the likely efficiencies brought about by the conduct outweigh any likely negative effects on competition and consumer welfare in the affected markets, [iv] the conduct does not eliminate effective competition, by removing all or most existing sources of actual or potential competition …112
This approach, which seems to follow the rule of reason under Article 81(3) EC, has also been recognized by the CFI in Microsoft v. Commission and by the ECJ in British Airways v. Commission: [A]lthough the burden of proof of the existence of the circumstances that constitute an infringement of Article 82 EC is borne by the Commission, it is for the dominant undertaking concerned, and not for the Commission, before the end of the administrative procedure, to raise any plea of objective justification and to support it with arguments and evidence. It then falls to the Commission, where it proposes to make a finding of an abuse of a dominant position, to show that the arguments and evidence relied on by the undertaking cannot prevail and, accordingly, that the justification put forward cannot be accepted.113
In brief, the approach of the European Commission and the European Courts is similar to the three-main-steps general rule in Microsoft III as noted.
2.2
ANTI-COMPETITIVE PRICE PRACTICES
The ultimate objective of competition law is to reduce prices, increase the quantity and quality of goods and services, and promote innovation. Pricerelated anti-competitive practices are thus often of concern. In the field of technology transfer, concerns about price-related anti-competitive practices are involved not only in the product market, where restrictions on product 112 113
Article 82 EC Guidance, para. 30 (and para. 31) (emphasis added). Microsoft v. Commission, supra note 92, para. 688. The ECJ ruled similarly in British Airways, supra note 108, para. 86.
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prices occur, but also in the technology market, where anti-competitive royalty issues arise.114 2.2.1
Royalty Concerns
One of the most difficult problems in technology transfer is how best to measure the value of transferred technology. Licensors often seek to optimize their royalty income. Meanwhile, licensees want to be able to minimize their financial obligations to licensors. A royalty provision, at least one relating to minimum royalty requirement, often reflects the relative negotiating power of the two parties. Therefore, the parties to a technology transfer agreement ‘are normally free to determine the royalty payable’ by the licensee as well as the methods of royalty payment.115 In general, competition authorities or courts should not work as price regulators. However, competition concerns may arise in some circumstances involving royalty obligations. There may be disproportionate royalties indicating price fixing between competitors, where a technology transfer agreement is a sham or pretext. The EU TT Guidelines read: [I]t is a hardcore restriction [either] if competitors provide for reciprocal running royalties in circumstances where the licence is a sham, in that its purpose is not to allow an integration of complementary technologies or to achieve another procompetitive aim [or] if royalties extend to products produced solely with the licensee’s own technology.116
In addition to royalty-related price fixing, concerns may be raised in cases relating to excessive royalties, obligations for licensees to continue to pay royalties after the technology transferred becomes available to the public (post-expiration royalties), and obligations to pay royalties on sales of each finished product unit produced by licensees even where the particular product does not actually embody the transferred technology (total sales royalties). 2.2.1.1 Excessive royalties One of the rationales supporting IPRs is that IPRs are granted to reward the investment, development and disclosure of right holders’ innovation by enabling them to benefit from their innovation. The US Supreme Court has clearly stated that ‘a patent empowers the owner to exact royalties as high as
114 The anti-competitive aspects of fair, reasonable and non-discrimination royalties in standard setting are not considered here. 115 TT Guidelines, para. 156. 116 TT Guidelines, para. 157.
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he can negotiate with the leverage of that monopoly’.117 Furthermore, it is often argued that: The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.118
Excessive prices may be pro-competitive rather than anti-competitive, because high prices, which lead to high profits, may attract and encourage investment, innovation, commercialization and competition. As a result, in the absence of evidence of either price fixing between competitors or predatory pricing in the product market, royalties in a technology transfer agreement are not subject to US antitrust challenge, even if they are alleged to be exploitatively excessive.119 In the EU, it is also accepted that parties to a technology transfer agreement are free to determine the royalties paid by the licensee.120 However, excessive royalties, contrary to the US perspective, may be incompatible with EU competition law and constitute an abuse of a dominant position in exceptional circumstances, because Article 82(a) EC clearly prohibits a dominant firm from ‘directly or indirectly imposing unfair purchase or selling prices’. This provision has often been interpreted as prohibiting exploitative, excessive pricing by a dominant firm. In its seminal United Brands judgment, the ECJ held that a price is excessive if ‘it has no reasonable relation to the economic value of the product’.121 The Court articulated a two-step test to condemn excessive pricing under Article 82 EC: (i) there remains an excessive difference between the costs actually incurred and the price actually charged, and (ii) the price actually charged is unfair either in itself or when compared to competing products.122 This test, particularly its second limb, has some derivatives. The ECJ may compare the price charged by a dominant firm to prices charged by equivalent firms in neighbouring geographic markets,123 or to 117 118 119
Brulotte v. Thys Co., 379 U.S. 29, 33 (1964). Trinko, supra note 83, at 407. See, e.g., Linkline, supra note 82, at 1121; John Doe 1 and John Doe 2 v. Abbott Laboratories, 571 F.3d 930 (9th Cir. 2009). 120 See TT Guidelines, para. 156. 121 United Brands, supra note 107, para. 250. 122 Ibid., para. 252. See also Case T–306/05, Scippacercola and Terezakis v. Commission, [2008] ECR II–4, para. 100. 123 Case 110/88, Lucazeau v. SACEM, [1989] ECR 2811, para. 25; Case 30/87, Corinne Bodson v. SA Pompes funèbres des régions libérées, [1988] ECR 2479; Deutsche Grammophon, supra note 40, para. 19.
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prices charged by the same dominant firm to various customers and/or over time.124 In addition to a price–cost comparison, which is almost a compulsory benchmark in the examination of excessive pricing, other benchmarks may be applied, namely a competitors benchmark, geographical benchmark, and historical costs benchmark. This is consistent with United Brands because, from the economic perspective, there are several ways ‘of selecting the rules for determining whether the price of a product is unfair’.125 Regarding IPRs, the ECJ, in Volvo126 and Renault,127 confirmed that IPRrelated excessive prices set by a firm holding a dominant position may be anticompetitive and prohibited by Article 82 EC. It also stated that ‘an undertaking abuses its dominant position where it charges for its services fees which are unfair or disproportionate to the economic value of the service provided’.128 These arguments can be applied to excessive royalties in technology transfer. However, there are many practical difficulties in determining whether a royalty is excessive and how an excessive royalty is anti-competitive under Article 82 EC.129 In order to apply the United Brand excessive pricing test or its derivatives in the case of excessive royalties, competent authorities have to: (i) find an adequate cost measure to determine costs of the technology transferred, (ii) set a level where a profit achieved by the licensor becomes excessive, and (iii) identify appropriate benchmarks to compare with the royalties actually charged.130 Determining these three issues for IPRs is much more complicated and carries a high risk of errors. Recently, Mark Lemley and Carl Shapiro have presented an economic model of patent hold-up, which reflects royalty bargaining between a patent holder and a downstream firm.131 On the basis of this bargaining model and
124
Case 226/84, British Leyland Public Limited Co. v Commission, [1986] ECR 3263, paras 27–29; Case 26/75, General Motors Continental NV v. Commission, [1975] ECR 1367, para. 12. 125 United Brands, supra note 107, para. 253. See also O’Donoghue and Padilla, supra note 99, pp. 613–619. 126 Case 238/87, AB Volvo v. Erik Veng (UK) Ltd, [1988] ECR 6211, para. 9. 127 Case 53/87, Consorzio italiano della componentistica di ricambio per autoveicoli and Maxicar v. Régie nationale des usines Renault, [1988] ECR 6039, para. 16. 128 Case C–340/99, TNT Traco v. Poste Italiane, [2001] ECR I–4109, para. 46; Kanal 5, supra note 93, para. 28; British Leyland, supra note 124, para. 27; Case COMP/A.36.568/D3, Scandlines Sverige v. Port of Helsingborg, Commission Decision of 23 July 2004, paras 158 and 208–248. 129 See Ezrachi, Ariel and D. Gilo (2009), ‘Are Excessive Prices Really SelfCorrecting?’, J. Comp. L. & Econo., 5(2), 249–268; Article 82 Guidance, para. 7. 130 See Geradin, Damien (2007), ‘Abusive Pricing in an IP Licensing Context: An EC Competition Law Analysis’, available at http://ssrn.com/abstract=996491; O’Donoghue and Padilla, supra note 99, pp. 621–628. 131 Lemley, Mark A. and C. Shapiro (2007), ‘Patent Holdup and Royalty Stacking’, Tex. L. Rev., 85, 1991.
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empirical investigations, these authors conclude that where a patent is only one part of a larger product, royalties are often excessive. They then propose to correct excessive royalties owing to patent hold-up by making it harder to obtain an injunction under patent law.132 In contrast, Einer Elhauge, while recognizing the Lemley–Shapiro economic model, contends that patent holdup may not lead to excessive royalties.133 This demonstrates that whether excessive royalties exist or not is very controversial, not only from the legal but also from the economic and empirical perspectives. In a related scenario, excessive royalties charged by a licensor who holds a dominant position in a technology market and integrates into a downstream product market, i.e. this firm or its controlled firm also produces technology-embodied products, may constitute price (or margin) squeezing. An increase in royalties by a licensor in the upstream technology market obviously raises the costs of licensees in the downstream product market and imposes additional efficiency constraints on the licensees. This makes the licensees less competitive by having insufficient profit margin in comparison with the licensor in the downstream product market and may cause them to lose sales and market shares to the licensor.134 This conduct may be regarded as either exclusionary conduct in the downstream market or exploitative in the upstream market under EU competition law. The Commission has decided that price squeezing independently violates Article 82 EC in Telefónica135 and Deutsche Telekom, which was upheld by the CFI.136 Therefore, excessive royalties can be condemned as royalty-related price squeezing, a stand-alone type of abuse under Article 82 EC. In contrast, the US Supreme Court recently in Linkline137 ruled that price squeezing claims, which are identical to those in the refusal to deal in Trinko, are not recognizable under the Sherman Act, because this Act ‘does not forbid – indeed, it encourages – aggressive price competition at the retail level, as long as the prices being charged are not predatory’.138 To conclude, there are some differences between the US and the EU regarding the issues of excessive royalties and royalty-related price squeezing. It is worth noting that applying Article 82 EC or Section 2 of the Sherman Act to those issues should be done more leniently and prudently because of the 132 133
Ibid., pp. 1993 and 2009–2010. Elhauge, Einer (2008), ‘Do Patent Holdup and Royalties Stacking Lead to Systematically Excessive Royalties?’, J. Comp. L. & Econo., 4(3), 535–570. 134 TT Guidelines, para. 23. 135 Case COMP/38.784, Wanadoo España v. Telefónica, Commission Decision of 4 July 2007, not yet reported. 136 Case T–271/03, Deutsche Telekom v. Commission, [2008] ECR II–477, para. 167. 137 Linkline, supra note 83. 138 Ibid., at 1119 and 1122.
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reward incentives of IP protection and the risks of R&D investments. But at least from the EU perspective, the application of Article 82 EC, particularly Article 82(a) EC, should continue to be kept as ‘part of the competition authority’s arsenal’139 to control effectively an abuse of a dominant position due to excessive royalties or royalty-related price squeezing, which threatens competition, especially in a secondary market. 2.2.1.2 Post-expiration royalties At the moment, although excessive royalties are almost never challenged under US antitrust law, post-expiration royalties may be. In the Brulotte ruling140 in 1964, at a time when antitrust law overrode IP law, the Supreme Court expressed its hostility towards the extension of the IPR-related legal monopoly or conduct going beyond the scope and length of IPRs granted. The Court condemned a post-expiration royalty provision under the per se illegality rule. By using a ‘leverage’ argument, it held that ‘the exaction of royalties for use of a [patented] machine after the patent has expired is an assertion of monopoly power in the post-expiration period when … the patent has entered the public domain’. But this argument was formalistic and contrary to the principle established in US law under which royalties charged could be as high as the market would bear. As Justice Harlan observed in his dissenting opinion in this case, courts must distinguish ‘long-term use payments from long-term instalment payments of a flat-sum purchase price’.141 If a patent holder could legally charge higher royalties limited by the life of the patents, it is legitimate for her to choose to spread the royalties out over a longer period as a ‘deferred’ royalty payment.142 In 2002, the Seventh Circuit criticized the Brulotte ruling. It held: The Supreme Court’s majority opinion reasoned that by extracting a promise to continue paying royalties after expiration of the patent, the patentee extends the patent beyond the term fixed in the patent statute and therefore in violation of the law. That is not true … The duration of the patent fixes the limit of the patentee’s power to extract royalties; it is a detail whether he extracts them at a higher rate over a shorter period of time or a lower rate over a longer period of time … charging royalties beyond the term of the patent does not lengthen the patentee’s monopoly; it merely alters the timing of royalty payments. 143
139 Régibeau, Pierre (2007), ‘The (Complex?) Relation between Art. 82(a) and Intellectual Property Rights’, available at www.eui.eu/Documents/RSCAS/Research/ Competition/2007ws/200709-COMPed-Regibeau.pdf. 140 Brulotte, supra note 117, at 33. 141 Ibid., at 36. 142 Thys Co. v. Brulotte, 62 Wash. 2d 284, 288 and 291 (Wash. 1963). 143 Scheiber v. Dolby Laboratories, Inc., 293 F.3d 1014, 1017–1018 (7th Cir. 2002), cert. denied, 537 U.S. 1109 (2003) (emphasis added).
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The Seventh Circuit, however, reluctantly followed the Brulotte ruling, because a lower court has no authority to overrule a Supreme Court decision. The Brulotte ruling is very difficult to square with Aronson.144 In the latter case, the Supreme Court held that, from the antitrust perspective, a technology licensor could lawfully continue to exact royalty payments even after the transferred technology, which had not been patented, entered the public domain, where the licensee had freely agreed to such a royalty arrangement through a negotiation in which both parties had been independent and on an equal footing. Permitting enforcement of such an agreement, reasoned the court, would ‘encourage invention in areas where patent law does not reach, and will prompt the independent innovator to proceed with the discovery and exploitation of his invention’; competition, therefore, ‘is fostered and the public is not deprived of the use of valuable, if not quite patentable, invention’.145 On the basis of the Aronson ruling, the Ninth Circuit appeared to find a reasonable solution to the Brulotte obstacle. In Zila v. Tinnell,146 an inventor assigned to a company all of his worldwide rights to an invention prior to the patent grant in return for a perpetual royalty of 5 per cent of the sale price of a product incorporating the invention. After the first patent expired, the company in question stopped paying all royalties and declared that the entire licensing agreement was unenforceable under the Brulotte decision. The Ninth Circuit disagreed. It held that the company still had obligations under other provisions in the contract, including the obligation to pay royalties based on patented improvements, because the contract provided royalties on sales of the invention rather than the first patent. The Ninth Circuit ruled: [Courts] do not read Brulotte so mechanically as to render the royalty provision here necessarily invalid as of the expiration of the [first] patent. Rather, [courts] believe the parties’ intent can be best furthered, and the Brulotte doctrine implemented, by a more nuanced consideration of the contract.147
It appears that the Ninth Circuit resolves the tension between patent law and freedom of contract in a manner that, to the extent permitted by patent law, respects the original intent of parties concerned.148
144 145 146 147 148
Aronson v. Quick Point Pencil Co., 440 U.S. 257 (1979). Ibid., at 266. Zila, Inc. v. Tinnell, 502 F.3d 1014 (9th Cir. 2007). Ibid., at 1025. See Gates, Sean and J. Maier (2009), ‘Brulotte’s Continuing Shadow over Patent Licensing’, J. IP L. & Practice, 4(3), 181; Horwitz, Ethan (2008), ‘Patent and Technology Licensing’, PLI/Pat, 933, 112–113. Regarding the patent–antitrust– contract intersection see infra Section 2.5.
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In the EU, post-expiration royalties were initially scrutinized with some suspicion under Article 81(1) EC. In AOIP/Beyrard,149 the Commission contended that a post-expiration royalty which ‘has the effect of burdening manufacturing costs without any economic justification and thereby weakening the competitive position of the licensee’ infringed Article 81 EC. However, the Commission changed its attitude in Boussois/Interpane150 where it stated that an obligation to pay royalties after the expiration of IP protection is not caught by Article 81(1) EC. The Commission argued that this obligation is similar to an obligation to pay a fixed sum spread over several instalments, where outstanding instalments are merely payable after the IPRs have entered the public domain. Furthermore, the ECJ also upheld the post-expiration royalties in Kai Ottung,151 the facts of which were, to some extent, similar to those of Aronson in the US. The technology transfer agreement here was concluded after a patent application was submitted but before the patent grant; and the licensee was required to pay royalties for an indeterminate period. The ECJ decided that such a royalty obligation, even after patent expiry, does not in itself constitute a restriction of competition within the meaning of Article 81(1) EC. The ECJ also stated that an obligation to pay royalties throughout the validity of an agreement, even after the expiration of IPRs, cannot fall under Article 81(1) EC if the licensee may freely terminate the agreement by giving reasonable notice. 2.2.1.3 Total sale royalties Under the view that royalties can be freely charged, it is almost impossible to condemn royalties based upon total sale receipts under US antitrust law. This tendency is reflected in Automatic Radio152 and Zenith Radio.153 Both cases involved package licences, and royalties were computed on the basis of the licensee’s total sales of products, regardless of whether the licensed patents were actually used or not. The Supreme Court in Automatic Radio held: We cannot say that payment of royalties according to an agreed percentage of the licensee’s sales is unreasonable. Sound business judgment could indicate that such payment represents the most convenient method of fixing the business value of the privileges granted by the licensing agreement.154
149 150 151
AOIP/Beyrard, supra note 45. Decision 87/123/EEC, IV/31.302, Boussois/Interpane, OJ 1987 L 50/30. Case 320/87, Kai Ottung v. Klee & Weilbach, [1989] ECR 1177, paras 13 and
15. 152 Automatic Radio Manufacturing Co. v. Hazeltine Research, 339 U.S. 827 (1950), overruled in part on other grounds by Lear, Inc. v. Adkins, 395 U.S. 653 (1969). 153 Zenith Radio Corp. v. Hazeltine Research, Inc., 395 U.S. 100 (1969). 154 Automatic Radio, supra note 152, at 834.
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The Court clarified this in Zenith Radio by permitting voluntary royalty metering if ‘convenience of the parties rather than patent power dictates the total-sales royalty provision’.155 However, the Supreme Court also distinguished the case of royalties being based on unpatented products for the convenience of the parties from those involving the patentee’s coercion or bargaining power. It reasoned: [W]e do not read Automatic Radio to authorize the patentee to use the power of his patent to insist on a total-sales royalty and to override protestations of the licensee that some of his products are unsuited to the patent or that for some lines of his merchandise he has no need or desire to purchase the privileges of the patent. In such [an] event, not only would royalties be collected on unpatented merchandise, but the obligation to pay for nonuse would clearly have its source in the leverage of the patent.156
In the EU, although the ECJ was generally very strict in Windsurfing,157 it was ready to permit a royalty calculated on the basis of a patented rig combined with a non-patented board. The ECJ held that it was difficult to calculate the value of the patented product alone; and the total sales royalty was the same as the royalty for the patented product standing alone. However, the ECJ also stressed that if such a total sales royalty provision induced the licensee to refuse to sell separately a product not covered by IPRs, it would not be compatible with Article 81 EC. This reasoning resembles that of the US Supreme Court in Zenith Radio. From the perspective of Article 82 EC, the ECJ also took a similar view in its recent judgment in Kanal 5.158 In this case, a copyright management organization, which had a dominant position – a de facto monopoly – in making music protected by copyright available for television broadcast, applied a remuneration model according to which the amount of royalties corresponded in part to the overall revenue of television broadcasters. The ECJ held that the application of this model of total sale royalties does not infringe Article 82 EC, provided that it: is proportionate overall to the quantity of musical works protected by copyright actually broadcast or likely to be broadcast, unless another method enables the use of those works and the audience to be identified more precisely without however resulting in a disproportionate increase in the costs incurred for the management of contracts and the supervision of the use of those works.159
155 156 157 158 159
Zenith Radio, supra note 153, at 138. Ibid., at 139. Windsurfing, supra note 47, paras 61–67. Kanal 5, supra note 93. Ibid., para. 41.
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It appears that total sale royalties can be challenged under both US and EU competition laws if a less restrictive alternative can reasonably be found. 2.2.1.4 Remarks Although their views relating to excessive royalties and royalty-related price squeezing may be different, both the US and the EU have favourable views regarding post-expiration and total sales royalties. However, royalty-related competition concerns may arise if the royalty provision can prevent or foreclose competition. Microsoft I160 is a good illustration of this. Microsoft allegedly had monopoly power in the operating system market. It licensed its copyrighted Windows to computer manufacturers (OEMs) under licensing agreements requiring a royalty to be paid on every computer manufactured, whether or not a particular computer installed the Windows software (‘per processor’ licence). This increased the costs of installing other operating systems, restrained their growth, and made it more difficult for other potential competitors to enter the relevant market. This was alleged to violate the Sherman Act.161 This would also be the case under the TT Guidelines in the EU, where the Commission observes that such conduct creates the same foreclosure effects as a non-compete (exclusive dealing) obligation does.162 However, whether and when such royalty-related foreclosure raises competition concerns depends mainly on the extent to which the royalty provision excludes competing licensors from a properly defined relevant market or appreciably restrains their licensing opportunities.163 The analysis is similar to the foreclosure analysis in exclusive dealing and even tying cases presented below. 2.2.2
Restrictions on Product Prices
A technology transfer agreement may contain an obligation restricting the licensee’s rights to set prices for technology-embodied products. Under such an obligation, the licensee must sell the products at a specific fixed price, or a price which is not higher than a maximum price or lower than a minimum price fixed by the licensor. Perhaps surprisingly, the US Supreme Court in US v. General Electric164
160 161
Microsoft I, supra note 85. This case was finally resolved by a consent decree. See Page, William H. and J.E. Lopatka (2007), The Microsoft Case: Antitrust, High Technology, and Consumer Welfare, Chicago: University of Chicago Press, pp. 22–32. 162 See TT Guidelines, para. 160. 163 Hovenkamp et al., supra note 16, pp. 23(31)–23(33). 164 US v. General Electric, supra note 9.
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concluded that an obligation in a single licensing agreement setting the prices at which the manufacturer could sell patented products was compatible with US antitrust law. The Court supported such an obligation on the basis of two arguments. The first emphasized the patentee’s rights to ‘secure pecuniary award’ for its patent monopoly. The patentee was entitled to impose restrictions reasonably designed to optimize returns on its patent, including the right to acquire profits by controlling the prices at which patented products were sold. The second argument was derived from the scope of a patent, part of which includes the right to make and the right to sell. When participating in making and selling patented products, the patentee could restrict the licensee’s rights to sell in order to protect her own profits.165 In other words, a licensor could not be forced to compete with her licensee in the selling of technologyembodied products when both of them were competitors in the product market. However, even if these arguments are logical, the Supreme Court in US v. General Electric did not consider the question whether or not the licensing agreement between the licensor (General Electric) and licensee (Westinghouse) might be a pretext to fix prices between themselves as competitors. Their market shares in the relevant market (electric lamps) was respectively 69 per cent and 16 per cent.166 The exclusive rights specified in IP law should not be expanded into a right of innovators to conduct price fixing in order to protect their own high costs of production and eliminate or suppress competition in an innovation-embodied product market. Such a restriction would not balance the respective benefits of the public and the innovators. It would reverse ‘the order and place the rewards to [innovators] first and the public second’.167 Judge Posner observes that courts should not apply the US v. General Electric reasoning, since they have to, at least, consider the market power of licensors, as well as the rationale behind the technology transfer agreement in question.168 The DOJ has tried to attack the US v. General Electric ruling in both US v. Line Material169 and US v. Huck Manufacturing;170 but the Supreme Court has refused to overrule US v. General Electric. Nonetheless, this ruling has been construed narrowly by both the Supreme Court and lower courts. There
165 166 167 168
Ibid., at 490. Ibid., at 481. US v. Line Material Co., 333 U.S. 287, 320–321 (1948). Asahi Glass Co., Ltd. v. Pentech Pharmaceuticals, Inc., 289 F. Supp.2d 986, 992 (N.D. Ill. 2003). 169 Line Material, supra note 167. 170 US v. Huck Manufacturing Co., 227 F. Supp. 791 (D.C. Mich. 1964), affirmed, 382 U.S. 197 (1965).
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is a violation of Section 1 of the Sherman Act either if a patent holder combines with other patent holders, as producers, to fix prices of products embodying the respective patents,171 or if price fixing in technology transfer agreements between a patent holder and her licensees creates a concerted practice of price fixing among the licensees.172 The US v. General Electric immunity is also lost if: (i) the patent holder attempts to set the price of two or more licensees,173 (ii) the patent holder does not manufacture patented products,174 or (iii) products produced under a patented process are not patented.175 Consequently, the US Antitrust–IP Guidelines almost entirely ignore the US v. General Electric ruling.176 If a licensor and a licensee are not actual or potential competitors, i.e. the technology transfer agreement is a vertical agreement, resale price maintenance in that agreement may also give rise to antitrust concerns. In State Oil v. Khan,177 the Supreme Court overruled its ruling in Albrecht,178 and declared that it is no longer per se illegal for producers or wholesalers to set maximum vertical resale prices for goods they sell to independent businesses. Similarly, if a licensor imposes maximum resale prices to be charged by her licensees for products manufactured by those licensees under the transferred technology, this restriction should be assessed under the rule of reason. The restriction may effectively prevent the licensees from abusing their power relating to the transferred technology in order to raise prices, especially when they are granted an exclusive right to exploit the technology in a specific territory or field of use. Regarding minimum resale price maintenance, the Supreme Court held it per se illegal in Dr. Miles.179 in 1911. However, this issue was reconsidered and overruled in 2007 by the Supreme Court in Leegin.180 Those who supported the application of the rule of reason to minimum resale price maintenance argue that the price maintenance often has pro-competitive justifications from an economic perspective. First, it increases inter-brand competition. By fixing a minimum price at which a product may be sold, the minimum
171 172
See US v. Line Material Co., supra note 167, at 310–311. US v. United States Gypsum, 340 U.S. 76 (1950); US v. New Wrinkle, 342 U.S. 371 (1952). 173 Newburgh Moire Co. v. Super Moire Co., 237 F.2d 283, 291–294 (3rd Cir. 1956). 174 Royal Indus. v. St. Regis Paper Co., 420 F.2d 449, 453 (9th Cir. 1969). 175 See Hovenkamp et al., supra note 16, pp. 31(12)–31(23). 176 See Antitrust–IP Guidelines, Section 5.2. 177 State Oil v. Khan, supra note 58. 178 Albrecht v. Herald, 390 U.S. 145 (1968). 179 Dr. Miles Medical Co. v. John D. Park & Sons Co., 220 U.S. 373 (1911). 180 Leegin, supra note 58.
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resale price maintenance guarantees retailers a minimum mark-up, and so provides them with an incentive to expand and invest resources to attract additional customers for that product. It can, therefore, facilitate market entry for new firms and brands and further manufacturers’ competitive goals. Second, the price maintenance eliminates freeriding. Minimum resale price maintenance can eliminate freeriding by ensuring that retailers who do not provide services relating to product sales cannot undercut retailers who have provided those services.181 As a result, although minimum resale price maintenance can be abused by a powerful manufacturer or retailer, the Supreme Court supported those economic justifications. The Court ruled that the minimum resale price maintenance does not ‘always or almost always [tend] to restrict competition and decrease output’; it should thus be analysed under the rule of reason.182 The rulings in State Oil v. Khan and Leegin can be applied to support both maximum and minimum price maintenance in a technology transfer agreement. However, either may be used as a pretext to fix prices of products manufactured under the transferred technology among licensees. Resale price maintenance in technology transfer should thus also be assessed under the rule of reason. The European Commission shares the same view, although it applies that view more strictly. In its TTBER 2004, the Commission states that when parties to an agreement are competing undertakings, the restriction of a party’s ability to determine its prices when selling products to third parties is a hardcore restriction, which basically cannot be exempted under Article 81(3) EC.183 If they are not competing undertakings, the Commission permits a maximum sale price and a recommended sale price, but prohibits a fixed or minimum sale price.184 However, it is likely that under the influence of the Leegin decision of the US Supreme Court, as well as the economic effectsbased approach of the TTBER 2004, the EU competition authorities will support minimum sale price maintenance in vertical technology transfer agreements. This observation is supported by a recent comment of the ECJ in CEPSA, as well as in Pedro IV, where the Court held, with respect to vertical relations in general: If the referring court were to conclude that [the distributor] was, in reality, required to charge the fixed or minimum sale price imposed by [the supplier], that contract could not qualify for the block exemption established by [the vertical agreement]
181 182 183 184
Ibid., at 2728–2733. Ibid. Article 4.1(a) TTBER 2004; TT Guidelines, para. 79. Article 4.2(2) TTBER 2004; TT Guidelines, para. 97.
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Competition law, technology transfer and the TRIPS Agreement Regulation No 2790/1999. However, where an agreement does not satisfy all the conditions provided for by an exempting regulation, it will be caught by the prohibition provided for in Article 81(1) EC only if its object or effect is to restrict appreciably competition within the common market and it is capable of affecting trade between Member States. [Once] the conditions for the application of Article 81(1) EC are met and so long as the agreement concerned does not justify the grant of an exemption under Article 81(3) EC, the nullity referred to in Article 81(2) EC can be relied on by anyone.185
According to this reasoning, price fixing or minimum sale prices imposed by a licensor upon her licensee(s) cannot automatically be caught by Article 81(1) EC. Furthermore, even if it falls foul of Article 81(1), it should still be evaluated under Article 81(3) under the rule of reason. Briefly, restrictions on prices of products embodying transferred technology should be assessed under the rule of reason both in the US and the EU. These restrictions violate US antitrust or EU competition law only if they establish price fixing between licensors, between licensees, or between a licensor and licensees where they are competing firms.
2.3
ANTI-COMPETITIVE NON-PRICE PRACTICES
Anti-competitive contractual restrictions in technology transfer agreements involve both price- and non-price-related practices. The anti-competitive nonprice practices include not only grantback, tying and package licensing, and non-challenge as listed in Article 40.2 of the TRIPS Agreement, but also exclusive licensing, exclusive dealing, output restrictions, and other non-price restrictions. 2.3.1
Grantback
A grantback is a provision in a technology transfer agreement obligating the licensee to grant the licensor an exclusive or non-exclusive licence, or an assignment, of the licensee’s improvements in the transferred technology which are protected by IP law.186 Grantbacks, especially non-exclusive ones, can have pro-competitive benefits by offering efficiency to both licensors and
185 Case C–279/06, CEPSA Estaciones de Servicio SA v. LV Tobar e Hijos SL, [2008] ECR I–6681, para. 72 (emphasis added); Case C–260/07, Pedro IV Servicios v. Total, Judgment of 2 April 2009, not yet reported, paras 81–83. 186 Antitrust–IP Guidelines, Section 5.6; Hovenkamp et al., supra note 16, p. 25(1); Holmes, William C. (2006), Intellectual Property and Antitrust Law, St. Paul, MN: Thomson West, p. 23(2).
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licensees.187 They permit both parties to share the value of future innovation, to which both have made contribution by way of the initial technology of the licensors and the improvements of the licensees. They can serve as an alternative to higher royalty rates where the nature and value of future improvements are uncertain. Furthermore, because licensees’ improvements can make the transferred technology obsolete, grantbacks, as a ‘reward’, can protect licensors from being driven out of the technology market. The US Supreme Court holds: An improvement patent may [have great strategic value. It] may, on expiration of the basic patent, be the key to a whole technology. One who holds it may therefore have a considerable competitive advantage… One who uses one patent to acquire another is not extending his patent monopoly to articles governed by the general law and as respects which neither monopolies nor restraints of trade are sanctioned. He is indeed using one legalized monopoly to acquire another legalized monopoly.188
However, grantbacks may equally adversely affect competition in innovation. If licensees are forced to grant an exclusive licence or assignment of their improvements to the licensor, the licensees seem hardly to receive any benefits from any future improvements which they may make. This can discourage the licensees from innovating, particularly where the grantback provision is larger in scope, or longer in duration, than the transferred technology protected under IP law. Furthermore, grantbacks may extend improperly the licensor’s market power, where the licensor can control and accumulate all improvements from all licensees not only during the life of her original protected technology but also in a subsequent period.189 Since there are both pro-competitive benefits and potentially anti-competitive effects of grantbacks, they are not in themselves ‘per se illegal and unenforceable’. 190 Grantback issues should be evaluated under the rule of reason. The competent authorities should weigh and balance the negative effects of grantbacks on licensees’ incentives to make improvements against their positive effects on the licensor’s incentives to transfer not only her own technology but also her licensees’ improvements which will be transferred to her.191
187 US Antitrust–IP Guidelines, Section 5.6; US DOJ and FTC (2007), Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, p. 92; Hovenkamp et al., supra note 16, pp. 25(2)–25(10). 188 Transparent-Wrap Machine Corp. v. Stokes & Smith Co., 329 U.S. 637, 642–644 (1947) (emphasis added). 189 US DOJ and FTC, supra note 187, p. 93. 190 Transparent-Wrap Machine, supra note 188, at 648. 191 Antitrust–IP Guidelines, Section 5.6; ABA Section of Antitrust Law, supra note 16, p. 86.
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Consequently, non-exclusive grantbacks, which permit licensees to transfer their improvements to others, are almost always legal both in the US and the EU.192 As to exclusive or assignment grantbacks, they are condemned in the US only if the licensor meets the test for monopolization or attempts to monopolize under Section 2 of the Sherman Act. Besides, if exclusive or assignment grantbacks are used by a group of licensors and licensees to protect a cartel and exclude others from entry, they can be challenged under Section 1 of the Sherman Act.193 In the EU, the Commission clearly states that exclusive or assignment grantbacks to the licensee’s own severable improvements or her new applications of the transferred technology are excluded restrictions. They are not block-exempted and must be assessed under Article 81(3) EC.194 However, disagreeing with the US Antitrust–IP Guidelines, which do not distinguish between severable and non-severable improvements concerning grantbacks, the Commission contends that exclusive or assignment grantbacks to nonseverable improvements do not fall into Article 81(1) EC because such improvements cannot be exploited by the licensee without the licensor’s permission.195 This does not mean that exclusive or assignment grantbacks to non-severable improvements do not fall under Article 82 EC. In general, in applying a rule of reason analysis to a grantback clause in the US or the EU, many factors are taken into account. They include: the relevant market, market power, and the extent of competition in the market for the technology; the scope and duration of the grantback; whether the grantback is royalty free, and whether improvements are sub-licensed royalty free; and the extent to which pooling agreements in conjunction with grantbacks impede competition and innovation.196 2.3.2
Tying and Package Licensing
Generally, tying (tie-in, or bundling197) is defined as ‘an agreement by a party
192 In the US see, e.g., Binks Manufacturing Co. v. Ransburg Electro-Coating Corp., 281 F. 2d 252, 259 (7th Cir. 1960), cert. denied, 366 U.S. 211 (1961); Well Surveys v. McCullough Tool Co., 199 F. Supp. 374, 395 (N.D. Okla. 1961), affirmed, 343 F. 2d 381 (10th Cir. 1965), cert. denied, 383 U.S. 933 (1966). In the EU see, e.g., Decision IV/26.813, Raymond-Nagoya, OJ 1972 L 143/39; Boussois/Interpane, supra note 150. For further details, see Anderman, supra note 42, pp. 111–118. 193 Hovenkamp et al., supra note 16, pp. 25(8)–25(9). 194 Articles 5.1(a) and 5.1(b) of the TTBER 2004; TT Guidelines, paras 109–111. 195 TT Guidelines, para. 109. 196 TT Guidelines, paras 110–111; ABA Section of Antitrust Law, supra note 16, pp. 230–232. 197 There is no clear-cut distinction between tying and bundling. The CFI, in
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to sell one product but only on the condition that the buyer also purchases a different (or tied) product, or at least agrees that he will not purchase that [tied] product from any other supplier’.198 Tying in technology transfer occurs when a licensor conditionally transfers her technology (the tying technology) to those who also agree to buy another product or service. If the tied product or service is another technology, the tying is package licensing.199 Tying in technology transfer can be ‘contractual tying’, in which the tying is clearly stipulated in the technology transfer agreement, and/or ‘technological tying’ (product integration tying), in which ‘the tying and tied products are bundled together physically or produced in such a way that they are compatible only with each other’.200 A tying provision in general as well as one in a technology transfer agreement may have adverse effects on competition. First, it may hinder the rational purchasing decisions of buyers, and undermines the incentives for cost and/or quality-conscious behaviour. Second, it may foreclose competition, to some degree, not only in the tied product market but also in the tying product market. Furthermore, it can also be a means for evading price regulations or facilitating cartel practices at the buyer/licensee or seller/licensor level.201 The Supreme Court in Northern Pacific Railway202 was very strict over tying. It ruled: [T]ying agreements serve hardly any purpose beyond the suppression of competition … They deny competitors free access to the market for the tied product, not because the party imposing the tying requirements has a better product or a lower price but because of his power or leverage in another market. At the same time buyers are forced to forgo their free choice between competing products. For these reasons ‘tying agreements fare harshly under the laws forbidding restraints of trade.’ … They are unreasonable in and of themselves whenever a party has sufficient economic power with respect to the tying product to appreciably restrain free competition in the market for the tied product and a ‘not insubstantial’ amount of interstate commerce is affected.
Microsoft v. Commission, supra note 92, used the term ‘tying’ 122 times and the term ‘bundling’ 74 times; and both terms often appeared in the same paragraph, e.g. para. 859. 198 Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 461 (1992); Northern Pacific Railway, supra note 62, at 5–6. See also Article 82 EC Guidance, para. 48. 199 See US Philips v. ITC, supra note 80, at 1189–1190. 200 US DOJ and FTC, supra note 187, p. 107; US DOJ, supra note 81, p. 78. 201 Sullivan and Grimes, supra note 12, pp. 423–424; Langer, Jurian (2007), Tying and Bundling as a Leveraging Concern under EC Competition Law, Alphen aan den Rijn: Kluwer Law International, pp. 17–26; TT Guidelines, para. 193. 202 Northern Pacific Railway, supra note 62, at 6.
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On the other hand, tying also has pro-competitive benefits. 203 First, it may be a good tool for the seller/licensor to implement an efficient form of price discrimination. Tying products are priced at a low level for every buyer/licensee to be able to afford. However, the more tying products are used, the more buyers pay through buying more tied products as inputs for using the tying products. In effect, it allows sellers to set prices on the basis of metered use of tying products. Second, tying may enhance the seller’s ability to gain entry or market penetration in otherwise impenetrable markets. Third, it maintains a quality reputation by ensuring that appropriate inputs are used. Fourth, it allows innovators to increase their reward for innovation. Finally, tying may enhance the producer’s informational flows and feedback on technologically sophisticated products.204 The assumption that ‘tying agreements serve hardly any purpose beyond the suppression of competition’ has indeed now been rejected. Tying is no longer considered per se illegal or as a hard-core restriction. In order to prove a tying arrangement violates US antitrust or EU competition law, at least five requirements should all be met. They are: (i) the tying and tied products are two separate products from the consumer perspective; (ii) the firm imposing tying has a dominant position/market power on the tying product market; (iii) this firm does not give customers a choice to obtain the tying product without the tied product; (iv) the tying forecloses competition; and, (v) it is not objectively justified.205 This five-pronged test seems to mean that a tying arrangement is assessed under the rule of reason. This is confirmed in Microsoft III,206 in which the DC Circuit held that ‘the rule of reason, rather than per se analysis, should govern the legality of tying arrangements’. This court explained that, in order to prove that the conduct of Microsoft in tying its internet explorer browser (the tied product) with its Windows operating system violated Section 1 of the Sherman Act, it had to be demonstrated that the anti-competitive effects on the tied product outweighed any benefits of the tying arrangement.207 On the other
203 Sullivan and Grimes, supra note 12, pp. 426–438; Langer, supra note 201, pp. 7–17; TT Guidelines, paras 194–195. 204 Tying, as a tool to achieve vertical integration, permits the producer to obtain valuable information about any weaknesses of the product and may be used to improve it. See Justice Scalia’s dissenting opinion in Eastman Kodak, supra note 198, at 502. 205 In the US, see ibid., at 461–462; Jefferson Parish Hospital, supra note 28, at 12–18. In the EU, see Microsoft v. Commission, supra note 92, paras 854, 912–944, 960–975, 1031–1090, and 1144–1167. See also Elhauge, Einer (2009), ‘Tying, Bundled Discount, and the Death of the Single Monopoly Profit Theory’, available at http://ssrn.com/abstract=1345239. 206 Microsoft III, supra note 86, at 84. 207 Ibid, at 95. See also BMI, supra note 63, at 21–22.
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side of the Atlantic in its Microsoft EU decision,208 the Commission also analysed the effects of competition foreclosure in the tied product market. This was judged appropriate by the CFI in Microsoft v. Commission.209 That tendency coincides with the view in the Antitrust–IP Guidelines in the US210 and that contained in the TT Guidelines in the EU.211 Additionally, the US Supreme Court in Illinois Tool Works212 underlined that ‘a patent does not necessarily confer market power upon the patentee’. This view, as mentioned above, was early recognized by the ECJ.213 In all cases involving a tying arrangement, it must be proved that the tying seller has market power in the tying product market. A focus on the harmful effects on the tied product market derives from the leverage theory, i.e. the exploitation of market power over the tying product to extend that power into sales of the tied product, which is supported by the language of Jefferson Parish Hospital.214 Moreover, in Eastman Kodak, faced with the issues of lock-in effects and switching costs,215 the US Supreme Court found that tying may be an antitrust problem because the high cost of purchasing copiers, or durable products in general, results in lock-in, which prevents consumers from switching to competing products. This makes the consumers subject to price increases in the after-sales service market. Therefore, all manifestations of market power should be examined to enable a court to ‘make a more balanced and thorough competitive assessment of a tie’.216
208 Case COMP/C-3/37.792, Microsoft, C(2004)900 final, OJ 2007 L 32/23 (Microsoft EU), para. 794. 209 Microsoft v. Commission, supra note 92, paras 1038, 1041, 1043, 1049, and 1058. 210 Antitrust–IP Guidelines 1995, Section. 5.3. 211 TT Guidelines, paras 193–195. 212 Illinois Tool Works, supra note 29, at 45–46. 213 See ECJ case law listed at supra note 40. 214 Jefferson Parish Hospital, supra note 28, at 14–15. However, the leverage theory is objected to by the Chicago School which contends that it is not a rational method of obtaining a second source of monopoly profits. See Posner, supra note 25, p. 926. 215 Eastman Kodak, supra note 198. Lock-in effects occur when ‘a consumer becomes so committed to a particular product [durable assets] that she cannot switch to a competing product without incurring significant costs. These switching costs can include the cost of acquiring new equipment or technology; the transaction cost of switching suppliers (including search costs); the cost of learning to use new equipment and functioning in the new technological environment; consumer uncertainty about the quality of untested brands; forgone benefits of loyalty programs … and psychological brand loyalty’. Note (2001), ‘Antitrust and the Information Age: Section 2 Monopolization Analyses in the New Economy’, Harv. L. Rev., 114, 1631–1632. 216 Sullivan and Grimes, supra note 14, p. 424.
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From the consumer perspective, there is a possibility, as Microsoft III217 demonstrated, that a tying arrangement could bring low prices and allocative benefits to consumers in the short run. This was confirmed in US Philips v. ITC concerning package licensing. In this case, the Federal Circuit held that in contrast to technology-to-product tying, in which the purchase of a tied product is made compulsory, package licensing: does not bar the licensee from using any alternative technology that may be offered by a competitor of the licensor. Nor does it foreclose the competitor from licensing his alternative technology; it merely puts the competitor in the same position he would be in if he were competing with unpatented technology.218
The Federal Circuit concluded that package licensing is not anti-competitive like a technology-to-product tying. Such tying could even be welcomed in the market and may not be seen as illegal tying. However, a licensor with a dominant position in an essential technology market may, by tying, (i) gain market power and foreclose competition in the tied product or non-essential technology market, the so-called offensive tying shown in Microsoft v. Commission in the EU and Eastman Kodak in the US,219 and/or (ii) maintain and expand the licensor’s dominant position in the tying technology market by stifling both innovation and marketing of a new essential technology, the so-called defensive tying shown in both Microsoft III in the US and Microsoft v. Commission in the EU.220 In other words, tying may be used by a dominant licensor not only as a sword to ‘attack and conquer’ the tied product or non-essential technology market but also as a shield to monopolize the tying essential technology market.221 In its TT Guidelines, the European Commission observes: The main restrictive effect of tying [as offensive tying] is foreclosure of competing suppliers of the tied product. Tying [as defensive tying] may also allow the licensor
217 218 219
Microsoft III, supra note 86, at 59–64. US Philips v. ITC, supra note 80, at 1189–1190. The US Supreme Court held that ‘[p]ower gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next’. Eastman Kodak, supra note 198, at 480 note 29 (internal quotation marks and citations omitted). 220 Microsoft v. Commission, supra note 92, para. 1088. See also Chin, Andrew (2005), ‘Decoding Microsoft: A First Principles Approach’, Wake Forest L. Rev., 40(1), 20–21. 221 Nguyen, Tu T. (2008), ‘Competition Rules in the TRIPS Agreement – The CFI’s Ruling in Microsoft v. Commission and Implications for Developing Countries’, IIC, 39(5), 570.
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to maintain market power in the market for the tying product by raising barriers to entry since it may force new entrants to enter several markets at the same time.222
Both offensive and defensive tying may raise entry barriers, decrease nonprice competition, thereby reduce dynamic efficiency and harm consumer benefits in the long term. Such anti-competitive effects far outweigh the shortterm benefits223 and the tying should be scrutinized under Section 2 of the Sherman Act or Article 82 EC. Interestingly, the European Commission, after its success in Microsoft v. Commission, has been investigating Microsoft’s tying of its Internet Explorer to the Windows operating system. This investigation is based on the legal and economic principles of tying established in the earlier case.224 This also reflects the fact that tying in technology transfer appears to have attracted much scrutiny by the Commission under Article 82 EC.225 2.3.3
Non-Challenge Clause
Prior to 1969, the ‘licensee estoppel’ doctrine was applied in the US to prevent licensees from enjoying the benefits of licences they had obtained, and then challenging the validity of the licensed IPRs.226 It was not illegal under this doctrine to incorporate a ‘non-challenge’ clause into technology transfer agreements. Such a clause ensured that right holders (and even their licensees) would avoid expensive litigation, which resulted when licensees began actions. But precluding such a challenge by an agreement could substantially reduce the chances of licensees, who often have the greatest incentive to challenge the enforceability of licensed IPRs, overturning IPRs that were invalid. The Supreme Court, in Lear,227 reviewed this doctrine in relation to a patent license, and overruled it after balancing public interests against the ‘competing 222 TT Guidelines, para. 193 (emphasis added). See also Article 82 EC Guidance, paras 49 and 52. 223 See Sullivan and Grimes, supra note 12, p. 430; Bhattacharyya, Somnath (2007), ‘US Philips Corp. v. International Trade Commission: Seeking a Better Tie between Antitrust and Package Licensing’, Colum. J. L. & Soc. Probs., 40, 287–289. 224 European Commission (2009), ‘Antitrust: Commission confirms sending a Statement of Objections to Microsoft on the tying of Internet Explorer to Windows’, Press release of 17 Jan. 2009, available at http://europa.eu/rapid/ pressReleasesAction.do?reference=MEMO/09/15. 225 See Article 82 EC Guidance, paras 47–62. 226 The general rule of licensee estoppel provides that when a licensee enters into an agreement to use the IPRs of a licensor, the licensee effectively recognizes the validity of that property and is estopped from contesting its validity in future disputes. See Flex-Foot, Inc. v. CRP, Inc., 238 F.3d 1362, 1368 (Fed. Cir. 2001). 227 Lear, Inc. v. Adkins, 395 U.S. 653, 670–671 (1969).
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demands of the common law of contracts’. Consequently, patent licensees cannot be estopped from challenging the validity of a licensed patent. A pure contractual obligation prohibiting a licensee from challenging patent validity is unenforceable under Lear. However, lower courts have interpreted the balancing test explained in Lear in different ways.228 In order to challenge patent validity under the Lear doctrine, a licensee was often required to: (i) actually cease payment of royalties and (ii) give notice to the licensor.229 However, the Supreme Court in MedImmune230 has recently interpreted US patent law as not requiring those conditions. A licensee can now challenge the validity of a patent or seek a declaratory judgment while she continues to pay royalties and does not repudiate the technology transfer agreement. Accordingly, a licensee is encouraged to seek to invalidate the licensed IPRs. If the challenge is successful, it will end any obligation to continue to pay royalties. Conversely, if it fails, the sole cost will be the fees incurred in the legal process. The licensee can continue to enjoy her right under the technology transfer agreement, unless otherwise stipulated in the agreement by way of termination or royalty increase upon challenge. US courts, therefore, have been reluctant to judge that ‘non-challenge’ clauses constitute misuse of IPRs or violate the Sherman Act.231 Although those clauses may reduce the chances of licensees contesting the validity of IPRs, they do encourage licensors to transfer their technology. And those clauses may actually accelerate, rather than retard, challenges to invalid IPRs by making would-be licensees carefully consider the validity of IPRs before, rather than after, they conclude technology transfer agreements.232 Courts often balance the pros and cons of a non-challenge clause in any specific case under the rule of reason. In the EU, the Commission had been very strict on non-challenge clauses in technology transfer agreements. It considered that such a clause, which deprived a licensee of the possibility of ‘removing an obstacle to his freedom of action’ for revocation of the IPRs transferred, was a contractual restriction of competition.233 The ECJ upheld the Commission’s per se condemnation of
228 229
ABA Section of Antitrust Law, supra note 16, pp. 234–235. Studiengesellschaft Kohle, m.b.H. v. Shell Oil Co, 112 F.3d 1561, 1561 (Fed. Cir. 1997). 230 MedImmune, Inc. v. Genentech, Inc., 127 S.Ct. 764, 777 (2007). 231 See, e.g., Panther Pumps & Equip. v. Hydrocraft, Inc., 468 F. 2d 225, 232 (7th Cir. 1972). But in Bendix Corp. v. Balax, Inc., 471 F.2d 149, 158 (7th Cir. 1972), the Seventh Circuit held that a no-challenge clause in a licence agreement binding after termination of the agreement might conceivably constitute misuse. 232 Saturday Evening Post Co. v. Rumbleseat Press, Inc., 816 F.2d 1191, 1200 (7th Cir. 1987). 233 Decision 79/86/EEC, Vaessen/Moris, OJ 1979 L 19/32, para. 14; Davidson Rubber, supra note 45; AOIP/Beyrard, supra note 45.
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a non-challenge clause in Windsurfing.234 However, the ECJ and Commission have become gradually more flexible on this issue. In Bayer v. Süllhöfer,235 the ECJ held that in order to determine whether or not a non-challenge clause falls under Article 81(1) EC, the legal and economic context of the agreement incorporating that clause must be taken into account. According to the EU TTBER 2004, a non-challenge clause in a technology transfer agreement is an excluded restriction which cannot be block-exempted. However, it does not affect the possibility of the licensor’s terminating the agreement when the licensee challenges the validity of the transferred technology.236 This protects the licensor by creating a disincentive for the licensee to challenge, and ensuring that the licensee is in the same position as third parties when the transferred technology is challenged. In brief, although the EU view regarding a non-challenge clause in a technology transfer agreement seems stricter than the US one, such clauses are now analysed under the rule of reason in both the US and the EU. In the US in particular, after the MedImmune ruling, licensees can challenge the IPRs of licensors whenever they would like to do so. A mere non-challenge clause seems to fall outside antitrust scrutiny, at least in the US. 2.3.4
Exclusivity in Technology Transfer Agreements
There are two types of exclusivity in technology transfer agreements that may give rise to competition concerns: exclusive licensing and exclusive dealing (or non-compete obligations).237 2.3.4.1 Exclusive licensing Exclusive licensing refers to agreements ‘which restrict the right of the licensor to licence others and possibly also to use the technology itself’.238 When granting an exclusive licence to a specific licensee, the licensor gives up her rights to practise the technology as well as the right to grant additional licences.239 Generally, exclusive licensing is granted for a limited territory, field of use or customer group.
234 235
Windsurfing, supra note 47, paras 92–93. Case 65/86, Bayer AG and Maschinenfabrik Hennecke GmbH v. Heinz Süllhöfer, [1988] ECR 5249, para. 21. 236 TTBER 2004, Article 5.1(c); TT Guidelines, paras 112–113. 237 Antitrust–IP Guidelines, Sections 4.1.2 and 5.4. 238 Ibid., Section 4.1.2. 239 If a technology transfer agreement stipulates that the licensor retains the right to practise the technology, but gives up the right to grant additional licences, it is a partial or limited exclusivity, or sole agreement. See TT Guidelines, para. 162.
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The US Patent Act expressly states that a patent holder may ‘grant and convey an exclusive right under his application for patent, or patents, to the whole or any specified part’ of the US.240 The right of patent holders to grant exclusive licences for their patents has thus long been recognized by US courts.241 Furthermore, after the ruling of the Supreme Court in Sylvania,242 which requires that all vertical non-price restrictions be scrutinized under the rule of reason rather than the per se rule, the benefits of exclusivity through territorial, field of use or customer restrictions have been recognized. With exclusive licensing, the licensee is assured that she is the only person who can use the transferred technology; she can devote her best efforts to exploitation of the technology without concerns about freeriding. As a result, antitrust principles applying to ‘a licensor’s grant of various forms of exclusivity to and among its licensees are similar to those that apply to comparable restraints outside the licensing context’243 under the Sylvania ruling. So the mere grant of an exclusive licence, even between actual or potential competitors without the licence, neither violates antitrust law nor constitutes a misuse.244 However, with further evidence of an anti-competitive conspiracy or the exercise of market power, exclusive licensing may raise antitrust concerns and will be analysed under the rule of reason. In the EU, with its aim of establishing a common market in which free movement is respected and competition is not distorted, the Commission and the ECJ began with a hostile attitude to exclusive licensing.245 Unlike the US authorities, the Commission contended that a right holder’s commitment to restrict her own freedom by granting exclusive licensing was not of the essence of her rights under IP law because this hindered the wide use of technology, prevented technology from being enriched by a broader range of experience, and had no beneficial economic effect.246 Exclusive licensing, therefore, was presumed to fall under Article 81(1) EC, and not to be exempted under Article 81(3) EC. However, the ECJ has gradually become more flexible on this issue. In Nungesser,247 the ECJ distinguished an open exclusive licence, which did not 240 241
35 U.S.C. 261. See, e.g., Waterman v. Mackenzie, 138 U.S. 252, 255 (1891); Zenith Radio, supra note 411, at 135–136. 242 Continental T.V. v. GTE Sylvania, 433 U.S. 36 (1977). 243 Antitrust–IP Guidelines, Section 4.1.2. 244 ABA Antitrust Section, supra note 16, p. 186. 245 Consten & Grundig, supra note 37; Davidson Rubber, supra note 45; Decision 75/570/EEC, Bronbemaling/Heidemaatschappij, OJ 1975 L 249/27. 246 Ibid., Part III. 247 Case 258/78, Nungesser v. Commission, [1982] ECR 2015, paras 53 and 57–58.
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affect the position of third parties such as parallel importers and licensees for other territories, and a closed exclusive licence with an absolute territorial protection, which eliminated all competition from third parties. Acknowledging the benefits of an open exclusive licence in encouraging the licensee to apply the transferred technology, the ECJ concluded that an open exclusive licence is not in itself incompatible with Article 81(1) EC. The Court then went much further in Coditel II248 and Erauw-Jacquéry249 when ruling that even a closed exclusive licence with an absolute territorial restriction may fall outside Article 81(1) EC in the light of commercial practice in a particular industry.250 Furthermore, from likely victories of pharmaceutical firms in recent cases regarding allegedly anti-competitive practices such as a unilateral quotas policy,251 refusal to supply more than a specified quantity252 and dual pricing,253 all in order to prevent parallel trade, one may conclude that absolute territorial restrictions in general and exclusive licences in particular in the EU must be assessed under the rule of reason; and such restrictions may well qualify for individual exemption under Article 81(3) EC. This is also reflected in the TT Guidelines.254 Both the US and EU competition authorities now have a favourable view concerning the exclusive licence. But they will still intervene in three circumstances. First, when exclusive licensing creates a market allocation cartel between the licensor and licensee(s). Palmer 255 in the US exemplifies this. In this case, before concluding an exclusive licensing agreement, both parties were competitors in providing bar review courses in Georgia. The licensor gave the licensee an exclusive licence to market the licensor’s copyrighted materials in Georgia. They agreed that the licensor would not compete with the licensee in Georgia, and the licensee would not compete with the licensor outside that state. The Supreme Court held the arrangement to be an (even per se) illegal allocation of markets.
248 249
Case 262/81, Coditel v. Ciné-Vog Films, [1982] ECR 3381, para. 20. Case 27/87, Erauw-Jacquéry v. La Hesbignonne, [1988] ECR 1919, paras
10–11. 250 See Korah, Valentine (2006), Intellectual Property Rights and the EC Competition Rules, Oxford: Hart Publishing, pp. 30–36. 251 Joined Cases C–2/01 P and C–3/01 P, Bundesverband der ArzneimittelImporteure v. Commission, [2004] ECR I–23. 252 Case C–53/03, Syfait v. GSK, [2005] ECR I–4609; Sot. Lelos kai Sia, supra note 109. 253 Case T–168/01, GSK v. Commission, [2006] ECR II–2969. 254 TT Guidelines, paras 162–167. 255 Palmer v. BRG of Georgia, 498 U.S. 46 (1990). See also Princo v. ITC, supra note 17, at 13.
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Second, when exclusive licensing creates a market division between licensees. As in the first circumstance, if the licensees are actual or potential competitors in the relevant market, they could be conspiring with the licensor to use exclusive licensing as a pretext assisting in the division of the market between the licensees. Such an arrangement may violate Section 1 of the Sherman Act or Article 81 EC. The European Commission in its CISAC decision256 in 2008 punished both these two types of exclusivity in licensing. Under the exclusivity clause of the model contract established by the Confederation of Societies of Authors and Composers (CISAC), a collecting society reciprocally authorized another collecting society to license the repertoire of the former on the territory of the latter on an exclusive basis. This prevented the first collecting society, as a member of the CISAC, from licensing its own repertoire, or from allowing a further collecting society to have access to its authorization in the territory of the authorized collecting society. As a consequence, the exclusivity clause restricted competition among licensors and licensees (and even among the current licensees and would-be licensees). Besides, due to the uniform territorial restriction of the exclusivity clause implemented as a concerted practice, each collecting society’s authority to license was confined to granting access to its portfolio of repertoires for exploitation in its territory regardless of where the user was located. This led to the fact that only one collecting society in each country was able to grant multi-repertoire licences in that country. The exclusivity in question created a market division among members of the CISAC as licensees. Since the Commission found no justification for this, it decided that the conduct infringed Article 81 EC. It seems that the Commission would like to support pan-European licensing of one collecting society’s repertoire, rather than territorial licensing . Third, when a licensee who has market power in the product or technology market gains an exclusive licence from the licensor in order to monopolize or abuse its dominant position. Such an exclusive licensing arrangement raises substantial barriers to market entry and gives the licensee the power to exclude competition. In Tetra Pak I,257 the CFI confirmed the Commission’s decision that the acquisition of an exclusive licence by a dominant firm for the only technology that competed with the one already belonging to that firm violated Article 82 EC.
256 Case COMP/C2/38.698, CISAC, Commission Decision of 16 July 2008, OJ 2008 C 323/12, appealed in Case T–398/08. 257 Case T–51/89, Tetra Pak v. Commission, [1990] ECR II–309 (Tetra Pak I). In the US, see the FTC decision, In the Matter of Biovail Corp., File No. 011 0094, Docket No. C–4060, available at www.ftc.gov/os/caselist/c4060.shtm
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2.3.4.2 Exclusive dealing In the technology transfer context, exclusive dealing (or a non-compete obligation) occurs when a technology transfer agreement prevents the licensee from using competing technologies. It prevents the so-called ‘inter-technology free riding’ to assure the licensor that the technology transferred to the licensee will not be used to benefit the licensor’s competitors. Furthermore, it gives the licensee incentives to focus on the transferred technology with her best efforts.258 Consequently, it promotes technology transfer and the exploitation of technology actually transferred.259 However, exclusive dealing may be anti-competitive by foreclosing the licensor’s competitors or raising their costs of market entry (distribution costs). If a licensor establishes a network of exclusive dealing, many licensees are restricted from dealing with competing technologies. Then access to competing technologies owned by other licensors can be substantially restricted by unavailability of licensees. 260 In Microsoft III, Microsoft’s exclusive dealing arrangements with its partners regarding Microsoft’s Internet Explorer were declared to be exclusionary, in violation of Section 2 of the Sherman Act.261 These exclusive dealing arrangements closed a substantial percentage of the available opportunities for the distribution of other internet browser software to Microsoft’s competitors and increased their distribution costs. These reduced the rival browser’s usage market share and would tend to prevent the rival browser from becoming a rival platform, thereby allowing Microsoft to earn greater profits in the operating system software market where Microsoft has held monopoly power.262 Microsoft I263 also indirectly exemplified the anti-competitive effects of exclusive dealing. In this case, a per-processor licence fee was charged by Microsoft to computer manufacturers regardless of whether the Microsoft operating system was actually installed on a particular computer. If a computer manufacturer and an ultimate customer wanted to install another operating system, they would have to pay twice, once to Microsoft and once to its competitor. The per-processor licence functioned as a penalty for dealing with Microsoft’s competitors. It raised market entry costs for the
258 See, e.g., Ryko Mfg. Co. v. Eden Services, 823 F.2d 1215, 1234–1235 and note 17 (8th Cir. 1987), cert. denied, 484 U.S. 1026 (1988); Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380, 395 (7th Cir. 1984). 259 TT Guidelines, paras 201–202. 260 Ibid., paras 198–200. 261 Microsoft III, supra note 86, at 67–74. 262 See Page and Lopatka, supra note 161, pp. 184–191. 263 Microsoft I, supra note 86.
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competitors, and even eliminated them. Consequently, it was an indirect form of illegal exclusive dealing.264 In order to conclude whether or not an exclusive dealing arrangement in a technology transfer agreement is anti-competitive, both the US and EU competent authorities will balance the promotion of the exploitation and development of the transferred technology and the anti-competitive effects of foreclosing competing technologies. The net effect of the arrangement depends, among other things, on the degree of foreclosure in the relevant technology market, the duration of the arrangement, and the market power of the licensor or licensors in a case where they all use the arrangement.265 In any event, exclusive dealing in technology transfer agreements is inconsistent with competition law only if competition in the relevant market, owing to the exclusive dealing, ‘has been foreclosed in a substantial share of the line of commerce affected’.266 2.3.5 Output Restrictions and Other Non-Price Restrictions Output restrictions stipulated in a technology transfer agreement can be provided in the direct form of output quotas or under the indirect form of higher royalty rates once a specified output is reached. Basing themselves on the exclusive rights conferred on right holders under IP law, US courts have often upheld output restrictions or considered them under the rule of reason, because ‘the cases are to the effect that the owner of a valid product patent may by license restrict production of the licensee to a specified quantity, at a specified place’.267 Output restrictions are, to some extent, essential to protect benefits of licensors when they decide to transfer their technology. And in the absence of technology transfer, licensees could not produce products without infringing IPR-protected technology of licensors. This is supported by the ruling of the US Supreme Court in NCAA.268 In this case, the Court applied the rule of reason rather than the per se rule to a horizontal output restriction where cooperation between competitors was essential for an industry, amateur college football, to exist. In Nintendo of America,269 the Federal Circuit 264 See also LePage’s Inc. v. 3M, 324 F.3d 141 (3rd Cir. 2003), cert. denied, 542 U.S. 953 (2004); U.S. v. Dentsply Int’l., Inc., 399 F.3d 181 (3rd Cir. 2005), cert. denied, 126 S.Ct. 1023 (2006) (exclusive dealing in forms of loyalty rebates and discount violated Section 2 of the Sherman Act). 265 Antitrust–IP Guidelines, Section 5.4; Article 82 EC Guidance, paras 32–46. 266 Tampa Electric Co. v. Nashville Coal Co., 365 U.S. 320, 327 (1961). 267 US v. E.I. Du Pont De Nemours & Co., 118 F. Supp. 41, 226 (D. Del. 1953), affirmed, 351 U.S. 377 (1956). 268 NCAA, supra note 68. 269 Nintendo of America, supra note 30, at 1578.
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followed this trend. Nintendo had a dominant position (80 per cent) in the market for home video games (game cartridges and game equipment used with cartridges). Nintendo granted a licensee a licence to produce game cartridges on condition that the licensee would be restricted to producing and distributing a specified number of cartridges and forbidden to export them. The Federal Circuit held that an export restriction on patented products would not violate antitrust law, and an output restriction would not constitute a per se violation. However, court rulings may differ if an output restriction is on unpatented products produced by using a patented process or machine. To support the restriction, one may argue that ‘the patent owner has simply excluded licenses from “use” of its patent beyond a prescribed level’. On the other hand, it can be attacked by arguing that ‘the patentee has attempted to exclude the licensee from producing unpatented items not covered by the claims of the patent itself’.270 In any event, an output restriction in a technology transfer agreement raises competition concerns only if it is the mask of an illegal output cartel.271 Like the non-price restrictions mentioned above, other restrictions, such as sale restrictions, field of use restrictions and captive use restrictions are analysed under the rule of reason in both the US and the EU.272 In brief, a technology transfer agreement often contains pro-competitive benefits for both parties and for consumers in general. It will be in breach of US antitrust or EU competition law only if it is a pretext to fix prices, divide markets or monopolize or abuse a dominant position. In order to determine whether or not non-price restrictions in a technology transfer agreement violate US antitrust or EU competition law, the competent authorities should weigh and balance the pro-competitive benefits of the agreement and the anti-competitive effects of the restrictions contained in it.
2.4
REFUSAL TO TRANSFER TECHNOLOGY
In addition to anti-competitive restrictions explicitly contained in technology
270 271
See Holmes, William C., supra note 186, Chapter 19.2. See, e.g., Hartford-Empire Co. v. US, 323 U.S. 386 (1945), supplemented, 324 U.S. 570 (1945); American Equipment Co. v. Tuthill Bldg. Material Co., 69 F.2d 406 (7th Cir. 1934). 272 ABA Section of Antitrust Law, supra note 16, pp. 163–178; TT Guidelines, paras 168–174 (sale restrictions), paras 175–178 (output restrictions), paras 179–185 (field of use restrictions), and paras 186–190 (captive use restrictions: ‘obligation on the licensee to limit his production of the licensed product to the quantities required for the production of his own products and for the maintenance and repair of his own products’).
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transfer agreements, the act of refusing to transfer technology can, in certain cases, raise antitrust/competition concerns both in the US and the EU. 2.4.1
Refusal to License in the US
2.4.1.1 Trinko and traditional views The US Supreme Court has ruled that there is no duty to use IPRs that are internally developed. In Continental Paper Bag,273 the Court decided that although the purpose of patentees not to use a patent was ‘protecting their general industries and shutting out competitors’, this was legitimate because ‘it is the privilege of any owner of property to use or not use it, without question of motive’. Additionally, Section 217(d)(4) of the Patent Act of 1988 states that a patent owner cannot be deemed guilty of misuse by virtue of its refusal to use or license the patent.274 This regulation refers to patent misuse, but one can argue that it may be still relevant in antitrust by invoking the reasoning of the Illinois Tool Works judgment.275 In this case, based both on Section 217(d)(5), which eliminates the presumption of misuse in patentrelated tying unless ‘the patent owner has market power in the relevant market’, and on the conclusions of antitrust enforcement agencies and economists, the Supreme Court required proof of market power for antitrust violation, regarding patent-related tying.276 This ruling could lead to the opinion that Section 217(d)(4) may be used to support the argument that refusal to license does not violate US antitrust law. However, as Herbert Hovenkamp observes, ‘the Patent Act provides that simple nonuse of patent is not “misuse”, but this does not preclude the pursuit of nonuse under the antitrust laws when market power and unreasonable exclusionary effect are shown’.277 Certain practices may not be patent misuse under Section 217(d)(4), but they may still be subject to scrutiny under antitrust law.278 So far, no antitrust case relating to refusal to license has been settled by the Supreme Court. However, the Court’s ruling on the refusal to deal in Trinko in 2004, which was confirmed in Linkline279 in 2009, may be a significant starting point. Trinko involved an alleged refusal by Verizon, an incumbent monopoly local telephone service provider, to share its network with its 273
Continental Paper Bag Co. v. Eastern Paper Bag Co., 210 U.S. 405, 428–429
(1908). 274 275 276 277
35 U.S.C. 271(d)(4). Illinois Tool Works, supra note 29. Ibid., at 41–45. Hovenkamp, Herbert (2005), ‘United States Antitrust Policy in an Age of IP Expansion’, in Barry E. Hawk (ed.), supra note 56, p. 236. 278 See also US Philips v. ITC, supra note 80, at 1185–1186. 279 Linkline, supra note 83.
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competitor (AT&T) in a way which would allow its competitor to compete effectively with Verizon as a local telephone service provider in Verizon’s service area. Under the Telecommunications Act of 1996,280 Verizon had a duty to provide such access to its competitors. But it breached the duty, so was fined and required to implement its duty by regulatory authorities. From the antitrust perspective, the Supreme Court highlighted the proposition that ‘there is no duty to aid competitors’, and held: Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities. Enforced sharing also requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing – a role for which they are ill suited. Moreover, compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion. Thus, as a general matter, the Sherman Act “does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.”281
The Supreme Court reasoned that if refusal to deal by a single firm is recognized as a violation of antitrust law, courts can be faced not only with uncertainty about balancing the incentives for firms to invest internally and innovate to get a monopoly power and forced dealing but also with difficulties in identifying and remedying such conduct. Indeed, although the Supreme Court confirmed that ‘under certain circumstances, refusal to cooperate with rivals can constitute anticompetitive conduct’ and violate Section 2 of the Sherman Act, it should be ‘very cautious in recognizing such exceptions’.282 The Supreme Court did not make clear under which circumstances it would recognize an exception and condemn refusal to deal under Section 2. However, the Court compared the refusal to deal by Verizon and the one which was indeed held to be in breach of Section 2 in Aspen Skiing.283 Characterizing Aspen Skiing as ‘at or near the boundary of Section 2 liability’, the Supreme Court in Trinko identified Aspen Skiing Company’s type of refusal to deal as 280 281 282 283
47 U.S.C 251(c). Trinko, supra note 83, at 407–408 and 411 (emphasis added). Ibid, at 408. Aspen Skiing Company v. Aspen Highlands Skiing Corporation, 472 U.S. 585 (1985) (Aspen Skiing Co., the defendant, controlled three of four ski mountains in Aspen, Colorado; and the plaintiff controlled the fourth. The two parties had previously offered a popular multi-day joint ticket for all four mountains; but Aspen Skiing Co. withdrew its participation without a credible business justification. The Supreme Court ruled that the refusal of Aspen Skiing Co. to cooperate with its smaller competitor violated Section 2 of the Sherman Act).
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a Section 2 violation if a two-pronged test is satisfied: (i) there is a unilateral termination of a voluntary course of dealing which is presumably profitable; and (ii) there is a sacrifice of short-term profits to achieve an anti-competitive end, i.e. to eliminate a viable competitor from the relevant market and get a higher monopoly price.284 Still, the Court in Trinko found Verizon’s refusal to deal distinguishable from the one in Aspen Skiing in two ways: (i) there was no course of dealing between Verizon and its competitor; and (ii) the course of dealing in Trinko was not voluntary, but rather compelled by the Telecommunications Act. There was, accordingly, no reason to infer that Verizon sacrificed its short-term profit for ‘dreams of monopoly’. Furthermore, the Court also stated that its holding would be unchanged even if the essential facilities doctrine crafted by some lower courts was considered; but the Supreme Court neither recognized nor repudiated that doctrine285 because, in its view, the Telecommunications Act’s ‘extensive provision for access makes it unnecessary to impose a judicial doctrine of forced access’. 286 On the basis of Continental Paper Bag, Section 217(d)(4) of the Patent Act of 1988, and especially Trinko, one may argue that a unilateral refusal to transfer technology does not violate US antitrust law. According to this view, the Trinko ruling makes it clear that there is no basis for ‘a stand-alone essential facilities doctrine’, and the antitrust law was not ‘intended to create a duty by one competitor to assist its competitors by assuring them access to its tangible or intellectual property’.287 And while ‘compulsory licensing as a merger remedy is a well-established tool’, non-merger compulsory licensing should be ‘a rare beast’288 due to potential harm to innovation and difficulties in
284 285
Trinko, supra note 83, at 409. In the US, the essential facilities doctrine is derived from the Supreme Court’s decision in US v. Terminal Railroad Association of St. Louis, 224 U.S. 383, 410–411 (1912). Although the Court did not use the term ‘essential facilities’, this case has been invoked by many lower courts in order to interpret and apply the legal principles explained in the case. In MCI Communication Corp. v. AT&T, 708 F.2d 1081, 1132–1133 (7th Cir. 1983), the Seventh Circuit set out four elements necessary to establish liability under the essential facilities doctrine: (i) control of the essential facility by a monopolist; (ii) a competitor’s inability practically or reasonably to duplicate the essential facility; (iii) the denial of the use of the facility to a competitor; and (iv) the feasibility of providing the facility. In addition to the essential facilities doctrine, there remains also the so-called ‘Colgate doctrine’ derived from US v. Colgate, 250 U.S. 300, 307 (1919), which affirmed the freedom to deal. 286 Trinko, supra note 83, at 409–411. 287 Pate, R. Hewitt (2004), ‘Securing the Benefits of Global Competition’, available at www.usdoj.gov/atr/public/speeches/205389.pdf. 288 Delrahim, Makan (2004), ‘Forcing Firms to Share the Sandbox: Compulsory Licensing of Intellectual Property Rights and Antitrust’, available at www.usdoj.gov/atr/public/speeches/203627.pdf.
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administering the remedy. However, this view may be questionable, particularly under the new tendency concerning compulsory licensing expressed by the Supreme Court in eBay,289 the relationship between antitrust law and specific-sector regulation in Credit Suisse,290 and decisions of lower courts regarding this issue, Kodak291 and Xerox,292 for instance. 2.4.1.2 Post-Trinko development: eBay and Credit Suisse Prior to eBay, there were no real compulsory licensing provisions in US patent law.293 The Supreme Court even stated that compulsory licensing was a rarity in the US patent system, and the Court declined to ‘manufacture such a requirement’.294 Moreover, case law considered a patent holder’s right to exclude others as of paramount importance, because this right was ‘the very essence of the right conferred by the patent’, ‘complete monopoly’, and even ‘absolute property’.295 However, in eBay, the Supreme Court unanimously rejected the assertion, as a ‘general rule’, that ‘a permanent injunction will issue once [patent] infringement and validity have been adjudged’.296 Instead, this Court confirmed the well-established principle of equity that a patent holder seeking a permanent injunction to forbid patent infringement must satisfy a four-factor test. The patent holder must prove that the following requirements are in her favour: (i) irreparable injury – the patent holder has suffered an irreparable injury; (ii) inadequacy of legal remedies – remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (iii) balance of hardships – considering the balance of hardships between the patent holder and patent infringer, the balance of hardship lies in the former’s favour; (iv) public interest – the public interest would not be
289 290 291
eBay Inc. v. MercExchange L.L.C., 547 U.S. 388 (2006). Credit Suisse Securities (USA) LLC v. Billing, 127 S.Ct. 2383 (2007). Image Technical Services, Inc. v. Eastman Kodak Co., 125 F.3d 1195 (9th Cir. 1997) (Kodak). 292 In re Independent Service Organizations Antitrust Litigation, 203 F.3d 1322 (Fed. Cir. 2000) (Xerox). 293 However, statutory compulsory licences exist in US law. See 7 U.S.C. 2404 (patents necessary for the nation’s food supply); 42 U.S.C. 2183 (patents necessary for national atomic energy needs); 35 U.S.C. 203 (patents developed through the use of government research funding); 17 U.S.C. 115 (copyrights in certain musical works). 294 Dawson Chemical, supra note 27, at 215. However, when the IP–antitrust pendulum swung back to the antitrust side, the Supreme Court did endorse compulsory licensing as an accepted remedy against anti-competitive conduct. See, e.g., US v. Besser Manufacturing Co., 343 U.S. 444, 447 (1952); US v. Glaxo Group Ltd., 410 U.S. 52, 64 (1973). 295 Continental Paper Bag, supra note 273, at 423–424 and 429. 296 eBay, supra note 289, at 392–394. The Supreme Court has also rejected a rule that an injunction automatically follows an adjudication of copyright infringement.
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harmed, ‘disserved’, by a permanent injunction.297 If the four-factor test is not met, a permanent injunction is not granted. The decision to grant or deny a permanent injunction lies within the discretion of district courts and will be reviewed only for an abuse of that discretion.298 It seems that a patent holder’s right to exclude cannot trump all others; and balancing of factors is given weight post eBay.299 This is totally compatible with Articles 7, 30 and 31 of the TRIPS Agreement. Consequently, a third party, who is using a patent without the patent holder’s consent after reasonable negotiations, or who would like to use a patent but cannot reach an agreement with the patent holder, may: (i) require courts to permit her to use or continue to use the patent with adequate compensation by a declaratory judgment,300 or (ii) file a counter-claim against a claim of permanent injunction, by demonstrating that the above-mentioned four requirements are not satisfied. Following eBay, lower courts have in many cases refused to grant a permanent injunction against patent infringement. However, since the Supreme Court in eBay did not address the issue of non-injunctive prospective relief after denial of a permanent injunction, lower courts have adopted several approaches to deal with future infringement. These approaches include: (i) compulsory licensing;301 (ii) awarding future infringement damages on the basis of ongoing royalties,302 and (iii) leaving the issue to negotiations between the parties concerned or requiring the patent holder to initiate new litigation to get damages for future infringement.303 The Federal Circuit in
297 298
Ibid., at 391. Ibid., at 391 and 395–396. See also Petersen, Benjamin (2008), ‘Injunctive Relief in the Post-eBay World’, Berkeley Tech. L. J., 23 198–204. 299 Wegner, Harold C. (2008), ‘Post-eBay Compulsory Licenses: TRIPS Standards’, Paper prepared for the 41st Congress of the AIPPI, p. 5 (on file with author). 300 The US Declaratory Judgment Act states that ‘any court of the United States, upon the filing of an appropriate pleading, may declare the rights and other legal relations of any interested party seeking such declaration’ and ‘further necessary or proper relief based on a declaratory judgment or decree may be granted … against any adverse party whose rights have been determined by such judgment’. 28 U.S.C. 2201 and 2202. 301 Finisar Corp. v. DirecTV Group, Inc., 2006 WL 2037617 (E.D.Tex. 7 July 2006) (Final Judgment), affirmed in part, reversed in part, and remanded, 523 F.3d 1323 (Fed. Cir. 2008); Innogenetics, N.V. v. Abbott Laboratories, 512 F.3d 1363 (Fed. Cir. 2008). 302 Voda v. Cordis Corp., 2006 WL 2570614 (W.D.Okla. 5 Sept. 2006), affirmed in part, reversed in part, vacated in part, and remanded, 536 F.3d 1311 (Fed. Cir. 2008); Paice LLC v. Toyota Motor Corp., 504 F.3d 1293 (Fed. Cir. 2007), cert. denied, 128 S.Ct. 2430 (2008). 303 z4 Technologies Inc. v. Microsoft Corp., 434 F.Supp.2d 437, 440 (E.D. Texas 2006).
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Paice v. Toyota suggested a solution for future infringement after the denial of a permanent injunction: Under some circumstances, awarding an ongoing royalty for patent infringement in lieu of an injunction may be appropriate … In most cases, where the district court determines that a permanent injunction is not warranted, the district court may wish to allow the parties to negotiate a license amongst themselves regarding future use of a patented invention before imposing an ongoing royalty. Should the parties fail to come to an agreement, the district court could step in to assess a reasonable royalty in light of the ongoing infringement.304
According to this solution, if the parties concerned cannot reach a licensing agreement after the denial of a permanent injunction, district courts should impose on their own motion an ‘ongoing’ royalty. The Federal Circuit also made a distinction between an ongoing royalty order and a compulsory licence, stating that the latter ‘implies that anyone who meets certain criteria has congressional authority to use that which is licensed’; while the former ‘is limited to one particular set of defendants’.305 However, this distinction is not persuasive. The fact that the infringer is de facto permitted to continue to practise the patent on the condition of paying an ongoing royalty is an implicit compulsory licence. As Judge Rader observed in his concurring opinion in Paice v. Toyota, ‘calling a compulsory license an “ongoing royalty” does not make it any less a compulsory license’.306 Moreover, the Federal Circuit has recently regarded jury-determined reasonable damages for the possible future sales of the infringing products, which include both an upfront payment and an ongoing royalty payment, as a compulsory licence. In vacating a district court’s grant of a permanent injunction because of the district court’s abuse of discretion in weighing the eBay four factors, the Federal Circuit remanded the issue to the district court ‘to delineate the terms of the compulsory license, such as conditioning the future sales of the infringing products on payment of the running royalty’.307 Besides, it appears that the eBay four-factor test, particularly the second factor, i.e. whether monetary damages are adequate to compensate for patent infringement, focuses more on compensatory damages rather than punitive damages. Infringers may take the risk of paying both actual damages (the market price of the licence) and disgorgement of their profits. But if the fourfactor test is not satisfied, monetary remedies must be determined reasonably by either the parties concerned or the courts.308
304 305 306 307 308
Paice v. Toyota, supra note 302, at 1314–1315. Ibid., at 1313. Ibid., at 1316. Innogenetics, supra note 301, at 1379–1381. The US Congress is now considering a reform of the Patent Act in order to
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Accordingly, it can be said that although the Supreme Court in eBay did not refer to compulsory licensing, the refusal to grant a permanent injunction together with reasonable determination of damages and ongoing royalties payable to a patent holder, if the four requirements do not cumulatively exist, indirectly amounts to a compulsory licence. This interpretation is compatible with Article 1, Section 8, Clause 8 of the US Constitution and the ultimate purpose of IP law that the rationale for granting IPRs is a balance of interests between the public and right holders. Furthermore, as analysed, IPRs should be treated under property rules with built-in exceptions and limitations. The Supreme Court has confirmed that even under the property rules, development and innovation should not be blocked, and ‘promoting economic development is a traditional and long accepted function of government’. As a result, competent authorities may transfer property from one private party to another if future ‘use by the public’ is the purpose of the taking.309 Moreover, the Supreme Court has highlighted that it is ‘the public interest which is dominant in the patent system’.310 One may argue that eBay marked a major change in IP law in the US. It seems that limited compulsory licensing as a remedy of last resort is not causing any major alarm, as once feared.311 And the uncertainty and difficulties raised in Trinko relating to compulsory licensing may be surmountable. Regarding the relationship between antitrust law and a specific regulatory statute, the Supreme Court in Trinko confirmed that the Telecommunication Act of 1996 does not ‘modify, impair, or supersede the applicability of any of the antitrust laws’. But the Court concluded that the forced dealing regulated in the Telecommunication Act and enforced by regulatory authorities was ‘an effective steward of the antitrust function’. Consequently, forced dealing should be enforced by regulatory authorities, rather than by antitrust courts.312 However, this observation may still be controversial. First, the purpose of the Telecommunications Act, stated in its Preamble, is to ‘promote competition’ in order to ‘secure lower prices and higher quality services’ for consumers and ‘encourage the rapid deployment of new telecommunications technologies’. This coincides with the purpose of US antitrust law; but the Act, as mentioned above, does not repeal the antitrust law.313 This means that antitrust law make changes to the entire market value rule in reasonable royalty damages. See Lemley, Mark A. (2009), ‘Patent Reform in the Courts and Congress’, Testimony before the Senate Committee on the Judiciary, p. 6 (on file with the author). 309 Kelo v. City of New London, 545 U.S. 469, 477 and 484 (2005). 310 Mercoid v. Mid-Continental Investment, supra note 20, at 665. 311 Nielsen, Carol M. and M. Samardzija (2007), ‘Compulsory Patent Licensing: Is It a Viable Solution in the United States?’, Mich. Telecomm. Tech. L. Rev., 13, 536. 312 Trinko, supra note 83, at 406 and 413–415. 313 US Telecommunication Act of 1996, Pub. LA. No. 104–104, 110 Stat. 56 (1996), Section 601(b)(1).
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remains applicable to the refusal to deal in question. Second, the Supreme Court, in Credit Suisse,314 distinguished the applicability of antitrust law and regulatory statutes when they overlap. If activities are regulated by a sectorspecific statute, antitrust law is not applicable only if the following four factors are satisfied: (i) regulatory authority exists under the regulatory statute to supervise the activities in question; (ii) there is evidence that the responsible regulatory entities exercise that authority; (iii) there is a resulting risk that the regulatory statute and antitrust law, if both are applicable, would produce conflicting guidance, requirements, duties, privileges, or standard of conduct; and (iv) the possible conflict affect practices that lie squarely within an area of market activities that the regulatory statute seeks to regulate.315 It appears that the third factor, and even the fourth, were not met, at least in the case of IPRs. Regarding the refusal to transfer technology and compulsory licensing, as presented, there is no conflict between IP law in general and antitrust law. And after eBay, the Supreme Court indirectly confirmed that refusal to license and compulsory licensing may be regulated under IP law. Furthermore, as Herbert Hovenkamp observes: [A] common characteristic of regulated industries is ongoing supervision of a firm’s activities. The patent system differs in this respect. While we have a great deal of supervision over the patent creation process, once a patent is created government agencies have relatively little to say about how it is used … This suggests a more important role for antitrust during the “post-grant” period. [The courts should] strike a different balance by giving less deference to a badly designed patent policy and more to antitrust.316
Interestingly, in her first remarks as the new head of the Antitrust Division of the DOJ, Christine Varney indicated that the ‘self-correction’ of markets has not occurred and, thus, urged vigorous antitrust enforcement to spur innovation and enhance consumer welfare. She believes, by quoting Posner, that ‘dominant firms can be expected to deal with their rivals where “cooperation is indispensable to effective competition”’, and ‘antitrust doctrine is supple
314 315
Credit Suisse, supra note 290, at 2392. In the EU, it appears that ex post competition rules will apply to anti-competitive practices despite the existence of an ex ante sector-specific regulation, unless the system of that regulation provides a dominant firm with no margin of freedom with respect to the practices in question. See Deutsche Telekom, supra note 136, paras 88–89; Sot. Lelos kai Sia, supra note 109, paras 61–63. 316 Hovenkamp, Herbert J. (2009), ‘Patents, Property and Competition Policy’, available at http://ssrn.com/abstract=1338899; See also Ghosh, Shubha (2009), ‘Carte Blanche, Quanta, & Competition Policy’, available at http://ssrn.com/ abstract=1354624; Baker, Jonathan B. (2008), ‘“Dynamic Competition” Does Not Excuse Monopolization’, available at http://ssrn.com/abstract=1285223.
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enough … to take in its stride the competitive issues presented by the new economy’.317 Therefore, there is no reason not to apply antitrust law to refusal to license and grant compulsory licensing as a remedy against refusal to license violating antitrust law. 2.4.1.3 Kodak, Xerox and others: a split among US courts of appeals Although no case concerning refusal to license has been reviewed by the Supreme Court, the courts of appeals have considered the issue. However, their decisions are divergent. In Kodak, the Ninth Circuit in 1997 found that a refusal to license violated Section 2 of the Sherman Act. Yet in Xerox, in similar circumstances, the Federal Circuit in 2000 ruled that such conduct did not fall under the Sherman Act and gave summary judgment for the defendant. These two cases involved the refusal to sell or license patented replacement parts (and copyrighted software) for equipment to ISOs by the manufacturers of equipment, Kodak and Xerox respectively. The refusal drove ISOs out of the equipment service market. Both Kodak and Xerox invoked their IPRs to justify their refusal. The Ninth Circuit, in Kodak, held that the refusal to sell ‘patented or copyrighted parts was a presumptively legitimate business justification’, but ‘the presumption may also be rebutted by evidence of pretext’.318 This court found that there was sufficient evidence of pretext, because: (i) Kodak refused to sell both patented and unpatented parts, and (ii) Kodak was not even thinking about its IPRs when it did so.319 Accordingly, the Kodak approach requires an evaluation of the right holder’s subjective motivation for refusal to sell or license IPR-embodied products. In contrast, the Federal Circuit in Xerox declined to follow the Kodak ruling. It held that such refusal derives from ‘the statutory right to exclude others from making, using, or selling the claimed invention’. Therefore, refusal to license is ‘free from liability under the antitrust laws’, even though it ‘may have an anticompetitive effect, so long as that anticompetitive effect is not illegally extended beyond the statutory patent grant’.320 The Federal Circuit also identified at least three exceptions to the legality of refusal to license under antitrust law, namely illegal tying, fraud in the Patent and Trademark Office, or sham litigation.321 Both the Kodak and Xerox decisions contain flaws. In Kodak, it is hard to determine subjective intent standards, and the issue is prone to uncertainty. Furthermore, focusing on subjective motivation could derail the modern US
317 318 319 320 321
Varney, supra note 106. Kodak, supra note 291, at 1219. Ibid., at 1219–1220. Xerox, supra note 282, at 1327–1328. Ibid., at 1327.
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antitrust analysis’s focus on the objective economic aspects of conduct (rather than the intent behind it) which has been recently confirmed in Weyerhaeuser.322 Meanwhile, the three exceptions to the legality of refusal to license listed in Xerox involve not only unconditional but also conditional unilateral refusal to license. Except for illegal tying, other types of conditional unilateral refusal to license are not addressed under the Xerox exceptions. Therefore, Xerox may give antitrust immunity to all other conditional licences on the basis of the argument that conditional licences are less restrictive than not licensing at all. This broad interpretation of Xerox can lead to the undesirable consequence that most of the restrictions in licensing, such as exclusive licensing, cross-licensing, exclusive grantbacks, selective licensing, or even price fixing, may easily escape antitrust scrutiny.323 Furthermore, this list is not exhaustive. Deception by a right holder at a SSO together with the abuse of a dominant position resulting from such deception – refusal to license, for instance – may be another exception, as in Rambus324 as decided by the FTC. In this case, Rambus knew that its patents covered technology included within the proposed standards being considered by an SSO. But it did not disclose this to the SSO. After the standards were adopted, Rambus proceeded to enforce its IPRs against SSO members implementing those standards. The FTC concluded that Rambus’ failure to disclose its IPRs amounted to deception qualifying as exclusionary conduct under Section 2 of the Sherman Act. The FTC then forced Rambus to license its IPRs to SSO members. If the FTC’s view were accepted, refusal to license by a right holder, whose IPRs are ultimately incorporated into a standard, in a case where she failed to disclose her relevant IPRs to an SSO in order to charge a higher price, may also violate Section 2. Consequently, compulsory licensing as a remedy could be granted. On appeal, however, the DC Circuit did not agree with the FTC’s view. This court believed that Rambus’ deceptive conduct and its attempt to charge a higher price alone could not be regarded as monopolization under Section 2, because such deception ‘has no particular tendency to exclude rivals and thus to diminish competition’.325 This DC Circuit’s view seems contrary to its view in Microsoft III in 2001 and the Third Circuit’s view in Broadcom v. Qualcomm326 in 2007, and even inconsistent with the Federal Circuit’s view in Qualcomm v. Broadcom327 in 2008. In Microsoft III, the DC Circuit found that Microsoft had marketed a set of software development tools
322 323 324 325 326 327
Weyerhaeuser, supra note 90. US DOJ and FTC, supra note 187, pp. 18–19. Rambus v. FTC, supra note 91. Ibid., at 464. Broadcom Corp. v. Qualcomm Inc., 501 F.3d 297 (3rd Cir. 2007). Qualcomm Inc. v. Broadcom Corp., 548 F.3d 1004 (Fed. Cir. 2008).
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permitting software developers to create application software that could run on other operating systems; but the set, in fact, could operate properly only on Microsoft’s Windows, because Microsoft intended to have Windows-dependent application software. Without any pro-competitive justification from Microsoft, the DC Circuit reasoned that Microsoft’s deceptive conduct ‘served to protect its monopoly of the operating system in a manner not attributable either to the superiority of the operating system or to the acumen of its makers’. Therefore, the court ruled that this deceptive conduct was anticompetitive, exclusionary and in breach of Section 2.328 Similarly, in Broadcom v. Qualcomm, the Third Circuit held that a patent holder who had promised to license her patented technology on fair, reasonable and nondiscriminatory (FRAND) terms, but did not keep her promise by charging non-FRAND royalties after her technology was included in a standard decided by an SSO, was guilty of anti-competitive conduct. The Third Circuit reasoned that such deceptive conduct ‘may confer an unfair advantage and bias the competitive process in [favour] of that technology’s inclusion in the standard’, and thereby confers monopoly power on the patent holder and harms competition as the result of patent hold-up.329 The reasoning in Microsoft III and Broadcom v. Qualcomm demonstrates that through deceptive conduct the suppression of information relating to competition in order to obtain (or maintain and develop) monopoly power can be suppression of competition itself.330 Moreover, from the IP law perspective rather than the antitrust law one, the Federal Circuit in Qualcomm v. Broadcom, by recognizing the patent hold-up issue arising due to deceptive conduct to an SSO prior to the adoption of a standard, upheld the view that a patent holder has waived her rights to enforce her patents, once included in a standard by an SSO, against standardcompliant products by her silence in the face of a disclosure duty.331 Accordingly, deception by a patent holder in SSOs may be prevented not only by IP law but also by antitrust law. In any case, a refusal to license, or impos-
328 329 330
Microsoft III, supra note 86, at 76–77. Broadcom v. Qualcomm, supra note 326, at 313–314. See Brief for Twenty Law and Economic Professors in support of petitioner for certiorari in FTC v. Rambus, No. 08–694, 29 Dec. 2008, pp. 11–13 (on file with the author). 331 Three requirements must be satisfied in order to invoke the Qualcomm v. Broadcom implied waiver: (i) a clear disclosure policy of an SSO, (ii) a clear understanding and expectation among SSO members about the disclosure, and (iii) intentional non-disclosure of the member in question. Qualcomm v. Broadcom, supra note 327, at 1012–1022. In Europe, the German Federal Supreme Court in the StandardSpundfass case in 2004, 36 IIC 742 (2005), ruled that a patent holder could be hindered from enforcing her patent against a third party if she did not license the patent on FRAND terms.
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ing excessive licensing fees (non-FRAND) owing to monopoly power obtained from such deception, may lead to compulsory licensing. Additionally, one can argue that the three exceptions in Xerox are very inflexible and formalistic. Xerox is not consistent with the trend of US antitrust law which ‘has moved away from the rigidity of formalism and legal issues’ in favour of ‘a fact-based analysis that applies rigorous economic principles to distinguish anticompetitive from pro-competitive conduct’.332 Noting the conflict between Kodak and Xerox, the Eleventh Circuit in 2004, in Telecom Technical Services,333 the facts of which were similar to those in Kodak and Xerox, found another way to resolve the antitrust issue of refusal to license by considering the actual harm to equipment owners/customers. In this case, a customer could service its equipment bought from the right holder in one of three ways. First, it could hire the right holder to service the equipment. Second, it could order the part directly from the right holder (or the right holder’s authorized distributors) and make arrangements to service the equipment itself. Third, it could hire an ISO to service the machine, although the right holder required that the customer furnish the ISO with a letter of agency authorizing it to order the part on the customer’s behalf before the right holder sold the part.334 As a result, although the right holder refused to sell and license her IPR-embodied parts, customers could still have their equipment serviced by ISOs. Since no ‘actionable harm to customers’ was found, the refusal to license did not violate Section 2 of the Sherman Act.335 Interestingly, Telecom Technical Services was decided after Trinko. However, the Eleventh Circuit did not apply, or at least mention, the strict view of the Supreme Court in Trinko.
332
Melamed, A. Douglas and A.M. Stoeppelwerth (2002), ‘The CSU Case: Facts, Formalism and the Intersection of Antitrust and Intellectual Property Law’, Geo. Mason L. Rev., 10, 425; US DOJ and FTC, supra note 187, p. 19. 333 Telecom Technical Services Inc. v. Rolm Co., 388 F.3d 820 (11th Cir. 2004). The reasoning in this case is similar to that in Data General Corp. v. Grumman System Support Corp., 36 F.3d 1147 (1st Cir. 1994). 334 Ibid., at 823. 335 Ibid., at 827–282. In addition to Xerox (quasi per se legality), Telecom Technical Services (presumptive legality with a focus on customer harms), and Kodak (presumptive legality with an intent-based rebuttal), refusal to license may be treated as absolute per se legality in SCM Corp. v. Xerox Corp., 645 F.2d 1195, 1206 (2nd Cir. 1981), cert. denied, 455 U.S. 1016 (1982), or as essential facilities in Intergraph Corp. v. Intel Corp., 3 F.Supp.3d 1255, 1278 (N.D. Ala. 1998), vacated, 195 F.3d 1346, 1367 (Fed. Cir. 1999). See Carrier, Michael A. (2006), ‘Refusals to License Intellectual Property after Trinko’, DePaul L. Rev., 55, 1191–1209.
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2.4.1.4 Remarks Refusal to license has been a subject of much debate among US antitrust and IP practitioners and policy makers. As shown in Section 1.3.1, antitrust law should act as a second filter to prevent IPR-related anti-competitive practices. With respect to the exercise of IPRs and refusal to license, antitrust law should be regarded as being lex specialis in relation to IP law.336 Moreover, the ‘certain circumstances’ where refusal to deal may violate Section 2 of the Sherman Act were not articulated in Trinko. Therefore, Trinko should not be interpreted as a judgment that closes all doors to compulsory licensing under US antitrust law. The fact that IP law and antitrust law are complementary does not imply that the application of one follows, or is limited by, the application of the other; that a remedy (if any) exists in IP law does not preclude the possibility of applying antitrust remedies. It is inappropriate to immunize a right holder from antitrust liability when she attempts to extend her IPR monopoly into, and eliminate competition in, downstream markets. Furthermore, if the mere fact of holding IPRs can in itself constitute persuasive objective justifications for a refusal to license under antitrust law, the exceptions established – at least tying as in Xerox – could never be applied.337 Besides, many scholars and practitioners from the IP law perspective are now expressing concerns about the US patent system. They argue that the US patent system ‘predictably provides excessive rewards to patent holders’; and the rewards ‘exceed the patentee’s actual contribution to economic welfare’.338 The balance between IP law and antitrust law in the US ‘has at least until quite recently been tilted in [favour of IP] law and against antitrust law’.339 Such excessive rewards and such a tilt will reduce not only static but also dynamic efficiency by retarding innovation. As a result, the US Supreme Court has, since 2006, intervened to reduce the power of patent holders and restore the balance through its judgments such as in eBay,340 MedImmune,341 336 IP is metaphorically ‘an island of monopoly in a sea of perfect competition’. It would be better to identify, from the perspective of a broader ecosystem that ‘seas and islands coexist in a broader universe of innovative and competitive processes’. Ghosh, supra note 316, pp. 2–3. 337 For a similar argument in the EU see Microsoft v. Commission, supra note 92, para. 690. See also Economides, Nicholas and W.N. Hebert (2008), ‘Patents and Antitrust: Application to Adjacent Markets’, J. Telecomm. & High Tech. L., 6, 481. 338 Shapiro, Carl (2007), ‘Patent Reform: Aligning Reward and Contribution’, available at www.nber.org/papers/w13141.pdf. 339 Lemley, Mark A. (2007), ‘A New Balance between IP and Antitrust’, Sw. J. L. & Trade Am., 13, 254. 340 eBay, supra note 289. 341 MedImmune, supra note 230 (a licensee does not need to breach or terminate the licence agreement before seeking a declaratory judgment which invalidates the patent in question).
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KSR,342 and Quanta.343 This is in line with Carl Shapiro’s proposal to reform the US patent system and align rewards and contribution,344 as well as evidence before the US Senate Committee on Judiciary hearing on ‘Patent Reform in the 111th Congress: Legislation and Recent Court Decisions’ in March 2009.345 However, it appears that internal reforms of the patent system could not by themselves properly resolve these concerns. Fine-tuning IP law and ex ante prevention of IPR abuses by such fine-tuning are not easy tasks. Antitrust law must intervene to assist the correction process of IP law. In any case, refusal to license should be seriously considered under antitrust law so as to enhance innovation and protect consumer welfare in the US. 2.4.2
Refusal to License in the EU
2.4.2.1 Refusal to deal in the EU: introduction Contrary to the essential facilities doctrine in the US, which is neither clearly recognized nor repudiated after Trinko, this doctrine or the duty to deal is well established in the EU due to judgments of the EU Courts and decisions of the Commission. Commercial Solvents346 is the first case in which the ECJ recognized the duty to deal. The Court concluded that it is an abuse for a dominant firm to cease supply of essential input to its customers in order to integrate vertically and then compete with its former customers in the downstream market for the final product. The ECJ held: [A]n undertaking which has a dominant position in the market in raw materials and which, with the object of reserving such raw material for manufacturing its own derivatives, refuses to supply a customer, which is itself a manufacturer of these derivatives, and therefore risks eliminating all competition on the part of this customer, is abusing its dominant position within the meaning of Article [82 EC].347
342 KSR International Co v. Teleflex Inc., 127 S.Ct. 1727 (2007) (a more flexible approach for determining obviousness is introduced; accordingly, persons of ordinary skill in the art are generally capable of combining available technologies to solve known problems, even without specific suggestions to do so in the prior art). 343 Quanta Computer, Inc. v. LG Electronics, Inc., 128 S.Ct. 2109 (2008) (patent exhaustion is triggered by the first authorized sale; see infra Section 2.5.1). 344 Shapiro, Carl, supra note 338, pp. 19–36. 345 See, e.g., evidence of Steven R. Appleton, Mark A. Lemley, Taraneh Maghamé, and Philip S. Johnson before the US Senate Committee on Judiciary hearing on ‘Patent Reform in the 111th Congress: Legislation and Recent Court Decisions’ on 10 March 2009 (on file with author). 346 Commercial Solvents, supra note 107. 347 Ibid., para. 25 (emphasis added).
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This case was upheld in Télémarketing.348 In this case, refusal to supply a service was regarded as incompatible with Article 82 EC when the refusal was implemented by a dominant firm in one market the services of which were indispensable for the activities of another firm in an adjacent market, without any objective justification but with the purpose of elimination of competition in the second market. The duty to deal in EU competition law is applied not only to the termination of an existing supply relationship349 but also to a first-time refusal.350 In Bronner, the ECJ clarified four principal requirements for the enforcement of this duty, namely: (i) indispensability of the facilities for competitors in the downstream market to carry on their business; (ii) lack of reasonable possibilities to duplicate the facilities due to technical, legal or economic obstacles; (iii) elimination of competition in the downstream market due to the refusal to deal; and (iv) no objective justifications.351 Regarding the objective justification requirement, the ECJ recently held that refusal to supply by a dominant firm is not illegal per se under Article 82 EC.352 If such refusal is used in a reasonable and proportionate way to protect the dominant firm’s legitimate economic interests, i.e. the refusal does not aim at strengthening the dominant position and abusing that position, the refusal is compatible with EU competition law. 2.4.2.2 Volvo and Renault: initial cornerstones As part of refusal to deal in general, a condemnation of a refusal to license together with compulsory licensing as a remedy for the anti-competitive effects of the refusal has been developed and elaborated by the EU Courts and Commission. Starting with Volvo353 and Renault,354 the ECJ adopted a cautious approach to refusal to license under Article 82 EC. Those cases concerned the ability of an after-sale service provider to obtain rights to protected designs for particular car parts from the manufacturer. Like US
348
Case 311/84, Centre belge d’études de marché-Télémarketing v. SA Compagnie luxembourgeoise de télédiffusion and Information publicité Bénélux, [1985] ECR 3261, para. 27. 349 Commercial Solvents, supra note 107; United Brands, supra note 107; Télémarketing, supra note 348; Sot. Lelos kai Sia, supra note 109. 350 Magill, supra note 38; Case C–7/97, Oscar Bronner v. Mediaprint, [1998] ECR I–7791; Case C–418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG., [2004] ECR I–5039; Case T–504/93, Tiercé Ladbroke SA v. Commission, [1997] ECR II–923. 351 Bronner, supra note 350, paras 38–44. 352 Sot. Lelos kai Sia, supra note 109, paras 50, 71 and 77. 353 Volvo, supra note 126. 354 Renault, supra note 127.
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courts, the ECJ held that the freedom to refuse to license IPRs is of ‘the very subject-matter’ of the exclusive rights of a right holder. Such refusal, therefore, is not in itself an abuse of a dominant position even in return for reasonable royalties. However, the ECJ did not rule that refusal to license was legal per se. The Court made clear that such refusal, or similar exercise of exclusive IPRs by a firm holding a dominant position may violate Article 82 EC if it involves certain additional abusive conduct such as: (i) arbitrary refusal to supply spare parts to independent repairers, (ii) fixing prices of spare parts at an unfair level, or (iii) a decision no longer to produce spare parts for a particular model even though many products of that model are still in circulation.355 The conclusion can be drawn that mere refusal to license is not in breach of EU competition law, but such a refusal in combination with additional abusive conduct violates the law.356 Consequently, the remedy for the anti-competitive practice must put an end to the additional abusive conduct. Compulsory licensing is used only if other remedies to prevent such conduct are not sufficient or effective. One may argue that the formula for an abuse of a dominant position concerning refusal to license in Volvo and Renault is ‘refusal to license plus additional abusive conduct’. 2.4.2.3 Magill, IMS Health and Microsoft v. Commission: new guidance The additional abusive conduct listed in Volvo and Renault is not exhaustive. Those three examples give no clear guidance to the competent authorities on how to scrutinize a specific case on refusal to license. The ECJ therefore took a further step in Magill. This case involved a refusal to grant copyrighted TV listing information allowing the publication of a comprehensive weekly TV guide with all broadcasters’ listings, which was not available in the market at the time of the dispute. The ECJ confirmed that a refusal to license IPRs by a dominant firm is not in itself an abuse violating competition law, but could be regarded as such in ‘exceptional circumstances’.357 The cumulative exceptional circumstances relating to a refusal to license by a dominant firm that may lead to an abuse are: (i) the refusal to license relates to a product (or service) indispensable to the exercise of a particular activity on the secondary (downstream) market; (ii) it prevents the emergence of a new product for which there is a potential customer demand; (iii) it excludes all competition on
355
Volvo, supra note 126, paras 8–9; Renault, supra note 354, paras 11 and
15–16. 356 Temple Lang, John (2009), ‘Article 82 EC – The Problems and the Solution’, p. 21 (contending ‘there must be some other identifiable abuse’), available at http://ssrn.com/abstract=1467747. 357 Magill, supra note 38, para. 50.
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the secondary market; and (iv) it is not justified.358 These four cumulative conditions were reconfirmed and, to some extent, elaborated on in IMS Health.359 The ECJ listed three cumulative conditions, namely new product with a potential customer demand, competition elimination, and no justification. However, the indispensability condition is the prerequisite that can be inferred from the ECJ’s explanations of those three conditions.360 Regarding the likelihood of excluding all competition on the secondary market, the ECJ requires the existence of an upstream market for an IP input, and a downstream market in which the input is indispensable. The rationale for the two-market requirement has not been clearly explained, but it seems to reflect the property principle that monopoly power resulting from a legitimately acquired property right cannot be objected to in a single market context.361 It also reflects a principle in competition law that legitimately having a dominant, or even monopoly, position in an upstream market does not in itself violate competition law. However, using control over the output of the upstream market, as an indispensable input in the downstream market, in order (i) to eliminate competition in the downstream market, i.e. offensive or ‘sword’ abuse, and/or (ii) to protect and strengthen the dominant position in the upstream market, i.e. defensive or ‘shield’ abuse, may be in breach of competition law. The ECJ followed arguments of AG Tizzano to rule that it is enough to identify a ‘potential’ or ‘hypothetical’ upstream market.362 As a result, it is sufficient that the upstream product which contains IPRs can be identified as a different stage of production, which is connected with, and indispensable for, the downstream product. Regarding the emergence of a new product, this condition can be explained by invoking the purpose of EU competition law, which aims at protecting competition, particularly consumer benefits, rather than protecting competitors.363 If a third party requiring access to IPRs intends to produce products which are currently available in the market, or which compete head-to-head for the same group of consumers with the products offered by the right holder, the benefits of the right holder, who is compelled to license her IPRs under competition law (if any), will be adversely affected. AG Gulmann in Magill observed:
358 359 360 361 362 363
Ibid., paras 53–56. IMS Health, supra note 350, paras 38–52. Microsoft v. Commission, supra note 92, paras 330 and 332. See O’Donoghue and Padilla, supra note 99, pp. 436–437. IMS Health, supra note 350, paras 44–45. Opinion of AG Jacobs in Bronner, supra note 350, para. 58.
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Where the product is one that largely meets the same needs of consumers as the protected product, the interests of the [IPR] owner carry great weight. Even if the market is limited to the prejudice of consumers, the right to refuse licences in that situation must be regarded as necessary in order to guarantee [the owner] the reward for his creative effort.364
Accordingly, there is a clear benefit to innovation, competition, and consumer welfare, at least in the long run, only if a third party intends to produce new goods or services in the secondary market not offered by the right holder, and for which there is a potential consumer demand. The new product requirement discourages a third party from freeriding on innovation investment made by the dominant firm holding the IPRs. Furthermore, this requirement may also induce a third party to increase investment, or follow-on R&D, to make improvements or upgrade to the current innovation in order to produce a new product based on the IPRs required. If a new product intended to be produced by a third party embodies not only the dominant firm’s IPRs but also additional IPRs as improvements, the new product can be partly protected under a dependent (second) patent owned by the third party, for instance, this party can under existing IP law require the competent authorities to grant a non-assignable compulsory licence of the dominant firm’s patent.365 Conversely, if a new product falls within the scope of the dominant firm’s patent, a compulsory licence of that patent for third parties to produce new products under competition law may be also compatible with the Paris Convention provisions incorporated into the TRIPS Agreement. Article 5.A(4) of the Paris Convention permits compulsory licensing ‘on the ground of failure to work or insufficient working’ before the expiration of a period of four years from the date of filing of the patent application or three years from the date of the grant of the patent, if there is no legitimate justification for inaction on the part of the patent holder.366 One may argue that if a patent holder neither locally produces nor imports products embodying the protected patent without any justification, she fails to work the patent with respect to the new products to be produced by a third party, for which there is a potential customer demand. So compulsory licensing of a patent for the production of new products not offered by the patent holder under competition law is also compatible with the TRIPS Agreement and the Paris Convention.367 364 365 366
Opinion of AG Gulmann in Magill, supra note 38, para. 97. See Article 31(l) of the TRIPS Agreement. The view that Article 5.A(4) of the Paris Convention (non-working) cannot be invoked if products are imported or locally produced according to Article 27.1 of the TRIPS Agreement is still disputable. 367 See also three refusal to deal scenarios analysed in Kjølbye, Lars (2009),
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As to the condition of objective justifications, it depends on the facts which will be reviewed on a case-by-case basis. The legal and economic context of any refusal to license and the legitimate commercial interests of right holders must be taken into account. The European Commission states: The Commission will consider claims by the dominant undertaking that a refusal to supply [or license] is necessary to allow the dominant undertaking to realise an adequate return on the investments required to develop its input business, thus generating incentives to continue to invest in the future, taking the risk of failed projects into account. The Commission will also consider claims by the dominant undertaking that its own innovation will be negatively affected by the obligation to supply, or by the structural changes in the market conditions that imposing such an obligation will bring about, including the development of follow-on innovation by competitors.368
Providing access to IPRs does not as such cause any major problem. However, the intent and activities of a dominant firm holding IPRs launching into the market the new IPR-embodied product that the requesting party also wishes to produce must be carefully considered. If the dominant firm itself effectively and timely puts the new product onto the market, granting third parties a right to share the IPRs at issue will adversely affect its interests; and it seems the new product condition may not be satisfied. However, the dominant firm could always argue ex post that it intended to produce the same new product as the requesting party would like to produce. Accordingly, it seems to be objectively justifiable only if the dominant firm can show prior plans to develop the new product by itself at the time when the licence is requested.369 Further, it remains controversial whether or not a refusal to license can indeed be justified by the value of IPRs. On the one hand, based on the nature of the IPRs protected in Magill (the TV programme listings that were sent free of charge to newspapers every week) and IMS Health (the 1860 brick structure map of Germany that was in reality an industry standard for the presentation of pharmaceutical sales figures), one may argue that the duty to license IPRs under Article 82 EC tends to arise in a case where IP protection for such rights is ‘weak’ or ‘bad’. If the protection is ‘strong’, i.e. the IPRs are a result of substantial investments entailing significant risks, a patent for instance, a dominant firm holding ‘strong’ IPRs should be allowed to exclude others for a period of time to ensure an adequate return on the investments, although that
‘Article 82 EC as Remedy to Patent System Imperfections: Fighting Fire with Fire?’, World Comp., 32(2), 177–179. 368 Article 82 EC Guidance, para. 89 (and also para. 30) (emphasis added). 369 See O’Donoghue and Padilla, supra note 99, pp. 451–452.
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firm may eliminate competition during this period.370 On the other hand, one may argue that the value of IPRs should not be taken into consideration. If the four conditions mentioned above are satisfied, the refusal to license will be in breach of Article 82 EC whether or not the IPRs in question are ‘strong’. In the interim measure stage in Microsoft v. Commission, the President of the CFI, while recognizing the difference between the value of IPRs in Magill and IMS Health and the value of Microsoft’s IPRs, stated that this ground of objective justification was at least arguable in principle.371 However, the Microsoft v. Commission ruling clearly expressed the attitude of the CFI that the four conditions in Magill/IMS Health, if satisfied, prevail over IPRs and incentives to innovate. To reconcile these two views, one may suggest the ‘grace’ period of four years from the date of filing of the patent application or three years from the date of the grant of the patent, whichever period expires last, should be respected, as Article 5.A(4) of the Paris Convention regulates failure to work. Within this period, competent authorities should not investigate any complaint concerning a refusal to license ‘strong’ patents. It could be argued that the abuse of a dominant position regarding the refusal to license in Volvo/Renault is different from that in Magill/IMS Health.372 The refusal to license in Magill/IMS Health violates Article 82 EC without any additional abusive conduct once the four conditions, namely indispensability of an IPR-protected input, elimination of competition in the secondary market due to the indispensability, emergence of new products, and no objective justification, are satisfied. Compulsory licensing is, therefore, the only remedy which can put an end to the abuse. In contrast to the ‘refusal to license plus additional abusive conduct’ in Volvo/Renault, the formula for a Magill/IMS Health violation of competition is a ‘refusal to license itself in special circumstances’. After Magill, in addition to IMS Health articulating the four Magill conditions, there have been two other cases concerning refusal to license: Ladbroke and Microsoft v. Commission. In Ladbroke, the CFI ruled that the Magill conditions were not met in a case of refusal by certain French racecourse operators to allow Ladbroke’s betting shops in Belgium access to the televised broadcasting of French horse races protected by IPRs. The reason is that, as it was already a leading supplier in the downstream market of bet-taking on French races without access to French race broadcasts, Ladbroke’s access
370 See Microsoft’s reasoning cited in the Order of the CFI President in Case T–201/04 R, Microsoft v. Commission, [2004] ECR II–4463, para. 106. 371 Ibid., para. 207; See also O’Donoghue and Padilla, supra note 99, pp. 452–453. 372 Korah, supra note 250, p. 139. However, the opposite view remains. See O’Donoghue and Padilla, supra note 99, pp. 431–433.
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could not be indispensable for the exercise of its bet-taking in Belgium.373 Consequently, competition in the downstream market was not eliminated by the refusal to license. In Microsoft v. Commission, the Commission applied a hybrid legal analysis.374 On the one hand, in addition to recalling Volvo, Magill, and Ladbroke, the Commission also mentioned other cases relating to refusal to supply tangible property, such as Commercial Solvents, Télémarketing and Bronner. On the other hand, the Commission observed that, in general, the criteria for a duty to supply in exceptional circumstances laid down in these cases were not exhaustive. A duty to license in particular may be appropriate in other circumstances, which would be based on the result of a comprehensive examination.375 The Commission analysed a series of factors which could justify imposing a duty to license on Microsoft.376 First, the refusal to license was part of a general pattern of conduct, including discrimination and tying:377 this is equivalent to the so-called ‘refusal to license plus additional abusive conduct’ in Volvo/Renault. Second, there was a disruption of past voluntary supply of interoperability information:378 this is similar to Commercial Solvents. Third, there was risk of elimination of competition in the market for server operating system software products because the interoperability information in question was of ‘significant competitive importance’, and there were no substitutes for Microsoft’s providing interoperability information:379 the requirement of competition elimination derived from indispensability of an input is always highlighted in all previous cases. Fourth, the refusal to license had an adverse impact on technical development and consumer welfare:380 although the previous cases did not directly refer to this requirement, it was indirectly taken into consideration, particularly with respect to consumer benefits, through the new product condition in Magill/IMS Health.381 Fifth, there was no objective justification: a duty to disclose the interoperability information would not affect Microsoft’s incentive to innovate, and the disclosure was consistent with EU legislation on protection of software programs;382 obviously, the objective justification was required in all previous cases. 373 374
Ladbroke, supra note 350, paras 87 and 132. See O’Donoghue and Padilla, supra note 99, p. 431; Korah, supra note 250,
p. 155. 375 376 377 378 379 380 381
Microsoft EU, supra note 208, paras 555 and 557–558. Microsoft v. Commission, supra note 92, para. 317. Microsoft EU, supra note 208 (Section 5.3.1.1.3.1 and Section 5.3.2). Ibid., (Section 5.3.1.1.3.2). Ibid. (paras 586 et seq. and Section 5.3.1.2.3). Ibid. (Section 5.3.1.3). The Commission elaborates on this factor, with reference to Microsoft v. Commission and IMS Health, in paras 86–88 of the Article 82 EC Guidance. 382 Microsoft EU, supra note 208 (Section 5.3.1.4.1).
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One may argue that the hybrid approach used by the Commission in Microsoft EU does not conflict with the four-condition test in Magill/IMS Health. The Commission was right when it contended that the criteria for assessing refusal to license in exceptional circumstances in the ECJ judgments were not exhaustive. This was confirmed in IMS Health where the ECJ held that the four requirements in Magill are just ‘sufficient’, which may be interpreted to mean that they are not necessary, and other requirements could replace them. The Commission’s hybrid approach was, to some extent, approved by the CFI when that Court adjudicated on the matter on appeal. The CFI held: [T]he Court considers that it is appropriate, first of all, to decide whether the circumstances identified in Magill and IMS Health … are also present in this case. Only if it finds that one or more of those circumstances are absent will the Court proceed to assess the particular circumstances invoked by the Commission.383
However, the CFI did not consider the other circumstances mentioned by the Commission, because the Court found that the Magill/IMS Health fourpronged test was satisfied.384 From the perspective of protecting the incentives to innovate for right holders, there remain concerns as to whether or not the new product condition can be replaced by the fourth condition in the Microsoft EU decision mentioned above or something else like it. The CFI in Microsoft v. Commission, basing itself on Article 82(b) EC, held that the new product condition consists ‘not only of production or markets, but also of technical development’. The CFI reasoned that this condition is satisfied if competitors accessing the compulsory licence will not merely ‘clone’ products produced by the right holder.385 Furthermore, contrary to the four-pronged test in Magill/IMS Health, the approach to the exceptional circumstance test in the Microsoft EU decision may cause legal uncertainty for right holders. And it also appears that the Commission, by taking a hybrid approach in assessing the refusal to license in the Microsoft EU decision, would like to blur the distinction between refusal to license and refusal to supply in general. This is also reflected in the Article 82 EC Guidance enacted in February 2009, in which the Commission does not distinguish a refusal to license from other types of refusal to supply.386
383 384 385 386
Microsoft v. Commission, supra note 92, para. 336. Ibid., para. 712. Ibid, paras 647 and 656–657. However, in a note in para. 78 of the Article 82 EC Guidance, the Commission highlights that ‘in exceptional circumstances a refusal to license intellectual property rights is abusive’.
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2.4.2.4 Remarks Refusal to license, especially after the ruling of the CFI in Microsoft v. Commission, may violate EU competition law in exceptional circumstances. The European Courts and the Commission have tried to provide clear criteria for these circumstances. In its Article 82 EC Guidance, officially enacted in February 2009, the Commission states that it will consider refusal to license (or supply in general) under four criteria, namely: (i) objective necessity of the input, (ii) elimination of effective competition, (iii) consumer harm, and (iv) efficiencies.387 However, these criteria are still rather vague and must be considered on a case-by-case basis. The ‘new product’ requirement is not explicitly mentioned. In any case, the EU approach towards a dominant firm which refuses to license its IPRs is that, if refusal harms future innovation and competition in the downstream market and consumer welfare, EU competition law must intervene. It appears that, because of the lack of Community IP law, the EU Courts and the Commission would like to apply EU competition law to ensure a balance between the legitimate rights conferred on right holders by Member States’ IP law and Community interests (and Community consumer welfare). By doing this, they also contribute, to some extent, to the establishment of such an EU-wide IP law.
2.5
CONTRACTUAL RESTRICTIONS ON DOWNSTREAM PURCHASERS
In addition to the anti-competitive restrictions imposed by a right holder on her licensees, the right holder may impose restrictions on downstream purchasers – consumers or end-users of IPR-embodied products. Such restrictions are imposed either (i) directly through purchase agreements between the right holder (as a producer) and the purchasers, or (ii) indirectly through a combination of licensing agreements between the right holder and her licensees and purchase agreements between her licensees (as producers) and the purchasers. The restrictions on downstream purchasers may be justified as consequences of IPRs and/or freedom of contract. However, antitrust/competition law should not be ignored and such contractual restrictions should be scrutinized on account of the intersection of IP law and antitrust law and of freedom of contract and antitrust law. The IPR–antitrust–contract scrutiny of right holders’ contractual restrictions on downstream purchasers has, to some
387
Article 82 EC Guidance, paras 75–90.
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extent, been elaborated in Quanta in the US.388 This scrutiny may also be found in the recent ECJ ruling in Sot. Lelos kai Sia.389 2.5.1 2.5.1.1
US Perspective Implications of Quanta
Quanta judgment In order to settle a series of disputes regarding patent infringements, LG Electronics (LGE) and Intel reached a licence agreement permitting Intel to manufacture and sell microprocessors and chipsets using LGE’s computer-technology patents. The licence agreement contained a limitation. It stipulated that no licence would be granted by LGE to any third party for the combination, by that third party, of products produced by Intel under the LGE–Intel licence agreement with items and components not produced by Intel (or LGE). In order to give effect to this stipulation, Intel agreed, in a separate agreement, to give written notices to its own customers informing them that they were not receiving any licence from LGE to use products purchased from Intel in connection with any product made by combining an Intel product with a non-Intel product. This meant that LGE intended not to authorize Intel’s customers to combine Intel’s microprocessors and chipsets with nonIntel products. It purported to grant a licence only for Intel branded products. However, Clause 3.8 of the licence agreement said that ‘the parties agree that nothing [in this agreement] shall in any way limit or alter the effect of patent exhaustion that would otherwise apply when a party hereto sells any of its Licensed Products’; meanwhile, LGE, in Clause 3.7 of the licence agreement, waived any claims of indirect infringement against Intel.390 Quanta, and other computer manufacturers, purchased microprocessors and chipsets from Intel and combined them with non-Intel products for resale. As a result, LGE sued Quanta for patent infringement. The case was brought in a US District Court, and its decision was appealed to the Federal Circuit. The Federal Circuit agreed with the District Court that the patent exhaustion doctrine did not apply to method claims. However, the Federal Circuit reversed the District Court’s ruling that the patent exhaustion doctrine in fact applied to LGE’s product claims. It held that the LGE–Intel licence agreement and Intel’s written notice to Quanta expressly disclaimed granting a licence
388 389
Quanta, supra note 343. Sot. Lelos kai Sia, supra note 109. Section 2.5 is developed from Nguyen, Tu T. (2009), ‘Patent Holders’ Contractual Restrictions on Downstream Purchasers in the United States and European Union through Quanta Prism’, J. World IP, 12(2), 89–121; however, US exhaustion issues are not discussed here. 390 Quanta, supra note 343, at 2114.
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that would allow Quanta to combine Intel’s licensed products with non-Intel products. According to the Federal Circuit, the sale made by Intel to Quanta was not an unconditional sale and did not exhaust LGE’s patent rights.391 After granting certiorari to review the Federal Circuit’s holding, the US Supreme Court was faced with three issues in applying its longstanding doctrine of patent exhaustion. These were: (i) whether a method patent392 is exhausted by the sale of an item embodying the method; (ii) whether the sale of a component that substantially embodies (but does not contain all elements of) a patent can exhaust the patent; and (iii) whether the sale at issue triggered patent exhaustion despite an attempt by the patent holder to condition the sale by means of a contractual restriction. Regarding method patents, the Supreme Court, basing itself on its case law in Ethyl Gasoline393 and Univis,394 confirmed that method patents are exhausted by the sale of an item embodying the method. To allow otherwise, it held, would destroy the exhaustion doctrine, because it would let patent holders ‘simply draft their patent claims to describe a method rather than an apparatus’ and thereby ‘shield practically any patented item from exhaustion’.395 Regarding the extent to which a product must embody a patent in order to trigger exhaustion, the Court, once again, relied on Univis to observe that the sale of a component that does not contain all the elements (or claims) of a patent can activate patent exhaustion when such a component substantially embodies the patent. The Court articulated its observation by using a twopronged test. It held that exhaustion is triggered when two conditions are cumulatively satisfied: (i) the component’s ‘reasonable and intended use [is] to practice the patent’; and (ii) the component embodies essential inventive features of the patent, i.e. it constitutes ‘a material part of the patented invention and all but completely practice[s] the patent’.396 In the case sub judice,
391
See LG Electronics, Inc. v. Bizcom Electronics, Inc., 453 F.3d 1364, 1369–1370 (Fed. Cir. 2006), reversed by Quanta, supra note 343. 392 A method patent is a process one – a series of steps for using or making something which ‘must either be tied to a particular machine or apparatus or must operate to change articles or materials to a different state or thing’; it usually refers to a way of using a product to accomplish a given result. See 35 U.S.C. 100(b) and 101; Gottschalk v. Benson 409 U.S. 63, 71 (1972); In re Bilski, 545 F.3d 943, 979 (Fed. Cir. 2008). 393 Ethyl Gasoline v. US, 309 U.S. 436, 446, 457 (1940) (the sale of a motor fuel produced under a patent also exhausted the patent for a method of using the fuel in combustion motors). 394 US v. Univis Lens, 316 U.S. 241, 248–251 (1942) (the sale of optical lens blanks that partially practised a patent exhausted the method patents that were not completely practised until the blanks were ground into lenses). 395 Quanta, supra note 343, at 2117–2118. 396 Ibid.
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firstly, Intel’s microprocessors or chipsets lacked utility until they were incorporated into computer systems, i.e. they were connected to memory and buses. Secondly, ‘the inventive part of the patent is not the fact that memory and buses are combined with a microprocessor or chipset; rather, it is included in the design of the Intel Products themselves and the way these products access the memory or bus’. This means that the Intel products substantially embodied the patents in question ‘because they had no reasonable noninfringing use and included all the inventive aspects of the patented methods’.397 Consequently, a sale of such components could trigger patent exhaustion. The facts of Quanta led to the conclusion that there was exhaustion. Otherwise, the patent holder would be allowed to collect a second royalty for practice of the same invention in the same component, which was incompatible with the Supreme Court’s exhaustion precedent.398 However, it seems unclear whether the two-pronged test is a necessary and efficient one for a substantial embodiment finding.399 It needs to be carefully evaluated on a case-by-case basis. Finally, regarding the requirements for patent exhaustion, the Supreme Court ruled that exhaustion is triggered only by an authorized sale of products that substantially embody a patent by the patent holder. It stressed that ‘[t]he longstanding doctrine of patent exhaustion provides that the initial authorized sale of a patented item terminates all patent rights to that item’.400 Considering the facts before it, the Court found that the LGE–Intel licence agreement ‘broadly permits Intel to “make, use, [or] sell” products free of LGE’s patent claims’.401 This agreement explicitly did not prevent Intel from selling Intel products to third parties with plans to combine those products with non-Intel products. The condition, which was stipulated only in the separate agreement (the Master Agreement) and required Intel to give a notice to its customers that LGE had not licensed to Intel’s customers any patent rights to combine Intel products with non-Intel products, did not itself affect the LGE–Intel licence agreement because Intel complied with the condition. Even if Intel had not provided such a notice to its customers, Quanta for instance, such inaction would have not affected the patent exhaustion since ‘Intel’s authority to sell its products embodying the LGE Patents was not conditioned on the notice or on Quanta’s decision to abide by LGE’s directions in that notice’.402 397 398
Ibid., at 2119 and 2121–2122. Osborne, John W. (2008), ‘Justice Breyer’s Bicycle and the Ignored Elephant of Patent Exhaustions: an Avoidable Collision in Quanta v. LGE’, Marshall Rev. IP L., 7, 269. 399 Gilly, Richard P. and M.S.G. Walker (2008), ‘Supreme Court’s Quanta Decision Clarifies the Reach of Patent Exhaustion’, IP & Tech. L. J., 20(9), 4. 400 Quanta, supra note 343, at 2115 and 2121. 401 Ibid, at 2121. 402 Ibid, at 2122.
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Therefore, the sale of Intel products was fully authorized by LGE according to the LGE–Intel licence agreement regardless of the content of the notice. Furthermore, as noted above, Intel products substantially embodied LGE patents, which were licensed to Intel under the LGE–Intel licence agreement. Thus, the patent rights in question were exhausted. LGE could not assert its patent rights regarding the Intel products which: (i) substantially embodied the patents in question and (ii) were sold to Quanta with LGE’s authorization. Interestingly, the Federal Circuit has recently refused to apply its own case law in order to follow Quanta and confirmed that the intent of the parties to a licence agreement with respect to downstream purchasers ‘is of no moment in a patent exhaustion analysis’.403 Quanta prism While dealing with the facts before it, the Supreme Court noted that ‘the authorized nature of the sale to Quanta does not necessarily limit LGE’s other contract rights’404 vis-à-vis Intel, and through Intel, vis-àvis Intel’s customers, i.e. Quanta. By this note, the Court implicitly recognized that although such a condition, i.e. contractual restrictions on downstream purchasers, cannot survive in the context of patent law due to patent exhaustion, it may survive in the context of contract law. A patent holder may find the light of contract damages against downstream purchasers (and/or against licensees, if any) at the end of the patent law tunnel even though exhaustion eliminates patent damages. In other words, to deal with a breach of contractual restrictions on downstream purchasers directly or indirectly imposed by a patent holder, the competent authorities and the parties concerned should initially rely on patent law. If the sale of patented product with such restrictions triggers patent exhaustion, i.e. such restrictions are outside the protection of patent law, the patent holder can invoke contract law since patent exhaustion and other built-in limitations of patent law do not affect freedom of contract.405 In any case, antitrust law can be used, particularly by downstream purchasers, either as a sword to attack contractual restrictions in the beginning or as a shield to counterclaim against the patent/contract infringement claim raised by the patent holder. US case law supports this observation. In Keeler, the Supreme Court upheld patent exhaustion by an authorized sale. Once patent rights are exhausted, contractual restrictions on downstream purchasers imposed by the
403 Transcore v. Electronic Transaction Consultants Corp., 563 F.3d 1271, 1275 (Fed. Cir. 2009). 404 Quanta, supra note 343, at 2122 n.7. 405 Carrier, Michael A. (2004), ‘Cabining Intellectual Property through a Property Paradigm’, Duke L. J., 54(1), 144; Kieff, F. Scott and T.A. Paredes (2004), ‘The Basis Matter: At the Periphery of Intellectual Property’, Geo. Wash. L. Rev., 73, 188–189.
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patent holder and her licensees are to be construed as ‘a question of contract, and not as one under the inherent meaning and effect of the patent laws’.406 Keeler further highlighted that a contract law solution ‘does not deprive a patentee of his just rights, because no article can be unfettered from the claim of his monopoly without paying its tribute’. This means that regarding patent law and contract law alternatives, patent law should be the first choice for guaranteeing compliance with the contractual restrictions. If unsuccessful, contract law may be applied. Some contractual restrictions on downstream purchasers may fall under the scope of patent law regardless of its built-in limitations. In some post-sale contexts, an unrestricted purchaser may undermine the inherent rights of a patent holder if no restriction is imposed on the purchaser. So such a restriction merely serves to increase the patent holder’s reward.407 If there is no authorized sale due to such contractual restrictions, patent exhaustion does not occur. Accordingly, such contractual restrictions may be effectively protected by patent law. Field of use restrictions, for example, well illustrate this argument. In General Talking Pictures,408 Transformer Company had been licensed by AT&T, a patent holder, to manufacture and sell patented amplifiers for private use only. The licensing agreement contained an explicit restriction that Transformer had no right to sell the amplifiers for commercial use such as use in theatres. This restriction had been notified to downstream purchasers by a notice affixed to amplifiers produced by Transformer. General Talking Pictures Corp. had bought amplifiers from Transformer. The buyer evidently knew that (i) Transformer had not been licensed to make or sell the amplifiers for commercial use, and (ii) the buyer could not use the amplifiers for commercial use. However, it did so and subsequently lost the patent infringement action brought against it. According to US patent law, a patent holder ‘may grant licenses extending to all uses or limited to use in a defined field’.409 She may impose a restriction on fields of use to downstream purchasers via a restriction on fields of use (and/or customers) to licensees under licence agreements. Such a restriction belongs to the scope of patent protection. Moreover, the sale of products by a licensee for a different use, which is not permitted under the licensing agreement, to a downstream purchaser who knows that the seller has no licence to make such a sale, is not made under the authority of the patent holder. This
406 407
Keeler v. Standard Folding Bed, 157 U.S. 659, 666 (1895). Carstensen, Peter (2006), ‘Post-Sale Restraints via Patent Licensing: A “Seedcentric” Perspective’, Fordham IP Media & Ent. L. J., 16, 1058. 408 General Talking Pictures Corp. v. Western Electric Co., 304 U.S. 175 (1938), affirmed on rehearing, 305 U.S. 124 (1938). 409 Ibid, at 181.
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means that such a sale is an unauthorized one and will not trigger patent exhaustion. In these circumstances, the downstream purchaser (and the licensee) is liable for patent infringement (and/or contributory infringement).410 As a result, the mere fact of sale by a licensee to downstream purchasers does not deprive the patent holder of the right to exclude the purchasers from the fields of operation and distribution of the patented product, which the patent holder reserved under the conditions of the licence agreement granted to the licensee, and of which the purchasers have actual knowledge.411 However, the restrictions on downstream purchasers of patented products via licence agreements in a case like General Talking Pictures are indirect restrictions. They differ from direct restrictions on downstream purchasers, since here the patent holder, as a seller, directly imposes restrictions on purchasers via purchasing agreements. Obviously, a patent holder is free to restrict the use of her patent in whatever way she chooses, both in the context of licensing others to manufacture and sell patented products and in the context of manufacturing and selling the product herself. Nevertheless, patent law protects inventions; it does not protect products because it does not provide a patent holder with an affirmative right to practise the patent but merely the right to exclude. The Supreme Court considers a patent licence to be different from a sale of a particular patented product.412 According to the doctrine of patent exhaustion articulated in Quanta, the consequence of a breach of such freedom by downstream purchasers varies in each context. Regarding the first context, as indicated by General Talking Pictures, if an indirect restriction on downstream purchasers does not trigger exhaustion, a breach of such a restriction may subject it to patent law remedies. By contrast, in the second context, when a patent holder manufactures and sells a patented product herself, a sale of that product by the patent holder in itself contains the authorization of the patent holder. This is true regardless of contractual restrictions contained in a purchasing agreement between the patent holder and a purchaser because no one can restrict the patent holder’s rights. In other words, such a direct sale by the patent holder to purchasers triggers patent exhaustion.
410 For contributory infringement see 35 U.S.C. 271(c); Ricoh Co., Ltd. v. Quanta Computer Inc., 550 F.3d 1325, 1337 (Fed. Cir. 2008). 411 Western Electric Co. v. General Talking Pictures Corp., 16 F. Supp. 293, 300 (S.D.N.Y. 1936), affirmed, 91 F.2d 922 (2d Cir. 1937), affirmed, 304 U.S. 175 (1938), affirmed in rehearing, 305 U.S. 124 (1938). 412 Oral argument of Thomas G. Hungar on behalf of the US at the Quanta oral argument. See the transcript of the Quanta oral argument on 16 Jan. 2008, 2008 WL 143658.
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This reasoning may be criticized by way of the argument that ‘the contract was for the proverbial slice of bread (a limited patent licence to one) not the whole loaf (a licence to all)’.413 However, it is supported by case law. The Supreme Court in Adams v. Burke414 ruled that when a patent holder ‘sells a machine or instrument whose sole value is in its use, he receives the consideration for its use and he parts with the right to restrict that use’. In US v. General Electric,415 the Court confirmed that the patent holder’s rights are exhausted where she makes patented products and sells them; but where she grants a licence to a licensee to make and sell patented products, she can limit the licensee in the exercise of the right to sell. 416 Although patent exhaustion occurs, contractual restrictions on a purchaser under a purchasing agreement between the patent holder and the purchaser may still, however, be subject to contract law remedies. Consequently, as highlighted by Quanta, the most important issue regarding contractual restrictions on downstream purchasers is the existence of an authorized sale. If an unauthorized sale is established, a breach of the restrictions may violate patent law. Otherwise, such a breach will be scrutinized under contract law because the exhaustion of the patent holder’s rights does not necessarily exhaust her rights under the freedom of contract.417 The Supreme Court has said that ‘[t]he extent to which the use of the patented machine may validly be restricted … by [a] special contract between the owner of a patent and the purchaser or licensee is a question outside the patent law’.418 Put differently, the patent exhaustion doctrine ‘lets a purchaser of a patent-protected work and all subsequent parties in the chain of distribution know that the work has been transferred free of any patent claims … although not necessarily of contract claims’.419 Briefly, one may find restrictions in a licence agreement that do not restrict the licensee’s sale right. In this case, despite the fact that the patent exhaustion doctrine is applied, a purchaser’s breach of such restrictions imposed via the licence agreement and detailed in the purchasing agreement continues to be subject to contract law remedies.
413
Kieff, F. Scott (2008), ‘Quanta v. LG Electronics: Frustrating Patent Deals by Taking Contracting Options off the Table’, Cato Sup. Ct. Rev., 316. 414 Adams v. Burke, 84 U.S. 453, 456 (1873). 415 US v. General Electric, supra note 267, at 489–490. 416 Consequently, patent holders may try to avoid patent exhaustion by characterizing their disposition of the patented product as a licence rather than a sale. 417 Patterson, Mark R. (2007), ‘Contractual Expansion of the Scope of Patent Infringement through Field-of-Use Licensing’, Wm. & Mary L. Rev., 49, 165. 418 Motion Pictures Patents Co. v. Universal Film Manufacturing Co., 243 U.S. 502, 509 (1917) (citing Keeler, supra note 406, at 666). 419 Brief for American Antitrust Institute in Quanta, 2007 WL 3407023, at 9.
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Additionally, as Justice Breyer said at the oral argument in Quanta, ‘there is a doctrine that you cannot impose equitable servitudes upon chattel’.420 Contract and antitrust laws may limit the scope of restrictions imposed on downstream purchasers by a patent holder via contract. In any case, contractual restrictions on downstream purchasers should be reviewed under antitrust law. It seems obvious from the language of the Sherman Act that where contractual restrictions on downstream purchasers are subject to contract law because of patent exhaustion, antitrust law can be a further outer boundary to prevent threats to the competitive process.421 If patent exhaustion does not occur, such restrictions should be scrutinized under both patent law and antitrust law since, as analysed in detail in Section 1.3.1, it is nowadays well recognized that patent law and antitrust law ‘share the common purpose of promoting innovation and enhancing consumer welfare’.422 Patent law cannot prevail over antitrust law or vice versa. Patent law does not confer a privilege to infringe antitrust law. And antitrust law cannot ‘negate the patentee’s right to exclude others from patent property’.423 However, patent licensing is generally pro-competitive and creates pro-competitive benefits. Therefore, such contractual restrictions are regarded as anti-competitive practices under antitrust law only to the extent that, under the rule of reason, the anti-competitive effects created are greater than the pro-competitive benefits of the licensing, or if the patent holder uses them to obtain (or attempt to obtain) illegal monopolization.424 To sum up, the Quanta judgment contributes to the prism of patent–antitrust–contract laws by allowing better scrutiny of contractual restrictions on downstream purchasers. There are two main steps in the process of using this prism. The first is to determine the patent exhaustion issue. The focus of this step is to find out whether or not there is an authorization by the patent holder to sell patented products. The second step is to evaluate such contractual restrictions through either the intersection of patent and antitrust laws or the intersection of contract and antitrust laws, or in some special cases both intersections. 2.5.1.2
Federal Circuit’s judgments revisited through the Quanta prism
Mallinckrodt and ‘single use only’ At first glance, the Federal Circuit was
420 421 422 423 424
Transcript of the Quanta oral argument, supra note 412. Carstensen, supra note 407, p. 1060. US Antitrust–IP Guidelines. Microsoft III, supra note 85, at 63; Xerox, supra note 292, at 1325. See supra Section 2.3.
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correct in both Mallinckrodt425 and Braun Medical v. Abbott Laboratories,426 which reiterated Mallinckrodt, when it held that, due to freedom of contract, contractual restrictions on downstream purchasers may be regulated by the parties concerned, but that these restrictions are still subject to patent, contract, antitrust, and even other applicable laws. If such a restriction is legitimate under these laws, its infringement by a purchaser entitles the patent holder to remedies for either patent or contract infringement.427 It appears that the Federal Circuit applied the prism of patent–antitrust–contract laws to scrutinize infringements of contractual restrictions on downstream purchasers. As noted, this so-called Quanta prism contains two steps. Incorrect application of either step will lead to an incorrect result. In the Mallinckrodt case, the plaintiff (Mallinckrodt) owned a patent on a device for delivery of radioactive or therapeutic material in aerosol mist form to the lungs of a patient, for diagnosis and treatment of pulmonary disease. It manufactured and sold the patented device, which bore a notice ‘single use only’, at a price of about 40–50 US dollars to hospitals. After the devices had been used, the defendant (Medipart) collected and recycled them for hospital reuse by cleaning and replacing some parts, and sterilizing them. The recycling fee was around 20 US dollars.428 Mallinckrodt sued Medipart for patent infringement since Medipart and the hospitals dealing with Medipart cut into Mallinckrodt’s profits by violating the ‘single use only’ notice. The District Court granted summary judgment in favour of Medipart based upon the doctrine of patent exhaustion and the repair exception. The Federal Circuit reversed. Regarding the first step of the Quanta prism, the Federal Circuit held that the sale of devices by Mallinckrodt to hospitals did not exhaust Mallinkrodt’s patent rights since the sale was subject to a condition. The court relied on the asserted condition on the sale of the device created by the ‘single use only’ notice. It then interpreted the patent exhaustion doctrine in the light of an unconditional sale, instead of an authorized sale as clarified later by Quanta. According to the Federal Circuit, ‘this exhaustion doctrine … does not apply to an expressly conditional sale or license’.429
425 426 427
Mallinckrodt, Inc. v. Medipart, Inc., 976 F.2d 700 (Fed. Cir. 1992). Braun Medical, Inc. v. Abbott Laboratories, 124 F.3d 1419 (Fed. Cir. 1997) Mallinckrodt, supra note 425, at 703 and 707 n.6; Braun Medical, supra note 426, at 1426. 428 The manufacturing cost of the device was approximately 10 US dollars. Stern, Richard H. (1993), ‘The Unobserved Demise of the Exhaustion Doctrine in US Patent Law’, European IP Rev., 15(12), 461. 429 Braun Medical, supra note 426, at 1426.
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However, by focusing only on whether a sale is authorized, Quanta indicates, as shown above, that patent exhaustion occurs after a sale made by either a patent holder, despite use restrictions, or an authorized licensee who does not depend on any sale-related restraints. But patent exhaustion may not occur after a sale by a licensee under a licence agreement containing use restrictions on downstream purchasers.430 This demarcation is clear when one examines the facts of Mallinckrodt. Mallinckrodt was the patent holder and it manufactured and sold the patented devices itself. Mallinckrodt had the authorization to sell the devices as a patent holder; and such an original sale does not violate the ‘single use only’ restriction. The sale by Mallinckrodt triggered its patent rights regardless of the conditions that Mallinckrodt imposed on hospitals purchasing the product from it. The Federal Circuit was thus incorrect under the first step of the Quanta prism. This observation is further supported by the fact that the patent holder in the Quanta oral argument before the Supreme Court abandoned the Mallinckrodt decision.431 Given the Federal Circuit’s holding in Mallinckrodt that the patent holder’s restriction did not trigger patent exhaustion, the next step, as mentioned in Mallinckrodt and identified under the Quanta prism, was to determine whether the ‘single use only’ restriction was permissible under patent and antitrust laws. However, it seems that the Federal Circuit was also incorrect in applying this second step. There is a distinction between the ‘repair’ and ‘reconstruction’ of patented products after they have been placed in commerce by the patent holder or her licensees. The Supreme Court has held that purchasers of patent products have the right to repair those products, but not the right to reconstruct them.432 In particular, a purchaser of a patented product has the right to repair the product as one of the rights of any personal property owner. Nevertheless, the ownership rights ‘do not include the right to construct an essentially new article on the template of the original’ since the right to make the article remains with the patent holder.433 Simply put, repairing a patented product, by a purchaser or any person with her permission, is not an act of patent infringement; but reconstructing the product constitutes patent infringement. Therefore, a restriction
430 431
Stern, supra note 428, p. 462. When Justice Stevens asked ‘[a]m I correct in understanding that you do not defend the Mallinckrodt decision?’, Mr Phillips, on behalf of the patent holder (LGE), replied ‘I do not defend the Mallinckrodt decision’. See the transcript of the Quanta oral argument, supra note 412. 432 See, e.g., Wilson v. Simpson, 50 U.S. 109 (1850); American Cotton Tie Co. v. Simmons, 106 U.S. 89 (1882); Aro Manufacturing Co. v. Convertible Top Replacement Co., 365 U.S. 336 (1961). 433 Jazz Photo Corp. v. ITC, 264 F. 3d 1094, 1102 (Fed. Cir. 2001).
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on purchasers repairing a patent product is not valid under patent law; but a restriction on purchasers reconstructing a patent product is valid. As a restriction on repair is not valid under patent law, it is unenforceable. Therefore, it is not necessary to continue to scrutinize that restriction under patent–antitrust law. However, that restriction is still contractual in nature. It should then be returned to the scrutiny of contract–antitrust laws. Still, Mallinckrodt held that if the ‘single use only’ restriction was valid – presumably under the scope of patent protection – ‘any reuse is unlicensed and an infringement, and there is no need to choose between repair and reconstruction’.434 This approach, supposing that the reuse in this case is repair rather than reconstruction, deprives purchasers of the repair right which is evidently a limitation on a patent holder’s rights. The Mallinckrodt approach may allow a patent holder, by contract, to eliminate the purchasers’ repair right with the result that purchasers would be guilty of patent infringement once they repaired their purchased patented products and sought to reuse them. In this respect, Mallinckrodt was inconsistent with previous case law established by the Supreme Court which treated the repair right as a built-in limitation of patent law and refused to extend the patent monopoly beyond the terms and scopes of the grant.435 Accordingly, although the Federal Circuit jumped to the second step of the Quanta prism, it did not scrutinize the ‘single use only’ restriction under patent and antitrust laws. Instead, it merely went back to the issue of conditions and relied on a conditional sale to justify a finding of patent infringement. Such reasoning entails that a breach of a ‘single use only’ notice, or even a breach of a repair restriction, is a patent infringement subject to patent remedies. But even if the ‘single use only’ restriction had fallen under the scope of patent protection, this should not have stopped further scrutiny under antitrust law. The Federal Circuit in Mallinckrodt was aware of this theory. It contended that if a contractual restriction was found to be reasonably within the patent grant, the inquiry was ended. However, this court also highlighted that if ‘such inquiry lead[s] to the conclusion that there are anticompetitive effects extending beyond the patentee’s statutory right to exclude, these effects … are reviewed in accordance with the rule of reason’.436 But in practice, after condemning the breach of the ‘single use only’ restriction as a patent infringement, the Federal Circuit did not go further and apply antitrust law to evaluate the contractual restriction (possibly due to the scope of the dispute in this case).
434 435 436
Mallinckrodt, supra note 425, at 709. Aro Manufacturing, supra note 432, at 342. Mallinckrodt, supra note 425, at 708.
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In brief, Mallinckrodt is incompatible with the Quanta prism. This incompatibility is also found in Arizona Cartridge Remanufacturers Association437 decided by the Ninth Circuit thirteen years after Mallinckrodt, which related to a restriction on reuse of patented ink cartridges. McFarling II and ‘single crop only’ In McFarling II438 and other ‘single crop only’ related cases involving Monsanto’s patented biotechnology, such as Monsanto Co. v. Scruggs and Monsanto Co. v. David,439 Monsanto licensed its patents to seed companies to produce gene-modified seeds resistant to glyphosate herbicide. These licence agreements required that the seed companies in turn impose contractual restrictions on farmers buying the patented seeds. This was accomplished by obtaining the farmers’ signatures on technology agreements which included a ban on replanting seeds harvested from the crop. The contractual restriction forced farmers to buy new glyphosate herbicide-resistant seeds every crop. However, McFarling (the farmer), as well as Scruggs and David, saved seeds from the previous crop’s harvest and replanted those seeds in their subsequent crop(s).440 Regarding the form of such restrictions, the ‘single crop only’ restriction in these cases is an indirect
437 Arizona Cartridge Remanufacturers Association v. Lexmark International, 421 F. 3d 981 (9th Cir. 2005). 438 Monsanto v. McFarling, 363 F.3d 1336 (Fed. Cir. 2004), cert. denied, 545 U.S. 1139 (2005) (McFarling II). There are three judgments of the Federal Circuit settling the dispute between Monsanto and McFarling: Monsanto v. McFarling, 302 F. 3d. 1291 (Fed. Cir 2002), cert. denied, 537 U.S. 1232 (2003) (McFarling I); McFarling II, and Monsanto v. McFarling, 488 F. 3d. 973 (Fed. Cir. 2007), cert. denied, 128 S.Ct. 871 (2008) (McFarling III), which involved respectively a preliminary injunction, patent misuse, and antitrust counterclaims, and damages. 439 Monsanto v. Scruggs, 459 F.3d 1328 (Fed. Cir. 2006), cert. denied, 127 S.Ct. 2062 (2007); Monsanto v. David, 516 F.3d 1009 (Fed. Cir. 2008), cert. denied, 129 S.Ct. 309 (2008). 440 The economic rationale behind the ‘single crop only’ restriction and its infringement is that prices of glyphosate herbicide-resistant seeds, the quality of which is guaranteed by a seed company, are supposed to be 19 to 22 US dollars per 50 pound bag, charged by a seed company, plus 6.5 US dollars, as a patent licence fee charged by Monsanto (the patent holder). The total cost of a patented seed bag is 25.5 to 28.5 US dollars. If a farmer saves seeds, the cost of such seeds is supposed to be 6 US dollars per bag. In addition, the farmer has to have the seed cleaned and tested by a seed cleaner in order to be assured that the seeds will be readily usable for planting; this may cost 2 US dollars. If the farmer also pays the patent owner the licence fee for each bag used in re-planting, the total costs would be, on these hypothetical figures, about 14.5 US dollars per bag. The farmer may save about 11 to 14 US dollars per bag. Thus, the contractual restraint involved in this situation increases the purchaser’s costs by around 43% to 49% over the hypothetical alternative. See McFarling III, supra note 438, at 979–980.
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restriction, which was imposed by a patent holder as a licensor on a downstream purchaser via a licensee in both the licence agreement and purchasing agreement; while the ‘single use only’ restriction in Mallinckrodt is a direct restriction, was imposed directly by a patent holder as seller on a purchaser. But the restrictions are similar and the ‘single crop only’ restriction also needs to be evaluated under the Quanta prism. Concerning the patent exhaustion step, a question raised is whether a sale of gene-modified seeds, with the ‘single crop only’ restriction on farmers by means of licence agreements and technology agreements signed by them, is treated as an authorized sale by the patent holder. Monsanto indirectly imposed such a restriction on farmers via licence agreements, and when farmers bought patented products from Monsanto’s licensees they accepted it by signing technology agreements. They knew that they (and the licensees) had to comply with such a limitation. But the farmers breached it. From the Quanta prism, it appears that, in general, if a purchaser buys a patented product and uses it outside the scope of authorization given to a licensee, with the purchaser’s knowledge, the initial sale of that product is not authorized by the patent holder. Additionally, as indicated in Quanta, an authorized sale triggers patent exhaustion of the purchased item only.441 The facts in McFarling II (and the other Monsanto-involved cases) differ from the facts in Mallinckrodt. In McFarling II, seeds that a farmer purchased from a seed company were first generation seeds, while seeds that the farmer used to plant in a subsequent crop were second generation seeds. The second generation seeds were ‘nearly identical copies’ of the first generation seeds.442 Both types of seeds contain the same modified gene resistant to glyphosate herbicide, i.e. the patented trait. This leads to the conclusion that the contractual restriction in McFarling II was not a restriction on the use of the purchased product as in Mallinckrodt, but rather a restriction on the use of goods made by the purchased product.443 Therefore, even if the sale of the patented seeds by a seed company, i.e. the first generation seeds, was an authorized sale, it could not trigger patent exhaustion with regard to the second generation seeds harvested from the crop because the second generation seeds themselves had not been sold.444 Since the patented trait appears on all generations of the seeds in question, the use of each generation is subject to the
441
The Supreme Court in Quanta said that ‘the initial authorized sale of a patent item terminates all patent rights to that item’, Quanta, supra note 343, at 2115. This coincides with the EU view. See infra Section 2.5.2.1. 442 McFarling II, supra note 438, at 1343. 443 Mueller, Janice M. (2006), ‘Patent controls on GM Crop Farming’, Santa Clara J. Int’l L., 4, 6–7. 444 McFarling I, supra note 438, at 1299.
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patent holder’s rights; and there is no patent exhaustion in each subsequent generation following a sale of first generation seeds. From the repair–reconstruction continuum, one may argue that the most essential aspect in the sale is the patented trait in a seed, not the seed qua seed. A second generation seed embodying the patented trait may be regarded as a repaired version of a first generation seed. Due to the fact that repair is permissible under patent law and the patented trait nearly does not change, the sale of the patented trait in the first generation seed exhausts the patented trait in the second generation seed. However, even if the second generation seed is accepted as a repaired version of the first generation seed (but it seems that this proposition is not correct), the sale of the first generation seed is not an authorized sale under the Quanta prism because of the ‘single crop only’ restriction and farmers’ knowledge of this restriction. In any case, the Federal Circuit was correct when it concluded that patent exhaustion did not occur in the Monsanto-involved cases. Therefore, the ‘single crop only’ restriction should next be scrutinized under patent–antitrust laws. From the patent law perspective, as the Federal Circuit observed, if Monsanto’s patents applied to all seed generations produced, the ‘single crop only’ restriction, which prohibited the replanting of the second generation seeds, did not extend Monsanto’s rights under patent law.445 However, there is a concern about the differences between the scope of seed/plant protection under patent law and that under plant variety protection law. Under the US Plant Variety Protection Act, replanting saved seeds is legal since ‘it shall not infringe any right … for a person to save seed produced by the person from seed obtained, or descended from seed obtained, by authority of the owner of the variety for seeding purposes and use such saved seed in the production of a crop for use on the farm of the person’.446 Moreover, according to the TRIPS Agreement, all WTO Members ‘shall provide for the protection of plant varieties either by patents or by an effective sui generic system or by any combination thereof’.447 Based on these, one may argue that seed protection under patent law should be effectively similar to that under plant variety protection law. Accordingly, replanting saved seeds by a farmer should be legal under patent law since it is legal under plant variety protection law. However, as the Supreme Court ruled in Pioneer Hi-Bred International,448 there are differences in the requirements for, and coverage of, seed protection under patent law and plant variety protection law. These differences do not lead to irreconcilable conflicts since the requirements for obtaining a utility patent are more 445 446 447 448
McFarling II, supra note 438, at 1344. 7 U.S.C. 2543. Article 27.3(b) of the TRIPS Agreement. J.E.M. AG Supply v. Pioneer Hi-Bred International, 534 U.S. 124, 142 (2001).
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stringent than those for obtaining a plant variety protection certificate; and the scope of utility patent protections can thus be greater than that of a plant variety protection certificate. The Supreme Court, as a result, apparently recognized that there is no exemption for saving seed under a utility patent. This is not incompatible with the TRIPS Agreement obligations of the US, because patent law and plant variety protection law in the US ‘mutually coexist’.449 In the light of the Supreme Court’s interpretation of the relationship between these two statutory schemes, the Federal Circuit was correct in concluding that utility patent holders are not prevented ‘from enforcing seed-saving prohibitions in their licenses’.450 Since the ‘single crop only’ restriction has passed patent law scrutiny, it should then be faced with antitrust law under the Quanta prism. McFarling argued that the prohibition on saving and replanting seeds was a form of illegal tying, which required farmers to purchase seeds produced by seed companies (the tied product) as a condition of obtaining Monsanto’s technology (the tying product).451 Monsanto, by leveraging its patent-based dominance in the market for patented genetic modification, thus improperly restricted competition in the market for the seed.452 McFarling also contended that Monsanto could have chosen a less restrictive alternative by allowing farmers to save second-generation seeds and replant them upon paying Monsanto a technology fee for the saved seeds each growing season. However, the Federal Circuit rejected McFarling’s tying claim. It reasoned that since the second generation seeds contained Monsanto’s patent trait, McFarling’s less restrictive alternative actually amounted to the grant of a compulsory licence in conjunction with replanting the second generation seeds.453 Referring to its previous judgments, particularly Xerox,454 the Federal Circuit reasoned that antitrust law does not affect the patent holder’s rights to refuse to sell or license in markets within the scope of the statutory patent grant, and ‘the anticompetitive effect of which McFarling complains is part and parcel of the patent system’s role in creating incentives for potential inventors’.455 Therefore, the court concluded that the ‘single crop only’ restriction, as Monsanto’s right to exclude others from its patented invention, could not be regarded as a tying arrangement exceeding the scope of the patent grant.456
449 450 451 452 453 454 455 456
Ibid, at 143; McFarling II, supra note 438, at 1344. Ibid., at 1344. Regarding tying see supra Section 2.3.2. Mueller, Janice M., supra note 443, p. 5. McFarling II, supra note 438, at 1342. Xerox, supra note 292. McFarling II, supra note 438, at 1343. Ibid, at 1342.
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From the patent law perspective, the Federal Circuit’s refusal of McFarling’s arguments seems reasonable because compulsory licensing has been historically disfavoured by US courts. However, compulsory licensing has been accepted as an antitrust remedy to correct patent holders’ violations of antitrust law. Debates continue among antitrust and patent law practitioners and policy makers on whether, and if so when, to impose compulsory licensing as antitrust liability for unconditional, unilateral refusals to license a patent.457 But at least, as the Federal Circuit held in Xerox, patent holders who engage in illegal tying, fraud in the Patent and Trademark Office or sham litigation may violate antitrust law and be subject to compulsory licensing.458 It appears that the Federal Circuit in McFarling II did not seriously consider this observation but rather focused on the patent holder’s rights. It did not address the antitrust consequences of the tying claim, particularly of the existence of less restrictive alternatives.459 From the antitrust law perspective, as noted in Section 2.3.2, tying should be scrutinized under the rule of reason. Generally, a five-pronged test should be satisfied in order to prove illegal tying under antitrust law.460 As McFarling’s certiorari petition pointed out, Monsanto admitted to the Antitrust Division of the US DOJ that ‘its genetically-altered technology (the patented “trait”) and the new seed constitute two separate markets’.461 Regarding market power, the facts showed that Monsanto’s glyphosate herbicideresistant generic technology is a unique commercial technology in the market and accounts for over 80 per cent of the soybeans used as seeds for planting.462 Due to the ‘single crop only’ restriction, McFarling and other farmers could not use Monsanto’s generic technology unless they bought new seeds for each crop. This tying, at least, probably foreclosed competition between seed companies and farmers. Finally, the tying seems not to be justified because there remains a less restrictive alternative, as noted above. In comparison between the less restrictive alternative and the ‘single crop only’ restriction, it is easy to find that Monsanto could receive an appropriate reward for its patented technology in both cases. But in the ‘single crop only’ circumstance, most of the benefits, seen as the difference between the cost of seed saving and replanting and the cost of buying new seeds, probably fall into 457 458 459
See supra Section 2.4.1. Xerox, supra note 292, at 1327. Foer, Albert A. (ed.) (2008), The Next Antitrust Agenda: The American Antitrust Institute’s Transition Report on Competition Policy to the 44th President, p. 290, available at www.antitrustinstitute.org/Archives/transitionreport.ashx. 460 See supra Section 2.3.2 461 McFarling’s certiorari petition with respect to McFarling II, 2004 WL 1535852, at 11. 462 Carstensen, supra note 467, p. 1074.
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the pockets of seed companies. This is not a justifiable result under patent law, because ‘[w]here the license restriction results primarily in benefits for the licensees rather than the patentee, the anticompetitive restriction cannot be justified as a subsidy for the patentee’s inventive activity’.463 Interestingly, Monsanto, in practice, has applied a less restrictive alternative in Argentina where it has permitted soybean farmers to save and replant patented seeds upon payment of an annual fee.464 In brief, the Federal Circuit in McFarling II and the other Monsantoinvolved cases correctly applied the first part of the Quanta prism. However when it applied the second part to evaluate the ‘single crop only’ restriction under patent–antitrust laws, it focused too much on patent law, and thereby did not appropriately apply antitrust law as a second filter in order to protect innovation and competition. 2.5.2
EU Perspective
2.5.2.1 Community exhaustion Principle of community exhaustion In order to establish and protect an undistorted and unpartitioned single market allowing for the free movement of goods, as mandated by the EC Treaty,465 the ECJ developed the doctrine of Community exhaustion. This doctrine was first raised in a copyright-related case, Deutsche Grammophon;466 and Centrafarm v. Sterling467 was the first patent-related case applying the doctrine. The basis of this exhaustion doctrine is that, once an IPR-embodied product has been placed on the market in any Member State by a right holder or with her consent, exhaustion of rights occurs. The right holder can no longer rely on any IPRs to prevent that product being imported into or sold within another Member State.468 The Community exhaustion doctrine has been codified by EU secondary legislation on trademarks, copyright, rights related to copyright, computer programs, databases, designs, and plant variety rights.469 There is no general legislation
463 Mannington Mills, Inc. v. Congoleum Industries, Inc., 610 F.2d 1059, 1071 (3rd Cir. 1979). In In re Yarn Processing Patent Validity Litigation, 541 F.2d 1127 (5th Cir. 1976), the Fifth Circuit held that allocating royalty benefits to a licensee which did not hold a patent was not protected by the patent regime. 464 Mueller, supra note 442, p. 15. 465 Articles 3.1(g), 28 and 30 EC. 466 Deutsche Grammophon, supra note 40, paras 11–13. 467 Case 15/74, Centrafarm v. Sterling Drug, [1974] ECR 1147, paras 10–12. 468 See Stothers, Christopher (2007), Parallel Trade in Europe: Intellectual Property, Competition and Regulatory Law, Oxford: Hart Publishing, pp. 42–44. 469 See Nguyen, supra note 389, p. 106 and note 95.
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harmonizing patent protection at the EU level.470 But the proposed Council Regulation on the Community patent also expresses the principle of Community exhaustion.471 In principle, the Community exhaustion of IPRs in general, or patents in particular, is triggered if two conditions are both fulfilled: the IPR-embodied product (i) has been placed on the market by the right holder or with her consent, and (ii) has been placed on the market in the Community.472 Regarding the first condition, there are two sub-conditions: the product has been placed on the market, and this act has been done by the IPR holder or with her consent. For the second condition, the ECJ has explicitly confined the territorial extent of exhaustion to the Community. The majority of exhaustion cases dealt with by the ECJ involve trademark exhaustion, but they can be applied, mutatis mutandis, to patent/other IPR exhaustion. Community exhaustion territoriality In the EMI Records v. CBS cases,473 as a result of past ownership transfers, the trademark ‘COLUMBIA’ was owned by CBS, an American company, in the US, while in the Community, it was owned by EMI Records, an unrelated English company. CBS and its subsidiaries in the United Kingdom, Denmark and Germany imported records bearing the trademark ‘COLUMBIA’ into the Community. EMI Records brought three actions before national courts against CBS’s subsidiaries alleging that such importation infringed its trademark. When these cases were referred to the ECJ for a preliminary ruling, the ECJ held that the EC Treaty does not ‘lay down any obligation on the part of the Member States to extend to trade with third countries’ under the principle of free movement of goods. Thus, the EC Treaty does not prevent the trademark holder in the Community ‘from exercising his right in order to prevent the importation of similar products bearing the same mark and coming from a third country’.474 Succinctly, international exhaustion is not recognized in the Community. 470 Directive 98/44/EC on the legal protection of biotechnological inventions, OJ 1998 L 213/13, requires that biotechnological inventions be protected under national patent law. But it does not mention the exhaustion issue. 471 See Article 10 of the proposal for a Council Regulation on the Community patent, COM(2000)412 final; Article 21 of the proposal for a European Parliament and Council Directive approximating the legal arrangements for the protection of inventions by utility model, COM(1999)309 final/2. 472 Case C–479/04, Laserdisken ApS v. Kulturministeriet, [2006] ECR I–8089, para. 21. 473 Case 51/75, EMI Records v. CBS United Kingdom, [1976] ECR 811; Case 86/75, EMI Records v. CBS Grammofon, [1976] ECR 871; Case 96/75, EMI Records v. CBS Schallplatten, [1976] ECR 913. 474 Ibid. (Case 51/75, paras 17 and 21–22; Case 86/75, paras 17 and 21; Case 96/75, para. 21).
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In Silhouette,475 spectacle frames bearing the trademark ‘Silhouette’ were sold by an Austrian trademark holder to a Bulgarian company. When these frames were found on sale in Austria, the trademark holder sought an interim injunction. Austrian law at that time recognized international exhaustion, so the trademark protection had been exhausted by the authorized sale in Bulgaria.476 Thus the trademark holder could not prevent the trademarked products from being re-imported into and sold in Austria. However, the ECJ, on the basis of Community exhaustion as provided for in Article 7 of the First Trademark Directive,477 held that the Member States cannot ‘provide in their domestic law for [international] exhaustion of the rights conferred by a trademark in respect of products put on the market in non-member countries’.478 This means that the Member States must comply with the rule of Community exhaustion as established by Community law. The condition requiring that IPR/patent exhaustion occurs only if the IPR/patent-embodied product has been placed on the market in the Community confines the exhaustion to Community territory. As the ECJ has held, the placing of IPR-embodied products on the market outside the European Community does not exhaust the proprietor’s right to oppose the reimportation of those products.479 Placed on the market by the patent holder or with her consent There are many terms which are used by the ECJ and in EU secondary legislation to express the point at which an IPR-embodied product had been ‘placed on the market’ for the purposes of the Community exhaustion doctrine. It may be not only ‘placed on the market’ but also ‘marketed’, ‘put on the market’, ‘put into circulation’, ‘disposed to others’, or ‘first sale’.480 Due to the variety of descriptive words, there remained confusion over exactly when the product was placed/put on the market, as demonstrated in Peak Holding.481 In this
475 476
Case C–355/96, Silhouette v. Hartlauer, [1998] ECR I–4799. At the time of the dispute, Bulgaria was not a member of the European Community. 477 Directive 89/104/EEC, OJ 1989 L 40/1. 478 Silhouette, supra note 475, paras 26 and 31. 479 Joined Cases C–414/99 to C–416/99, Zino Davidoff v. A&G Imports and Levi Strauss v. Tesco Stores, [2001] ECR I–8691, para. 33; Case C–173/98, Sebago v. G-B Unic, [1999] ECR I–4103, para. 21. However, as the ECJ observed in Silhouette, supra note 475, para. 30, that ‘the Community authorities could always extend the [Community] exhaustion … to products put on the market in non-member countries by entering into international agreements in that sphere, as was done in the context of the EEA Agreement’. 480 See Nguyen, supra note 389, p. 108 and note 105. 481 Case C–16/03, Peak Holding v. Axolin-Elinor, [2004] ECR I–11313.
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case, the alleged infringer (Factory Outlet) argued that goods had been put on the market by Peak Holding, the trademark holder, by virtue of: (i) being imported into the EU by the trademark holder and of its payment of the customs duties, with the intention of selling the goods in the EU; (ii) being offered for sale by independent resellers; (iii) being marketed (offered to consumers) by the trademark holder in its own shops or associated companies’ shops; and/or (iv) being sold to a French company under a contract which required that most of the goods be sold outside the EU.482 However, the ECJ did not accept all of these four alternatives. The Court observed that goods should not be regarded as ‘put on the market’ where the goods are neither ‘directed to the market’ nor is there ‘an actual transfer’ of the goods to a reseller/purchaser as a step directed towards the market.483 This means that at least alternatives (i) and (iii) were not deemed to be putting the goods on the market. The ECJ further clarified the acts of putting/placing goods on the market leading to trademark exhaustion. These acts consist of either the sale of goods bearing a trademark directly made by the trademark holder to a third party, or the sale which transfers to a third party the right to dispose of the goods bearing the trademark and allows the trademark holder to realize the economic value of the trademark.484 This interpretation, which can be similarly applied to patents or other IPRs, resembles the interpretation of the term ‘initial sale’ (or first sale) in the US exhaustion doctrine, which focuses on patent holders’ rewards.485 For the sub-condition that placing goods on the market is done by, or with consent of, the right holder, the scope of consent here is the consent with regard to particular IPR-embodied products. The ECJ upheld this view in Sebago by saying that: [T]he rights conferred … are exhausted only in respect of the individual items of the product which have been put on the market with the proprietor’s consent in the territory there defined. The proprietor may continue to prohibit … individual items of that product which have been put on the market in that territory without his consent.486
This consent exists only where the right holder in the importing state and the right holder in the exporting state in the EU for the same IPRs are the same,
482 483 484 485
Ibid., para. 17. Ibid., paras 26–29. Ibid, paras 39–42. The US Supreme Court similarly observed, in Univis, supra note 394, at 249, that an authorized sale is ‘both a complete transfer of ownership … and a license to practice’ the patented invention. 486 Sebago, supra note 479, para. 19.
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or where, even if they are separate persons, they are economically linked by a parent/subsidiary relation or by licence/distribution agreements.487 However, if the right holder is forced to market the goods, this is not considered to give rise to consent. In Merck v. Primecrown, the ECJ ruled: [W]here a patentee is legally bound under either national law or Community law to market his products in a Member State, he cannot be deemed, within the meaning of the ruling in Merck, to have given his consent to the marketing of the products concerned. He is therefore entitled to oppose importation and marketing of those products in the State where they are protected.488
Similar reasoning is applied to compulsory licensing, since a patent holder cannot be regarded as having consented to the operation of a third party being granted a compulsory licence, which deprives the patent holder of the right to determine freely the conditions under which she markets patented products herself.489 Legal obligations like compulsory marketing and licensing, which still result in placing patented products on the market do not involve the consent of the right holder. Accordingly, there is no exhaustion. The ECJ also distinguished these legal obligations from the effects of other pressures such as ethical obligations, price control or the threat of compulsory licensing.490 The ECJ held that such pressures, particularly ethical obligations, may compel a patent holder to provide patented products to Member States where they are needed. But, in the absence of any legal obligation, such conduct does not mean that the patent holder is deprived of the power to decide freely how she will market her products. It is difficult to distinguish such conduct from conduct under fully commercial considerations. Consequently, such ethical obligations cannot justify derogation of the rule on free movement of goods.491 Such exceptions to the patent/IPR holder’s consent may appear strange. But these considerations are compatible with the TRIPS Agreement. Article 6 of the TRIPS Agreement gives WTO Members leeway to decide upon their exhaustion rules.492 In addition, patented products manufactured under 487 Case C–9/93, IHT Internationale Heiztechnik v. Ideal-Standard, [1994] ECR I–2789, para. 34. 488 Joined Cases C–267/95 and C–268/95, Merck v. Primecrown, [1996] ECR I–6285, para. 50. 489 Case 19/84, Pharmon BV v. Hoechst, [1985] ECR 2281, para. 25. 490 Merck v. Primecrown, supra note 488, paras 47 and 53. 491 Ibid., para. 53. 492 Correa, Carlos M. (2007), Trade Related Aspects of Intellectual Property Rights: A Commentary on the TRIPS Agreement, Oxford: OUP, pp. 76–90; UNCTADICTSD (2005), Resource Book on TRIPS and Development, Cambridge: Cambridge University Press, pp. 92–117.
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compulsory licensing must be ‘predominantly’ supplied on the domestic market of the Member authorizing such use. This condition is waived either where a compulsory licence is granted to correct anti-competitive practices of the patent holder493 or where the system implementing Paragraph 6 of the Doha Declaration on the TRIPS Agreement, which is incorporated into Article 31bis of the TRIPS Agreement pending ratification, is applied in some regional trade areas.494 To conclude, the requirement of a patent holder’s consent in EU law is, to some extent, equivalent to the requirement of a patent holder’s authorization under US law. Such a requirement aims at protecting rights given to patent holders under patent law. 2.5.2.2 Contractual restrictions on downstream purchasers in the EU According to Community exhaustion, once patented products have been manufactured and sold directly to purchasers (or through distributors) in the EU by the patent holder, her patent rights are exhausted since the products have been placed on the market by the holder. Therefore, purchasers’ obligations under purchasing agreements between themselves and the patent holder, as in the US, are evaluated under contract–antitrust laws. This means that the US Federal Circuit’s decision in Mallinckrodt would not be followed in the EU. If the patent holder gives a third party a licence to manufacture and sell patented products, she may still impose restrictions upon downstream purchasers via the licence agreement between her and the licensee, and, the licensee in turn, by purchasing agreements between the licensee and purchasers. This is confirmed by the existence–exercise dichotomy established by the ECJ in Consten & Grundig495 and its progeny. According to this dichotomy, the existence of patents (and other IPRs) is respected but their exercise must be evaluated under EU competition law. On the basis of the existence of IPRs, right holders may impose contractual restrictions upon downstream purchasers and the prism of patent/IPR–antitrust–contract laws is then applied, as in the US under the Quanta prism, to scrutinize such restrictions. If a sale of a patented product in the EU, taking into account contractual restrictions, does not result in the patent holder’s consent, Community exhaustion does not occur. At this point, the restrictions will be evaluated under
493 494
Articles 31(f) and 31(k) of the TRIPS Agreement. Para. 6.1 of the Decision of the General Council of 30 Aug. 2003 on Implementation of Paragraph 6 of the Doha Declaration on the TRIPS Agreement and Public Health, WT/L/540; Article 31bis(3) of the TRIPS Agreement (amended), WT/L/614. 495 Consten & Grundig, supra note 37.
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patent and antitrust laws. This may happen in practice since the ECJ and CFI reject ‘the proposition that the grant of a licence for a particular territory exhausted the right of exclusivity in relation to other territories’.496 Furthermore, the TTBER 2004 and TT Guidelines exempt some restrictions on licensees from EU competition law (field of use, for instance), and thereby on downstream purchasers via purchasing agreements.497 The Micro Leader Business ruling498 of the CFI can exemplify the IPR–antitrust–contract prism in the EU. This case related to a complaint against Microsoft, alleging that it prevented parallel trade of Microsoft’s software from Canada to France and unilaterally fixed resale prices and/or charged excessive prices in the EU. Because the relevant right was not exhausted, the CFI held that the Commission was not right to stop the analysis under Article 82 EC after concluding that Microsoft had merely enforced its copyright. The Commission should have carried out further investigation to scrutinize whether Microsoft’s conduct was abusive or not under EU competition law.499 As a result, the CFI undoubtedly confirmed the two-step scrutiny under the IPR–antitrust–contract prism. However, the European Commission, interpreting the EU rules on free movement of goods and competition, has doubted the legality of contractual restrictions on downstream purchasers imposed by copyright holders. It observed that such restrictions, ‘not for sale in …’ or ‘not for export’ for instance, might be permitted under the national law of some Member States. However, in the area of copyright, such a restriction: does not form part of the essential function of copyright in goods placed lawfully on the market and accordingly cannot be used to oppose the import of goods from other member states. Such conditions run counter not only to the provision of the [EC] Treaty on the free flow of goods but also to competition rules.500
But it seems that if this strict view applies to patent law, the prism of patent–antitrust–contract laws, in principle, should still apply. It would also appear that contractual restrictions on downstream purchasers via licence
496 497
Ladbroke, supra note 350, para. 119. Articles 4.1(c) and 4.2(b) of the TTBER 2004; paras 179–185 of the TT Guidelines. 498 Case T–198/98, Micro Leader Business v. Commission, [1999] ECR II–3989. 499 Ibid., paras 56–57 500 Commission’s Green Paper on Copyright and the Challenge of Technology – Copyright Issues Requiring Immediate Action, COM(8)172 Final, 7 June 1988, para. 4.4.2 (footnotes omitted). This view, to some extent, was supported by the ECJ in Windsurfing, supra note 47, where the Court took a very strict view on anti-competitive restrictions in a licence agreement.
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agreements which do not affect the free movement of goods within the EU, at least field of use restrictions as clarified in the TTBER 2004, may be able to overcome the EU exhaustion doctrine. This is more likely to be the case when a patent holder can prove that, taking into account the restrictions via licence agreements and the knowledge of downstream purchasers, she did not consent to having the patented products put on the market in violation of such restrictions. Besides, the ECJ and CFI have recently expressed their favourable view of restrictions on pharmaceutical parallel trade imposed by patent holders.501 AG Jacobs, first of all, even questioned the existence of the ‘consent’ of patent holders when patented products are placed on the market under the price control of Member States.502 The fact that such conduct is regarded as the expression of the patent holder’s consent and results in patent exhaustion ‘goes too far’ under his view. He argued that an undertaking may agree to set prices of its patented pharmaceutical products in one Member State to comply with that Member State’s price control, provided that (i) the undertaking’s variable production costs are met, and (ii) prices will not be the same in other Member States in order to protect the undertaking’s revenues in other Member States. Even if patent exhaustion does occur in such a case, he contends that an undertaking having a dominant position ‘does not necessarily abuse that position by refusing to meet in full the orders sent to it by pharmaceutical wholesalers only by reason of the fact that it aims thereby to limit parallel trade’.503 The ECJ, in Syfait,504 refused to test these two views by answering that the Court had no jurisdiction due to the Greek competition authority’s lack of locus standi for seeking preliminary rulings. However, the same issue was referred back to the ECJ in Sot. Lelos kai Sia like a ‘boomerang’,505 and the Court could not refuse to answer. Regarding the first view of AG Jacobs, the ECJ held that the price control exercised by Member States does not totally remove the price making decisions of patent holders. Furthermore, thanks to a temporary legal monopoly conferred on the patent holder, there remains price competition in the market between the patent holder, as a manufacturer, and her distributors, and between her distributors and parallel traders.506 The ECJ thus rejected the first view of AG Jacobs and reiterated that there is consent by
501 502 503
See supra notes 251–253. Opinion of AG Jacobs in Syfait, supra note 252, para. 94. Ibid., paras 94 and 105. There has been much debate regarding the view of AG
Jacobs. 504 505
Ibid., para. 37. Opinion of AG Ruiz-Jarabo Colomer in Sot. Lelos kai Sia, supra note 169,
para. 1. 506
Ibid., paras 61–64 See also Nguyen et al., supra note 169.
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a patent holder where she markets patented products under a state-imposed price control. Regarding the second view, the ECJ recalled its case law which treated a refusal to deal as a per se violation of Article 82 of the EC Treaty.507 However, the ECJ presented a more favourable view, similar to that of AG Jacobs. This Court held that a patent holder has a right to react to protect her legitimate commercial interests. If the size of orders is not ordinary, taking into account the requirements of the market and the previous relations between the manufacturer and its business partners, a refusal may be justified.508 It seems that the ECJ accepts a rule of reason rather than per se analysis where it scrutinizes anti-competitive conduct under Article 82.509 One may infer from the Sot. Lelos kai Sia judgment that a pharmaceutical company cannot prevent patent right exhaustion once it sells its patented products on the market through a distribution channel. But it may have a right to refuse an excessive order from its distributors, or at least refuse to supply the difference between an excessive order and an ordinary order so as proportionately to protect its commercial interests. The Sot. Lelos kai Sia judgment, to some extent, contributed to the view that the two-step test under the prism of patent–antitrust–contract laws should be applied to evaluate contractual restrictions on downstream purchasers. As explained, the reasoning of the Mallinckrodt judgment would be rejected by the CFI and/or the ECJ because Community exhaustion, based on the facts of the case, occurs. Furthermore, the repair–reconstruction distinction in the EU (at the national level) reflects an approach more like that of the US Supreme Court than that of the Federal Circuit in Mallinckrodt.510 For example, the House of Lords in the United Kingdom, in United Wire Ltd. v. Screen Repair Services (Scotland) Ltd.,511 held that the right to repair ‘is a residual right, forming part of the right to do whatever does not amount to making the product’. This means that depriving purchasers of the repair right by contract is not accepted. From the contract–antitrust perspective, the ‘single use only’ restriction may be challenged with a tying claim under Article 82 EC, as recently articulated in the CFI’s decision in Microsoft v. Commission.512 Contrasting 507 508 509 510
Sot. Lelos kai Sia, supra note 367. Ibid., paras 76–77. See supra Section 2.4.2. Patterson, Mark R. (2008), ‘The Competitive Effects of Patent Field-of-Use License’, in Josef Drexl (ed.), Research Handbook on Intellectual Property and Competition Law, Cheltenham: Edward Elgar, pp. 183–185. 511 United Wire Ltd. v. Screen Repair Services (Scotland) Ltd., 4 All E.R. 353 (H.L. 2000). The German Federal Supreme Court has the same approach in Case No. X ZR 48/03, Flügelradzähle (Impeller Flow Meter), 36(8) IIC 963 (2005). 512 Microsoft v. Commission, supra note 92, paras 854 (dominant position),
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McFarling II with EU law, it appears that, regardless of the result of the first step of the patent–antitrust–contract prism, the ‘single crop only’ restriction may not survive under the tying/refusal to license scrutiny of Article 82 EC even if justifications are permitted. The ECJ and CFI, as analysed in Section 2.4.2, have already ruled that a refusal to license may violate EU competition law in exceptional circumstances.513 2.5.3
Remarks
The above Quanta-inspired analysis of contractual restrictions upon downstream purchasers imposed by patent holders under US and EU laws results in the conclusion that the two-step test of the so-called Quanta prism, or the prism of patent–antitrust–contract laws, or the prism of IPR–antitrust–contract laws in general, should be used to scrutinize such restrictions. There are some differences between the US and the EU in the application of this prism, but they do not affect the obligations of the US or the EU under the TRIPS Agreement. Questions may arise as to whether this Quanta prism can act as a ‘magical mirror’ to reflect the real economic effects of contractual restrictions upon downstream purchasers in the US and the EU. The answer to this depends on how the two-step test is applied in practice. The correctness of determining whether patent exhaustion has taken place and how antitrust law intervenes as a second filter, which contributes to checks and balances between patent rights and freedom of contract, will play a very important role. In the EU, establishing and preserving an undistorted and unpartitioned single market is a priority. The European Courts favoured a strict view on Community exhaustion as well as allowing competition law to govern contractual restrictions on downstream purchasers. However, with the enactment of the TTBER 2004 and recent judgments of the ECJ and CFI on pharmaceutical parallel trade on the EU side and the Quanta judgment on the US side, it seems that the gap between the US and the EU in the actual application of the twostep test through the prism of patent–antitrust–contract laws is narrowing. In any case, in order to apply the Quanta-inspired prism properly, promoting innovation and competition in the market as well as consumer welfare should be respected.
912–944 (separate products), 960–975 (coercion), 1031–1090 (foreclosure), and 1144–1167 (no objective justification). 513 Although having taken the view that licence agreements have ‘substantial pro-competitive potential’, the European Commission notes further that those agreements promote competition ‘[w]hen the licensor agrees not to invoke his intellectual property rights to prevent the sale of the licensee’s product … removes an obstacle to the sale of the licensee’s product’. TT Guidelines, para. 17.
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COMPATIBILITY WITH THE TRIPS AGREEMENT
As analysed in Section 1.3.3, the competition rules in the TRIPS Agreement allow WTO Members freely to adopt and enforce domestic competition law to IPR exploitation provided that the consistency and appropriateness requirements are satisfied. However, since the US is a dualist country, as noted in Section 1.1.3, US courts and antitrust authorities have never invoked these TRIPS flexibilities. Instead, they have applied their own domestic antitrust law to this area. In the EU, although the EU follows the dualist approach, the competition rules of the TRIPS Agreement were mentioned for the first time in Microsoft v. Commission. In this case, Microsoft and its proponents claimed that the Commission’s application of EU competition law to two IPR-related practices of Microsoft, particularly the Commission’s remedies against the alleged anti-competitive practices of Microsoft, was incompatible with the TRIPS Agreement. Microsoft argued that the Commission did not take proper account of the obligations imposed on the EU by the TRIPS Agreement while applying EU competition law against Microsoft.514 2.6.1
Arguments against TRIPS Compatibility
Regarding the Commission’s finding that Microsoft’s refusal to license its interoperability information violated Article 82 EC and the Commission’s grant of compulsory licensing of Microsoft’s interoperability information to Microsoft’s competitors, it was claimed that the Commission had infringed Articles 13, 31 and 39 of the TRIPS Agreement. Article 13 provides for WTO Members’ discretion to regulate and enforce copyright limitations and exceptions at the domestic level provided a three-step test is satisfied; such limitations or exceptions: (i) must be confined to certain special cases, (ii) do not conflict with a normal exploitation of the work, and (ii) do not unreasonably prejudice the legitimate interests of the right holder.515 Microsoft contended that the compulsory licensing imposed by the Commission did not meet these three requirements. First of all, the compulsory licensing, which permits any firm having an interest in developing and distributing work group server operating system software to have access to Microsoft’s interoperability information, is incompatible with the ‘special cases’ requirement. It allows any firms concerned to create products copying Windows server operating system software. Secondly, it forces Microsoft to license its technology to third parties
514 515
Microsoft v. Commission, supra note 92, paras 777–788 and 1171–1175. US – Section 110(5) of the US Copyright Act, WT/DS160/R, circulated on 15 June 2000, para. 6.97.
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while Microsoft would like to develop and market technology-embodied products. This would affect Microsoft’s sales since firms accessing Microsoft’s copyrighted technology could produce products interchangeable with Microsoft’s products and compete with Microsoft.516 The compulsory licensing thus conflicts directly with the ‘normal exploitation’ of Microsoft’s copyright. Thirdly, the refusal to license test under Article 82 EC applied by the Commission appears to legitimize the compulsory licensing which would benefit Microsoft’s competitors, regardless of whether the compulsory licensing is proportionate to the alleged anti-competitive conduct. This unreasonably prejudices Microsoft’s legitimate interests.517 Consequently, Microsoft argued that the Commission infringed Article 13 of the TRIPS Agreement. Additionally, it was argued that Article 31 of the TRIPS Agreement requires that a compulsory licence be granted ‘on its individual merits’. However, the Commission’s compulsory licensing includes patents relating to Microsoft’s interoperability information that have been granted, are being applied for, and will be applied for and granted. This means that the compulsory licensing in question includes ‘categories of inventions’ and does not satisfy the individual merits requirement under Article 31.518 Furthermore, the Commission was claimed to infringe Article 39 of the TRIPS Agreement, which protects undisclosed information since the compulsory licensing requires Microsoft to disclose its business secrets to its competitors.519 Regarding the Commission’s second finding that Microsoft’s tying of Windows Media Player with the Windows PC operating system violated Article 82 EC and the consequential remedy requiring Microsoft to offer for sale a version of Windows without Windows Media Player, Microsoft claimed that the remedy infringed Microsoft’s trademark rights and copyright protected under the TRIPS Agreement. Microsoft contended that the remedy deprives Microsoft of a right to control the quality of the product to which its trademark is affixed. This does not satisfy the requirement for exceptions under Article 17, which is similar to the three-step test under Article 13. The remedy that also forces ‘Microsoft to encumber the Windows trade mark in a manner that reduces its function as an indicator of source and quality, which causes confusion in the minds of consumers and harms the goodwill of the
516 Microsoft, in its 2008 Annual Report – Form 10-K – to the US Securities and Exchange Commission, pp. 15–16, available at www.microsoft.com/msft/reports/ar08/ downloads/MS_2008_10K.doc, states that the CFI and Commission decisions ‘may enable competitors to develop software products that better mimic the functionality of our own products which could result in decreased sales of our products’. 517 Microsoft v. Commission, supra note 92, paras 778–780. 518 Ibid., paras 786–787. 519 Ibid., para. 788.
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trade mark’ is in breach of Article 20 of the TRIPS Agreement.520 Furthermore, Microsoft argued that the remedy ‘forces it to create an adaptation of Windows which is not of [its] own design and which represents a substantial alteration of its copyrighted work’.521 2.6.2
Arguments for TRIPS Compatibility
In response to the Microsoft complaint that the Commission’s decision to force it to separate its Windows operating system from its Windows Media Player was contrary to minimum standards of copyright and trademark protection under the TRIPS Agreement, the CFI held: In any event, there is nothing in the provisions of the TRIPS Agreement to prevent the competition authorities of the members of the WTO from imposing remedies which limit or regulate the exploitation of intellectual property rights held by an undertaking in a dominant position where that undertaking exercises those rights in an anti-competitive manner. Thus, as the Commission correctly observes, it follows expressly from Article 40(2) of the TRIPS Agreement that the members of the WTO are entitled to regulate the abusive use of such rights in order to avoid effects which harm competition.522
The CFI also held that the unbundling remedy is proportionate to the goal of ending the abuse in question; this remedy solves the competition issues identified, while causing the least possible inconvenience to Microsoft and its business model. Furthermore, the CFI observed that merely hiding the icons of certain application programs, a measure taken by Microsoft pursuant to its concurrent settlement in the US, was not sufficient.523 It is clear that when the CFI rejected Microsoft’s claim relating to the unbundling remedy, it interpreted the TRIPS Agreement, particularly Article 40.2, in such a way that, if followed elsewhere, it would allow WTO Members freely to adopt and enforce domestic competition law on IPR exploitation. It is certainly the case that, when the Commission and Community Courts apply Article 82 (or 81) EC, they will focus on the nature of the anti-competitive conduct concerned. IPRs cannot by virtue of their existence alone, justify anticompetitive practices that harm competition. If such practices are discovered, appropriate measures will be applied to correct the anti-competitive effects. This is the first time, to the best of my knowledge, that a court of a WTO Member has applied the competition rules of the TRIPS Agreement to justify 520 521 522 523
Ibid., paras 1172–1174. Ibid., para. 1175. Ibid., para. 1192 (emphasis added). Ibid., paras 1220–1227.
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its enforcement of domestic competition law in a technology transfer case. However, it is regrettable that the CFI avoided invoking the TRIPS Agreement to justify the Commission’s decision forcing Microsoft to supply interoperability information. In response to the Microsoft complaint that such compulsory licensing conflicted with the protection of copyright, patent, and undisclosed information under the TRIPS Agreement, the CFI held: [T]he TRIPS Agreement does not prevail over primary Community law … WTO agreements are not in principle among the rules in the light of which the Community judicature is to review the legality of measures adopted by the Community institutions … It is only where the Community has intended to implement a particular obligation assumed under the WTO or where the Community measure refers expressly to specific provisions of the WTO agreements that the Community judicature must review the legality of the Community measure in question in the light of the WTO rules … the circumstances of the present case clearly do not correspond with either of the two situations.524
Microsoft could not rely on the TRIPS Agreement in support of its claim for annulment of the compulsory licensing either. However, the CFI could have applied its argument in response to the Microsoft complaint regarding the remedy correcting Microsoft’s illegal tying in a similar way. The CFI could have reasoned that Articles 8.2 and 31(k) – although Article 31(k) relates just to patents – would allow WTO Members, including the EU,525 to regulate such anti-competitive conduct as refusal to license and to engage in compulsory licensing to correct that conduct. Furthermore, in Microsoft v. Commission, the four-pronged test relating to the refusal to license and the five-pronged test relating to the tying,526 as applied by the CFI, were in harmony with the TRIPS consistency and appropriateness requirements, because both tests consist of weighing and balancing the rights inherent in IPRs and the anti-competitive effects caused by the abusive conduct of the right holder. All this is totally compatible with the TRIPS Agreement. On the one hand, the CFI invoked the competition rules of the TRIPS Agreement to justify the Commission’s unbundling remedy against the anticompetitive tying conduct. On the other hand, it, in a sense, avoided so doing with respect to the compulsory licensing as a remedy against the anti-competitive refusal to license. This is likely to create inconsistency when the CFI’s ruling is followed. It also reduces the pioneering role of the Microsoft v. Commission ruling regarding the application of the competition rules of the
524 525 526
Ibid., paras 798–802. The EU, particularly the European Community, is a WTO Member. See supra Sections 2.3.2 and 2.4.2.
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TRIPS Agreement at the domestic level. However, it does not alter the fact that, although there are now different competition law approaches to refusal to license on the two sides of the Atlantic,527 neither is incompatible with the TRIPS Agreement, as analysed in Section 1.3.3.2.
2.7
CONCLUDING REMARKS
The current US and EU approaches to the application of antitrust/competition law to technology transfer reflect the common recognition that antitrust/competition law and IP law have the same purpose of encouraging innovation and competition in order to serve consumer benefits. Further, the enactment of the TTBER 2004 and TT Guidelines in the EU created an important degree of convergence between US and EU competition policies towards technology transfer. By presuming that most technology transfer agreements are pro-competitive, an economics-based approach is applied in order to take into consideration the exclusive rights granted by IP law, the competitive relationship between parties to the agreement, and both the anti-competitive effects of restraints and the pro-competitive benefits of the agreement. The rule of reason is increasingly used by competition authorities on both sides of the Atlantic when they scrutinize restrictions in technology transfer agreements. Regarding refusal to license, there is no consensus between the US and EU approaches. Although both sides admit that refusal to license by a dominant firm is not in itself contrary to competition law, the EU follows a stricter approach. One of the reasons explaining this difference is that EU competition law clearly provides for a special responsibility of dominant firms to maintain effective competition in the market.528 According to the EU case law, there are two formulae for determining the illegality of refusal to license on competition law grounds, namely the ‘refusal to license plus additional abusive conduct’ and the ‘refusal to license under exceptional circumstances’. The US approach in question seems to use the first formula, the ‘refusal to license plus additional abusive conduct’, but its scope is narrower. With respect to right holders’ restrictions on downstream purchasers, both the US and the EU are likely to
527 Regarding the US approach see Statement on European Microsoft Decision issued by the Assistant Attorney General for Antitrust of the DOJ on 17 Sept. 2007, available at www.usdoj.gov/atr/public/press_releases/2007/226070.pdf. 528 Microsoft v. Commission, supra note 92, para. 229; Article 82 EC Guidance, paras 1 and 9. It should be noted that a special responsibility of a firm holding a monopoly power seems to be also emphasized in US antitrust law. See Eastman Kodak, supra note 198, at 488; US v. Dentsply Int’l, supra note 264, at 187.
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apply the IPR–antitrust–contract prism to evaluate such restrictions in order to promote innovation, competition and consumer welfare. Both the US and the EU are following innovation-oriented competition policies. The purpose of US and EU competition laws is to remedy a real or potentially unavoidable injury to competition. So antitrust/competition law is applied only when anti-competitive conduct is proved; and this is not prevented by invoking IPRs that are not clearly defined by IP written law and/or case law.529 Additionally, despite the fact that there remain differences between the US and EU approaches, such differences are not contrary to the obligations of the US or the EU under the TRIPS Agreement because IPRrelated justifications and objective, proportionate efficiency are taken into account in both systems.
529 Hovenkamp, Herbert (2008), ‘The Intellectual Property-Antitrust Interface’, in ABA Section of Antitrust Law, Issues in Competition Law and Policy, ABA Publishing, p. 2007.
3 Application of competition law to technology transfer in developing countries 3.1 3.1.1
BACKGROUND Overview
Technology, as one of the three main forces driving globalization,1 is a vital factor in economic growth, not only in the developed but also in developing countries. It provides ‘a solid potential for improving the well-being of all peoples’.2 However, the level of technological development in developing countries is still low. There is a large technological gap between the developed and developing countries. This gap tends to be increasingly widening as the result of rapid technological advances in developed countries and relatively slow advances in most developing countries.3 Consequently, most developing countries are net importers of technology. The majority of relevant technology currently is the property of MNCs, which can be transferred only through negotiated commercial agreements. On the one hand, the MNCs in principle offer good opportunities for developing countries to gain access to technology. On the other hand, these firms, if not controlled by appropriate legislation in host countries, often try to maximize the profits of technology transfer to developing countries by (i) refusing to work, (ii) refusing to license, (iii) charging excessive prices for technology
1 Technology, broader political changes and economic policies are the main forces that have driven globalization. See WTO (2008), World Trade Report 2008: Trade in a Globalizing World, Geneva: WTO, p. 20. 2 UN Declaration on the Establishment of a New International Economic Order, Resolution 3201(S-VI) of 1 May 1974, A/RES/S-6/3201, para. 1. 3 WB (2008), Global Economic Prospects 2008: Technology Diffusion in the Developing World, Washington, DC: WB, p. 92; UNCTAD (2007), The Least Developed Countries Report 2007: Knowledge, Technological Learning and Innovation for Development, Geneva: UNCTAD, p. 3; Reichman, Jerome H. and R.C. Dreyfuss (2007), ‘Harmonization without Consensus: Critical Reflections on Drafting a Substantive Patent Law Treaty’, Duke L. J., 57, 94.
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transferred, or (iv) incorporating anti-competitive restrictions into technology transfer agreements.4 These practices hinder the efforts of firms from developing countries seeking to acquire technology, especially IPR-intensive technology, on open markets at reasonable prices in order to preserve their own comparative advantages. They prevent consumers living in developing countries from accessing technology-embodied products at affordable prices. They also frustrate the socio-economic policies of developing country governments aimed at achieving a more competitive position on the technological frontier.5 Consequently, benefits of developing countries and consumer welfare in these countries may be adversely affected due to both the market power of MNCs and asymmetric information in technology transfer. Knowing the importance of technology transfer from developed to developing countries, the UN established principles for a New International Economic Order in 1974, one of which was giving the developing countries access to technology, and promoting the transfer of technology ‘for the benefit of the developing countries in forms and in accordance with procedures which are suited to their economies’.6 In order to implement this principle, the UN determined to ‘formulate an international code of conduct for the transfer of technology’, particularly to ‘adapt commercial practices governing transfer of technology to the requirements of the developing countries and to prevent abuse of the rights’ of licensors.7 The ToT Code, as noted in Section 1.3.2, was negotiated under the auspices of the UNCTAD from the 1970s to 1985. The purpose of the ToT Code was to assist developing countries in their selection, acquisition and effective use of technology appropriate to their needs under fair and reasonable terms and conditions. Meanwhile, the ToT Code also took into account both any relevant obligations under international IP conventions and the legitimate interests of all parties concerned, particularly technology holders.8 The ToT Code as well as the New International Economic Order aimed at equity and justice in technology transfer rather than at expropriation of technology. To this end, the UNCTAD, transnational agencies and developing
4 See Jefferies, Countess P. (2001), ‘A Preliminary Evaluation of the Proposed Text’, in Surendra Patel et al. (eds), International Technology Transfer: The Origins and Aftermath of the United Nations Negotiations on a Draft Code of Conduct, The Hague: Kluwer Law International, pp. 22–25; Blakeney, Michael (1988), ‘Transfer of Technology and Developing Nations’, Fordham Int’l L. J., 11, 708–711. 5 Reichman and Dreyfuss, supra note 3, p. 96. 6 UN Declaration, supra note 2, para. 4(p). 7 UN Programme of Action on the Establishment of a New International Economic Order, Resolution 3202(S-VI) of 1 May 1974, A/RES/S-6/3202. 8 See the 1985 ToT Code (the Preamble and Chapter 2), in UNCTAD (2001), Compendium of International Arrangements on Technology Transfer: Selected Instruments, Geneva: UNCTAD.
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countries primarily insisted on principles opposing the anti-competitive practices barred by the competition laws of developed countries.9 Consequently, Chapter 4 of the ToT Code contained a fairly standard catalogue of anticompetitive restrictions, which was subject to much controversy between developed and developing countries and contributed to a stalemate over the negotiation of the ToT Code.10 As mentioned, in the 1970s, a list of nine licensing practices considered as per se violations of the Sherman Act was implicitly accepted in the US. However, the developing countries (Group of 77) presented an ambitious list of forty practices which were to be prohibited from being incorporated into technology transfer agreements. Eventually, the list was reduced to twenty,11 then fourteen.12 Behind differences in the prohibited lists of restrictive practices, there remained differences in approaches to determining and scrutinizing such practices. Developed countries insisted upon a ‘competition’ test, which would restrict only practices that could be considered anti-competitive and forbidden under national competition law. By contrast, developing countries preferred to use a ‘development’ test, which would eliminate practices that were inherently unfair and unreasonable due to imbalances of bargaining power between powerful licensors (MNCs) and weaker licensees. Developing countries wanted to give their local acquiring firms more bargaining power and to control practices that could affect their firms’ further development at the expense of MNCs.13 Furthermore, there was contention in the negotiations of Chapter 4 of the ToT Code relating to whether the rule of reason or the per se rule should be applied to the listed restrictive practices. Although in the 1970s the US and the EU, as noted, applied the per se rule to specific anti-competitive practices under their competition laws, they preferred that restrictive practices in Chapter 4 of the ToT Code should all be subject to the rule of reason on a case-by-case basis. They also wanted to add the qualification ‘unreasonably’ or ‘unjustifiably’ to the practices listed. The developing countries, on the other hand, did not agree because, to some extent, they were not familiar with the rule of reason, while they felt that adding such a term would facilitate arbitrary conduct by licensors.14
9 10
Blakeney, supra note 4, pp. 696–697. See Davidow, Joel (2001), ‘Stalemate in the Negotiations on Restrictive Practices’, in Patel et al. (eds), supra note 4, pp. 209–215. 11 See Draft Texts Submitted to the Intergovernmental Group of Experts on an International Code of Conduct of Transfer of Technology, UNCTAD Document TD/AC.1/11 of 23 Nov. 1977, Int’l Legal Materials 17, 453. 12 See the 1985 ToT Code, supra note 8. 13 Sell, Susan K. (1998), Power and Ideas: North–South Politics of Intellectual Property and Antitrust, New York: State University of New York Press, p. 92. 14 Ibid., pp. 92–93; Thompson, Dennis (2001), ‘An Overview of the Draft Code’, in Patel et al. (eds), supra note 4, pp. 65–66.
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Although the ToT Code was finally abandoned in 1985, its negotiations reflected the policies and laws of developing countries relating to restrictive practices in technology transfer in the 1970s–1980s. In this period, most developing countries attempted to regulate and control technology transfer and related restrictive practices. They often applied a method that required registration and screening of all inward technology transfer agreements.15 Regulations were enacted to prevent, modify or expunge any practices that would create a dependent relationship or unwarranted control over technology, production, or marketing unfavourable to local acquiring firms or national interests.16 Under these regulations, the concept of restrictive practices included possible anti-competitive effects, but was not limited to them. The prohibition of restrictive practices in technology transfer agreements in developing countries at that time was based on broad concerns relating to potential adverse effects not only on competition but also on national economic development.17 Although most of the developing countries had not enacted their own competition law during this period,18 these countries, by using quasicompetition law regulations, tried to eliminate clauses in technology transfer agreements that restricted their ability to use the technology transferred to achieve more technological self-reliance. Furthermore, they also tried to weaken international standards of IP protection to help them gain access to high technology.19 However, most developing countries changed their policies and the laws in question by the end of the 1980s. The Uruguay Round negotiations, which led to the establishment of the WTO, were inaugurated in 1986. Developing countries, under pressures of economic reforms to stay competitive, gradually changed their economic policies in order to encourage trade liberalization, privatization, foreign investment and deregulation. As part of these changes, many developing countries removed restrictions on foreign investment including restrictions relating to technology transfer.20 In addition, developing countries were under pressure from developed countries to strengthen IP protection. The US threatened trade sanctions if a targeted country failed
15 16
Jefferies, supra note 4, pp. 27–33. Davidow, Joel (2004), ‘Liberalization of Antitrust Rules for IP Licensing: Global Trends and Unsolved Issues’, J. World IP, 7(2), 497; Sell, supra note 13, pp. 81–86 and 92. 17 Omer, Assad (2001), ‘An Overview of Legislative Changes’, in Patel et al. (eds), supra note 4, p. 304. 18 See Mehta, Pradeep S. (ed.) (2006), Competition Regimes in the World: A Civil Society Report, Jaipur: Jaipur Printers, pp. xxviii–xxxi. 19 Sell, supra note 13, p. 180. 20 Ibid., pp. 102–106. See also Thomas, Chantal (1999), ‘Transfer of Technology in the Contemporary International Order’, Fordham Int’l L. J., 22, 2108–2109.
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adequately to protect IPRs.21 Furthermore, with the establishment of the WTO and the minimum standard of IP protection under the TRIPS Agreement, developing countries were obliged to revise their IP laws to meet these new requirements. Trade liberalization, privatization, deregulation of technology transfer and the strengthening of the IP regime, taken together, pose new challenges to developing countries. They are potentially faced with more anti-competitive practices from the private sector. Additionally, it is more difficult for them to control such anti-competitive conduct than it was under the regime of registration and screening. The developing countries eventually recognized the connection between trade liberalization and competition law. They liked to promote competition in their domestic market. The UN Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business adopted in 1980 and its forum for capacity building and technical assistance have played a significant role in spreading concepts of competition policies and laws from developed to developing countries.22 Furthermore, some disputes settled at the GATT and WTO DSB have given rise to concerns that anti-competitive practices in developing countries may hinder market access for firms from developed countries.23 Accordingly, the developed countries tried to encourage, rather than coerce, the developing countries to adopt and implement more familiar types of competition policies and laws. Consequently, since the beginning of the 1990s many developing countries have adopted their own competition laws.24 However, contrary to the application of competition law to technology transfer in the US and the EU, which has given rise to numerous cases, there are few relevant cases reported in developing countries; and application also varies from one developing country to another.
21 Sell, supra note 13, pp. 182–198. See also Bickham, Timothy C. (1995), ‘Protecting US Intellectual Property Rights Abroad with Special 301’, AIPLA Q. J., 23, 195. 22 Ibid., pp. 200–212. 23 The WTO Panel in United States – Antidumping Act of 1916, WT/DS136/R, circulated on 31 March 2000, para. 6.172, note 426, stated that ‘panels under GATT 1947 and the WTO have addressed various aspects of restrictive business practices initiated by governments when such practices had the effect of impeding market access of foreign products or entry of foreign enterprises’. 24 There were about 40 countries with a competition law on their statute books in 1990. That number now is over 100 and more developing countries are in the enactment process. See Mehta (ed.), supra note 18, pp. xxviii–xxxi.
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Current Models in Developing Countries
3.1.2.1 Overview In general, the state of development of competition law differs greatly around the world. In developed countries, where competition law is well-established, provisions dealing with IPRs and technology transfer are often incorporated into their competition law regimes. This may be by means of additional regulations like the TTBER 2004 (and the TTBER Guidelines) in the EU or by the issue of guidelines like the Antitrust–IP Guidelines 1995 in the US.25 Regarding developing countries, addressing IPR-related competition issues in domestic legislation is a more difficult matter. Some countries, while having enacted IP legislation to meet the requirements of the TRIPS Agreement, have ignored the fact that the higher the IP protection is, the more the protections it provides can be abused by right holders.26 In this context, competition authorities in some countries, namely South Korea, Taiwan and Singapore, have followed the US and EU approach by issuing guidelines for the treatment of IPRs under their competition law.27 Some countries with less-developed competition law, e.g. the Philippines, have enacted competition-related provisions within specific IP legislation.28 Other jurisdictions, which follow a sectoral approach to regulation, just regulate for specific industries, particularly for certain technologically advanced industries such as telecommunications in Malaysia.29 Some countries, Guatemala and Hong Kong for instance,
25 In Japan see Section 21 of the Anti-monopoly Act; Article 10 of the Basic Law on Intellectual Property; JFTC Guidelines for the use of intellectual property under the Anti-monopoly Act of 28 Sept. 2007, available at www.jftc.go.jp/epage/legislation/ama/070928_IP_Guideline.pdf. 26 UNCTAD (2002), ‘The Relationship between Competition, Competitiveness and Development’, TD/B/COM.2/CLP/30, para. 19; CUTS (2003), Approaches to Competition Policy in South Asian Countries, Jaipur: Jaipur Printers, p. 37. 27 KFTC Guidelines of Reviewing Undue Exercise of Intellectual Property of 2000, available at http://ftc.go.kr/data/hwp/irp_guidelines.doc; TFTC Guidelines on Technology Licensing Arrangements of 2001, available at www.apeccp.org.tw/ doc/Taipei/Decision/ctdec001.htm; CCS Guidelines on the Treatment of Intellectual Property Rights of 2007, available at www.ccs.gov.sg/Guidelines/index.html. 28 See Sections 85, 87–88 and 93 of the Philippines’ Intellectual Property Code of 1997 (Republic Act No. 8293), WTO document IP/N/1/PHL/C/1 and IP/N/1/PHL/I/1. 29 See Sections 133–144 Malaysia’s Communication and Multimedia Act of 1998 (Act 588), available at www.commonlii.org/my/legis/consol_act/cama1998289/; Lee, Cassey (2005), ‘Malaysia’, in Douglas H. Brooks and S.J. Evenett (eds), Competition Policy and Development in Asia, Basingstoke: Palgrave Macmillan, pp. 201–204.
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have no specific legislation relating to the competition aspects of technology transfer.30 In competition statutes of some developing countries, one may find an explicit exemption regarding the application of competition law to the exercise of IPRs or technology transfer agreements. In South Korea, Article 59 of the Monopoly Regulation and Fair Trade Act states that ‘this Act shall not apply to any act which is deemed to be an exercise of rights’ under national IP laws.31 In Taiwan, similarly, Article 45 of the Fair Trade Act reads ‘no provision of this Law shall apply to any proper conduct in connection with the exercise of rights pursuant to’ Taiwan’s IP laws.32 However, competition authorities in both South Korea and Taiwan enacted guidelines to distinguish justifiable exercise of IPRs, which is entitled to competition law immunity, from unjustifiable acts going ‘far beyond the purpose’, or being ‘inappropriate use’, of IPRs, which still fall foul of competition law.33 Such exemptions may be reserved for IPR-related agreements. Article 50 of Indonesia’s Competition Law of 1999 exempts from the provisions of that law contracts relating to IPRs. Section 3.5(i) of India’s Competition Act of 2002, amended in 2007, states that the anti-competitive agreements section of the Act shall not restrict an IPR holder to ‘impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him’ under India’s IP legislation.34 It is unclear how Indonesia’s Competition Law and India’s Competition Act treat anti-competitive agreements concerning IPRs because competition authorities in Indonesia and India, contrary to the cases of South Korea and Taiwan, have not issued explicit guidelines to explain the exemptions. The Competition Authority of Indonesia (KPPU) has announced that such exemptions should not be regarded as absolute.35 In India, cases directly relating to this issue have not been found. However, in a trademark misrepresentation case, Godfrey
30
See Lex Mundi (2006), ‘Lex Mundi Intellectual Property and Competition Law Survey’, available at www.lexmundi.com/images/lexmundi/PDF/IP_Survey/ IP_FullVersion.pdf; AIPPI (2005), ‘Limitations on Exclusive IP Rights by Competition Law’, Q187 group reports, available at www.aippi.org/?sel=questions&sub=listingcommittees&viewQ=187#187. 31 MRFTA, available at unpan1.un.org/intradoc/groups/public/documents/ APCITY/UNPAN011494.pdf. 32 Taiwan’s Fair Trade Act of 2002, available at www.ftc.gov.tw/internet/ english/doc/docDetail.aspx?uid=644&docid=1552. 33 See KFTC Guidelines and TFTC Guidelines, supra note 27. 34 India’s Competition Act, available at www.cci.gov.in/images/media/ competition_act/act2002.pdf. 35 Lex Mundi, supra note 30, p. 71.
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Phillips,36 the Monopoly and Restrictive Trade Practices Commission, the predecessor of the current Competition Commission of India, analysed the impact of IPRs on competition by using the dichotomy between the existence of IPRs and their exercise elaborated by the ECJ. It finally concluded that competition law ‘would be attracted only where there is an abuse in the exercise of the rights protected and granted’ under IP statutes.37 Consequently, an abuse of IPRs may fall under competition law although the law contains a provision exempting the normal exercise of IPRs. Furthermore, from an advocacy booklet on IPRs recently published by the Competition Commission of India,38 it seems that Section 3.5(i) does not automatically include the right to exercise monopoly power. The Competition Commission will scrutinize any unreasonable conditions incorporated into licensing agreements or IPR abuse. This booklet also lists sixteen practices with respect to licensing agreements, which are regarded as adversely affecting competition in markets.39 This strict view is supported by the Patent Act of India, in which certain practices of patent holders, namely excessive prices, refusal to license affecting downstream markets, tying, exclusive grantback, non-challenge and package licensing are subject to compulsory licensing.40 Although there is diversity in this issue, it seems that, at first glance, China uses a reasonable approach in regulating IPRs in its Anti-monopoly Law as enacted on 31 August 2007. Article 55 of this Law reads: This Law does not govern the conduct of business operators to exercise their intellectual property rights under laws and relevant administrative regulations on intellectual property rights; however, business operators’ conduct to eliminate or restrict market competition by abusing their intellectual property rights shall be governed by this Law.41
36 Vallal Peruman & Dileep Singh Bhuria v. Godfrey Phillips (India) Ltd, 91/92 in UTPE 180/92 – MRTP Commission, New Delhi, 24 May 1994. 37 Ibid., paras 14–17. 38 Competition Commission of India (2008), ‘Intellectual Property Rights under the Competition Act’, available at www.cci.gov.in/images/media/Advocacy/ Awareness/IPR.pdf. 39 Ibid. 40 The Patent Act of India (Section 84 of the Patent (Amendment) Act of 2002 and Section 90(1)(ix) of the Patent (Amendment) Act of 2005), WTO document IP/N/1/IND/P/2. 41 Anti-Monopoly Law of China, available at www.china.org.cn/government/ laws/2009-02/10/content_17254169.htm. Accordingly, patent abuse, which is a violation of competition law, is a new ground for granting compulsory licences under the Article 48 of the Patent Law of China, amended on 27 Dec. 2008.
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This approach recognizes legitimate rights of right holders, yet it simultaneously paves the way for addressing any IPR abuses eliminating or restricting competition. However, Article 55 without any detailed guidance on its application in practice may raise uncertainty as to how it will be enforced. 3.1.2.2 Normative models Regarding substantive law, there are at least four models in developing countries, namely the laissez-faire model, the quasi per se prohibition model, the simple rule of reason model, and the hybrid model. Laisser-faire model Hong Kong, Guatemala and Jamaica are representatives of the laissez-faire model. Hong Kong and Guatemala follow the positive noninterventionism policy with no specific regulations relating to IPR exploitation, technology transfer and competition law. IPRs can be freely licensed, assigned, mortgaged or exploited under general principles of commercial contracts. All restrictions in technology transfer agreements are basically legitimate if there is consensus between parties.42 However, these countries are being faced with the challenges of anti-competitive practices, particularly exclusionary and exploitative abuses of market power by big firms. Therefore, Hong Kong, the most successful follower of laissez-faire policy in general, is felt to be in need of a competition law.43 Regarding Jamaica, the Fair Competition Act was enacted in 1993 and amended in 2001.44 However, this Act provides an absolute immunity to IPRrelated activities and technology transfer. Articles 3(c), 20.2(b), and 26.3 of this Act read: Nothing in this Act shall apply to the entering into of an agreement in so far as it contains a provision relating to the use, licence or assignment of rights under or existing by virtue of any copyright, patent or trade mark … An enterprise shall not be treated as abusing a dominant position by reason only that the enterprise enforces or seeks to enforce any right under or existing by virtue of any copyright, patent, registered design or trade mark … Nothing in [regulations prohibiting minimum resale price maintenance] affects the
42 43
Lex Mundi, supra note 30, pp. 61–64. Williams, Mark (2005), Competition Policy and Law in China, Hong Kong and Taiwan, Cambridge: Cambridge University Press, pp. 222–365 (Hong Kong has sectoral competition provisions in its Telecommunication Ordinance). However, policy makers of Hong Kong decided to remove a long-discussed cross-sector competition law from the legislative agenda of 2009. See ‘Keeping Hong Kong Competitive: Dropping a Proposed Antitrust Law is Smart for the Economy’, available at http://online.wsj.com/article/SB123628211306143155.html. 44 Jamaica’s Fair Competition Act, available at www.jftc.com/TheFCA/theact/ Theact.htm.
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validity … of any term or condition (a) of a licence granted by the proprietor of a patent or by a licensee under any such licence; or (b) of any assignment of a patent, so far as it regulates the price at which goods produced or processed by the licensee or assignee may be sold by him.
Consequently, the Jamaican market is exposed without any limitations to the exercise and exploitation of right holders. Quasi per se prohibition model Contrary to the laissez-faire model, some developing countries are still strict on restrictions on technology transfer and apply the quasi per se prohibition model even if they have not enacted their own competition statutes. The view of countries following this model is, to some extent, similar to that of most developing countries in the 1970s–1980s as shown above. Under this model, many restrictions are quasi per se prohibited. The Philippines exemplifies this.45 At the moment, the Philippines does not have a competition statute. However, the Constitution of 1987 provides that ‘[t]he State shall regulate or prohibit monopolies when the public interest so requires. No combinations in restraint of trade or unfair competition shall be allowed.’46 Regarding technology transfer-related competition rules, Section 87 of the Philippines Intellectual Property Code of 1997 lists fourteen prohibited restrictions, which are similar to the fourteen restrictive practices in the 1985 version of the ToT Code. These restrictions are likely to be per se illegal unless their substantial benefits will accrue to the economy. They are deemed prima facie to have an adverse effect on competition and trade according to legislators of the Philippines.47 Moreover, Section 88 requires that some mandatory provisions be incorporated into technology transfer agreements to protect licensees. Section 93 lists grounds for compulsory licensing. One of them is ‘where a judicial or administrative body has determined that the manner of exploitation by the owner of the patent or his licensee is anti-competitive’. Furthermore, the Supreme Court of the Philippines seems to favour the dissemination and transfer of technology. By balancing IPRs and social benefits, the Court held: The primary purpose of the patent system is not the reward of the individual but the advancement of the arts and sciences. The function of a patent is to add to the sum of useful knowledge and one of the purposes of the patent system is to encourage dissemination of information concerning discoveries and inventions.48
45 46 47 48
Lex Mundi, supra note 30, pp. 104–106. Section 19 Article XII of the Constitution of 1987 of the Philippines. The Philippines Intellectual Property Code, supra note 28, Sections 87 and 91. Angelita Manzano v. Court of Appeals, G.R. No. 113388, 278 SCRA 688 (1997), available at http://sc.judiciary.gov.ph/jurisprudence/1997/sep1997/113388. htm.
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This tendency is compatible with the purpose of the TRIPS Agreement analysed in Section 1.2.3. Additionally, this Court, in a case relating to compulsory licensing, confirmed the provision concerned in the Paris Convention, which is incorporated into the TRIPS Agreement, by holding: Section A(2) of Article 5 [of the Paris Convention] unequivocally and explicitly respects the right of member countries to adopt legislative measures to provide for the grant of compulsory licenses to prevent abuses which might result from the exercise of the exclusive rights conferred by the patent. An example provided of possible abuses is ‘failure to work’; however, as such, is merely supplied by way of an example, it is plain that the treaty does not preclude the inclusion of other forms of categories of abuses … the legislative intent [of the Philippines] in the grant of a compulsory license was not only to afford others an opportunity to provide the public with the quantity of the patented product, but also to prevent the growth of monopolies.49
This ruling has demonstrated that the exclusive IPRs are not absolute and may be limited in order to protect public interests and free competition. The flexibilities in the Paris Convention and, indirectly, those in the TRIPS Agreement could be regulated in national IP legislation and applied by the court system. Compulsory licensing as a remedy against anti-competitive practices in the Philippines is, therefore, unproblematic, at least in theory. Briefly, following the quasi per se prohibition model, the competent authorities of the Philippines have enough power under the Intellectual Property Code to limit the exercise of IPRs and prevent anti-competitive practices, both by requiring that certain provisions be incorporated in and/or expunged from technology transfer agreements and by granting compulsory licences.50 In addition to the Philippines, India, in practice, appears to follow the quasi per se prohibition model. As noted, the advocacy booklet on IPRs published by the Competition Commission of India lists sixteen illustrative anti-competitive practices which are regarded as per se unreasonable under competition law. The Patent Act of India also lists some per se restrictive or abusive conduct which may lead to compulsory licensing.51
49 Smith Kline & French Laboratories, Ltd. v. Court of Appeals, G.R. No. 121267, 2368 SCRA 9 (2001), available at http://sc.judiciary.gov.ph/ jurisprudence/2001/oct2001/121267.htm (emphasis added). 50 Somera, Bienvenido I. (2005), ‘Report Q187 in the name of the Philippines Group’, in AIPPI, supra note 30. 51 Competition Commission of India, supra note 38; Section 84 of the Patent (Amendment) Act of 2002 and Section 90(1)(ix) of the Patent (Amendment) Act of 2005 of India, supra note 40.
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Simple rule of reason model Developing countries applying this model often analyse anti-competitive practices under the simple rule of reason on a caseby-case basis as developed countries do. In order to facilitate the application of competition law to IPR-related issues, these countries, Singapore, Taiwan and South Korea for instance, have enacted guidelines.52 These guidelines tend to follow the principles for the application of competition law to technology transfer used by the US and the EU, such as no presumption of market power of right holders,53 pro-competitive benefits of licensing,54 and a fullyfledged context analysis.55 The recently enacted Guidelines of the Competition Commission of Singapore are almost a copy of the TTBER 2004 of the EU. Meanwhile, the Guidelines of the Fair Trade Commission of Taiwan state: In order to concrete the application of provisions of the [Fair Trade] Law, the Fair Trade Commission … has referred to its own experience with relevant previous cases, the status of development of domestic industries, and relevant regulations governing technology licensing arrangements in Japan, the USA, and European Union.56
However, in contrast to the Guidelines of Singapore, the Guidelines of the Fair Trade Commissions of Taiwan and of South Korea are stricter than the TTBER 2004 of the EU and the Antitrust–IP Guidelines 1995 of the US. These guidelines of Taiwan and of South Korea are, to some extent, similar to Regulation 240/96 which was repealed by the TTBER 2004 of the EU. They contain both inflexible black (prohibited) and white (permitted) lists. Regarding refusal to license, these three countries seem to follow the EU approach. The Guidelines of the Competition Commission of Singapore read: The basis of property rights is the right to exclude. Ownership of an IPR does not normally impose on the IP owner an obligation to license the use of that IP to others, even where the IPR confers market power on the IP owner. Therefore, a refusal to supply a licence, even by a dominant undertaking, is not normally an abuse. However, in limited circumstances, a dominant undertaking’s refusal to supply a licence may constitute an infringement under the section 47 prohibition. For example, this may occur if the refusal concerns an IPR which relates to an essential facility, with the effect of (likely) substantial harm to competition. The CCS may consider if the dominant undertaking is able to objectively justify its conduct, and 52 53 54 55
KFTC Guidelines, TFTC Guidelines, and CCS Guidelines, supra note 27. CCS Guidelines, paras 2.5 and 4.2; TFCT Guidelines, para. 3. CCS Guidelines, paras 2.11–2.13; TFTC Guidelines, Preface. CCS Guidelines, paras 1.5, 3.2, 3.13 and 4.5; TFTC Guidelines, para. 4.3; KFTC Guidelines, supra note 17, Article 3. However, factors taken into account and their importance may differ from one jurisdiction to another. 56 See the Preface of the TFTC Guidelines, supra note 17 (emphasis added).
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whether the dominant undertaking has behaved in a proportionate way in defending its legitimate commercial interest.57
The Guidelines of the Fair Trade Commission of South Korea similarly state that refusal to license violates competition law: [W]hen the licensor blocks the market entry of other business by declining the licensing approval though the person who wants to get the licensing approval about the industry property, which is necessary for providing particular goods and services, makes substantial efforts to get approval by suggesting reasonable conditions …58
These countries consider refusal to license under the essential facility doctrine, which is similar to the Bronner test in the EU, under which the criteria of indispensability and substantial harm to competition play important roles.59 South Africa, in addition to Singapore, Taiwan and South Korea, also applies the simple rule of reason model, but it has not enacted guidelines for the treatment of IPRs under its competition law. Although Article 90 of the Patent Act60 explicitly excludes some restrictions from technology transfer agreements, particularly tying clauses, Articles 4 and 5 of the Competition Act require that both anti-competitive effects and technological, efficiency or other pro-competitive gains of these agreements be evaluated, compared and weighed. Furthermore, Article 10 of the Competition Act permits a firm to apply to the Competition Commission in order to be exempted from the application of the Competition Act to an agreement or practice relating to IPR exercise. Regarding refusal to license, Article 8 of the Competition Act and Article 56 of the Patent Act, akin to the approach of Singapore, Taiwan and South Korea, can be interpreted that such a refusal may be in breach of the competition law of South Africa if the technology in question is an essential facility.61 However, applying the rule of reason model, even the simplest one, requires significant capacity and experience in enforcement authorities. This seems to be appropriate only for advanced developing countries.
57 58 59 60
CCS Guidelines, supra note 27, para. 4.6 (emphasis added). KFTC Guidelines, supra note 27, Article 3.17. The TFTC Guidelines do not refer to refusal to license. South Africa Patent Act No. 57 of 1978, latest amendment is Patent Amendment Act No. 20 of 2005, WTO document IP/N/1/ZAF/P/1 and IP/N/1/ZAF/P/ 1/Add.1. 61 See infra Section 3.2.2.
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Hybrid model Some developing countries use the fourth model, a mixture of the above-mentioned three models: the hybrid one. For example, Malaysia has no general legislation on competition. It has no explicit provisions preventing price fixing, limitation of production, tying, exclusivity, non-challenge clause, etc.62 However, as noted, in the Communications and Multimedia Act 1998 there is one chapter regulating competition practices in this industry. In general, the rule of reason is applied,63 but tying, for example, is per se illegal.64 In brief, competition-related laws and regulations on technology transfer vary from one developing country to another. It is difficult to say which model is the best. It depends on the economic, political, social and institutional contexts of each country. The most important thing is how a developing country can invoke the competition flexibilities in the TRIPS Agreement and other international, regional and bilateral agreements concerned in order to control anti-competitive practices relating to technology transfer while also encouraging, or at least not discouraging, inward technology transfer.
3.2
CERTAIN SPECIFIC CASES
At present, there have been only a handful of cases relating to the application of competition law to technology transfer in developing countries. The cases concerned, which have been recently reported and are available in legal literature, are: (i) Microsoft tying cases in South Korea, Taiwan and Croatia; (ii) cases relating to refusal to license and excessive pricing in the pharmaceutical sector in South Africa; (iii) Abbott’s withdrawal of pharmaceutical registration applications in Thailand, and; (iv) Philips licensing cases in Taiwan. These cases are chosen and analysed because they may have significant impacts on developing countries. 3.2.1
Microsoft Tying Cases
Microsoft has been faced with tying claims in both the US and the EU. Similar
62 Lex Mundi, supra note 30, pp. 87–89. However, the Patent Act 1983 of Malaysia (and its amendments), WTO document IP/N/1/MYS/P/1, contains some general provisions on invalidating restrictive practices (Section 45) and on compulsory licensing (Sections 49 and 49A). 63 Communications and Multimedia Act 1998 of Malaysia, supra note 29, Sections 133–134 and 138. 64 Ibid., Section 136.
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claims have also been raised in South Korea and Taiwan, respectively in Microsoft Korea 65 and Microsoft Taiwan,66 and even in Croatia. 3.2.1.1 Microsoft Korea This case was first initiated in September 2001 when Daum Communication filed a complaint with the KFTC about Microsoft’s conduct of tying its Messenger with its Windows XP. Microsoft was alleged by the tying, to abuse its dominant position in the PC operating system software market in order to try to monopolize the messenger software market. During its investigation relating to the tying of Microsoft’s Messenger, the KFTC also considered Microsoft’s tying of Windows Media Player, which was ruled illegal by the European Commission in 2004 and the CFI in 2007, and the tying of Windows Media Services, which the KFTC’s own independent investigation found to be suspicious. Further, in October 2004, RealNetworks filed a complaint with the KFTC against Microsoft relating to Microsoft’s tying of Windows Media Player and Windows Media Services.67 Consequently, Microsoft Korea involved three alleged tying claims: (i) tying Windows Media Services to the Windows Server operating system, (ii) tying Windows Media Player to the Windows PC operating system, and (iii) tying Microsoft’s Messenger to the Windows PC operating system.68 The KFTC used a three-criterion test for adjudicating the illegality of the tying, namely (i) a tying product and a tied product were separate products,
65 KFTC (2008), ‘2008 Annual Report’, available at http://eng.ftc.go.kr/ files/bbs/2008/AnnualReport.pdf; KFTC (2005), ‘The Findings of the Microsoft Case’, available at http://ftc.go.kr/data/hwp/micorsoft_case.pdf. This case was appealed before the Seoul High Court, but this court rejected the preliminary injunction sought by Microsoft (Seoul High Court Decision 2006Ah81, 4 July 2006). After Microsoft’s failure before the CFI in Case T–201/04, Microsoft v. Commission, [2007] ECR II–3601, Microsoft dropped its appeal against the KFTC decision. 66 TFTC (2003), ‘The FTC Approved an Administrative Settlement Proposed by Microsoft Taiwan and Its Affiliates’, available at www.ftc.gov.tw/internet/ english/doc/docDetail.aspx?uid=775&docid=805; Microsoft Taiwan (2003), ‘Administrative Settlement Offer’, available at www.ftc.gov.tw/EnglishWeb/ MSContrac2003.pdf. 67 Before the KFTC delivered its final decision, Microsoft reached settlements with RealNetworks and Daum Communication, in which Microsoft would pay these two firms in exchange for their withdrawal of complaints. However, the KFTC continued its investigation regardless of the settlements. Cho, Jung Wook (2007), Innovation and Competition in the Digital Network Economy: A Legal and Economic Assessment on Multi-tying Practice and Network Effects, Alphen aan den Rijn: Kluwer Law International, pp. 49–50. 68 KFTC (2008), supra note 65, p. 43.
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(ii) there was coercion relating to the tying, and (iii) there were anti-competitive effects and exclusion of competitors in the tied product market.69 First of all, regarding the criterion of separate products, the KFTC held that, in terms of function and use, the tying products (Windows PC and server operating systems) and the tied products (Windows Media Services, Windows Media Player and Microsoft’s Messenger) were distinguished from each other. Additionally, the tied products were not an inseparable part of the tying products; they were traded separately from the tying products and had separate demand structures from the consumer perspective. Furthermore, the tying and the tied products were generally not sold together as a unit. Therefore, the separateness condition was satisfied. Secondly, relating to the coercion criterion, the KFTC found that Microsoft’s market share in South Korea at the time of investigation was around 77 per cent for the server operating system software market and 99 per cent for the PC operating system software market. Faced with Microsoft’s tying, consumers were forced to buy Microsoft’s operating systems together with the tied products, because they were unlikely to be able to change to other operating systems. Thirdly, concerning the criterion of anti-competitiveness, the KFTC investigated the increase of Microsoft’s market share in the tied product markets in South Korea. In the media services software market for servers, Microsoft’s market share skyrocketed from the early 2000s, and in August 2004, it accounted for 93 per cent. Meanwhile, the market share of RealNetworks, Microsoft’s main competitor in this relevant market, slumped from around 90 per cent to nearly 0 per cent in that period. In the media player software market, Windows Media Player’s market share increased from 39.4 per cent in December 2000 to 60.5 per cent in August 2004. In the messenger software market, the market share of Microsoft’s Messenger soared while market shares of its competitors declined.70 These major changes relating to market shares of Microsoft and its competitors in the relevant tied product markets demonstrated, according to the KFTC, that the market concentration for Microsoft’s application program products was not a result of fair competition by quality or functionality of the products, rather of its anti-competitive tying which foreclosed the relevant markets.71
69 Ibid., pp. 44–47. This three-criterion test was spelled out by the Seoul High Court (Seoul High Court 2001 Nu 16288, 10 Feb. 2004), and upheld by the Supreme Court of South Korea (Supreme Court 2004 Du 3014, 26 May 2006). This test is also elaborated in the KFTC’s Guideline for Review of Unfair Business Practices enacted on 24 Dec. 2004, amended on 11 May 2005. See Cho, supra note 67, pp. 43–45. 70 KFTC (2008), supra note 65, p. 46. 71 Ibid., p. 47.
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Consequently, the KFTC concluded that Microsoft leveraged its dominant position in the PC and/or server operating system markets to the downstream markets, i.e. application program markets, namely media server, media player and messenger software markets. These leveraging practices eliminated competition there. This reasoning was similar to that of the European Commission, upheld by the CFI, in Microsoft v. Commission, on the basis of the illegality of offensive tying. Furthermore, the KFTC contended: [T]he tying practices by Microsoft led to increased supply of Windows Media Service[s], Windows Media Player and other applications that complemented Windows Media Technology. This, in turn, led to raising entry barrier for the [PC and Server operating system markets], resulting in enforcing monopoly power of Microsoft in each operating [system market].72
This means that the KFTC also applied the reasoning of the US court of appeals in Microsoft III and the CFI Microsoft v. Commission judgment relating to the illegality of defensive tying, which eliminates competition and defends and maintains a dominant position or monopoly power in the upstream market. On the basis of the above-mentioned arguments, the KFTC concluded that Microsoft’s tying practices were in breach of the Korean Monopoly Regulation and Fair Trade Act (MRFTA). In particular Microsoft violated: (i) Article 3-2(1)(3) of the MRFTA: Microsoft ‘unreasonably interfere[d] with the business activities of other enterprises’; (ii) Article 3-2(1)(5) of the MRFTA: it ‘considerably harm[ed] the interests of consumers’; and (iii) Article 23(1)(3) of the MRFTA: it ‘unfairly coerce[d] or induc[ed] customers of competitors to deal with’ it.73 It seems that the three-criterion test applied by the KFTC in this case, together with the dominant position requirement which was obvious in the Microsoft tying cases, is equivalent to the five-pronged test for scrutinizing tying allegations applied in the US and the EU, although the justification requirement was not explicitly highlighted in Microsoft Korea. Moreover, the KFTC analysed the adverse effects of both types of tying, offensive and defensive, to condemn the anti-competitive tying practices. The rule of reason was, to some extent, thus applied in Microsoft Korea. Regarding the remedies in Microsoft Korea, in addition to a 32.49 billion won fine (approximately 31 million US dollars), the KFTC went further than the US or EU authorities. The KFTC required Microsoft to untie Windows 72 73
KFTC (2005), supra note 65, p. 3. KFTC (2008), supra note 65, p. 44; Kim, Sejin (2007), ‘The Korea Fair Trade Commission’s Decision on Microsoft’s Tying Practice: The Second-Best Remedy for Harmed Competitors’, Pac. Rim L. & Pol’y J., 16, 378.
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Media Services completely from Windows Server operating system. While the remedy in the US required only hiding the icons of the programs,74 the KFTC ordered Microsoft to remove completely the Windows Media Services’ codes from the Windows Server operating system. Additionally, the KFTC ordered Microsoft not to distribute Windows Media Services together with the Windows Server operating system in any other form that might hinder the separate sale and distribution of Windows Media Services.75 This complete separation is a stronger measure than that of the EU.76 For Windows Media Player and Messenger, the KFTC’s remedy is similar to the EU one, which includes the ‘code removal’; but the KFTC also required Microsoft to install and operate Media/Messenger Centre in the PC operating system in order to provide users with substantial opportunities to download competing products.77 Briefly, the KFTC was stricter than the US, and even the EU, not only in scrutinizing tying practices but also in remedying them.78 3.2.1.2 Microsoft Taiwan In addition to Microsoft Korea, Microsoft was also faced with an investigation by the TFTC in 2002–2003. Microsoft was accused of abusing its monopoly power in Taiwan to engage in improper tying of products in its Microsoft Office software package and charging excessive prices.79 Due to the complexity of the case, the TFTC agreed to negotiate with Microsoft effectively to solve the case. Finally, in February 2003 the TFTC approved an administrative 74 Microsoft was required to permit end users and OEMs ‘to enable or remove access to each Microsoft Middleware Product or Non-Microsoft Middleware Product by … displaying or removing icons, shortcuts, or menu entries on the desktop or Start menu, or anywhere else in a Windows Operating System Product where a list of icons, shortcuts, or menu entries for applications are generally displayed’. US v. Microsoft, 231 F. Supp. 2d 144, 176–178 (DDC 2002); Massachusetts v. Microsoft, 373 F.3d 1199, 1207–1213 (DC Cir. 2004). 75 See the holding of the KFTC in Microsoft Korea, translated in Kim, supra note 73, pp. 393–394. 76 The European Commission Decision in Case COMP/C-3/37.792, Microsoft, C(2004)900 final, OJ 2007 L 32/23 (Article 6), just required Microsoft to ‘offer a fullfunctioning version of the Windows Client PC Operating System which does not incorporate Windows Media Player; Microsoft Corporation retains the right to offer a bundle of the Windows Client PC Operating System and Windows Media Player’. 77 See the holding of the KFTC in Microsoft Korea, translated in Kim, supra note 73, pp. 397–400. 78 The US DOJ protested the KFTC decision. See Statement of Deputy Assistant Attorney General J. Bruce McDonald regarding KFTC’s Decision in its Microsoft case, 7 Dec. 2005, available at www.usdoj.gov/atr/public/press_releases/2005/213562.pdf. 79 Liu, Kung-Chung (2005), ‘Interface between IP and Competition Law in Taiwan’, J. World IP, 8(6), 745–746.
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settlement agreement proposed by Microsoft Taiwan.80 According to the agreement, Microsoft undertook to comply with relevant provisions of the Fair Trade Law of Taiwan regarding pricing. It committed to reducing its prices, compared to May 2002 when the TFTC launched its investigation, by an average of 26.7 per cent, and price cuts ranged from 13.2 per cent to 54.5 per cent. Microsoft also agreed to comply with provisions relating to tying in the Fair Trade Law with respect to relevant software products. Furthermore, Microsoft Taiwan also undertook to promote consumer interests, facilitate intra-brand competition, provide after-sale services, grant reasonable sharing of software codes, and implement in Taiwan settlements made between US antitrust authorities and Microsoft.81 As a result, although the TFTC did not conclude whether or not the tying practice of Microsoft violated the competition law of Taiwan, the settlement between the TFTC and Microsoft reflected the success of applying competition law to IPRs so as to maintain fair trade and improve consumer benefits. It also forced Microsoft to implement in Taiwan decisions or settlements decided by competition authorities from the US. 3.2.1.3 Microsoft Croatia Microsoft Croatia,82 in addition to Microsoft Korea and Microsoft Taiwan, is another good example for developing countries with limited resources and skills in IPR-related competition enforcement. In Microsoft Croatia, there was no formal competition proceeding initiated before the Croatian Competition Agency against Microsoft. However, based on the Microsoft EU decision of the European Commission upheld by the CFI, the Croatian Competition Agency, at the end of 2007, requested Microsoft (Microsoft Hrvatska) to comply with the obligations imposed in the European Commission’s decision in the territory of Croatia. Responding by a written statement, Microsoft voluntarily undertook the obligations to perform its business practices within the terms of the Commission’s decision regarding the disclosure of interoperability information and unbundling of Windows Media Players from Windows in order to respect the key principles of competition law in Croatia. Microsoft Croatia well supports an observation that competition authorities in developing countries may reasonably apply IPR-related competition decisions or judgments from developed country jurisdictions to their own 80 81 82
See TFTC, supra note 68. Ibid. See UNCTAD (2008), ‘Recent Important Competition Cases Involving More than One Country’, TD/B/COMP.2/CLP/71, pp. 8–9; Press Release of the 96th Session of the Croatian Competition Council, 7 Jan. 2008, available at www.aztn.hr/ eng/arhiva_n.asp?krit=2&id=308&page=1.
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situations.83 In other words, developing countries can ‘piggy-back on analyses and power of larger jurisdictions’.84 This is a proper strategy for developing countries that have just embarked on competition law in general and IPR-related competition law in particular. 3.2.1.4 Remarks On the basis of comparing Microsoft Korea, Microsoft Taiwan and even Microsoft Croatia with Microsoft III in the US and Microsoft v. Commission in the EU, it is clear that although Microsoft’s allegedly anti-competitive tying conduct is almost identical worldwide,85 the legal outcomes are not. If developing countries do not apply their own competition law to technology transfer agreements, software licensing in these cases, they will not be able to protect competition and consumer welfare in their domestic markets. Due to the difficulties and complexities of applying domestic competition law to technology transfer agreements, developing countries should draw lessons and experience from similar cases settled by developed countries in order properly to investigate and adjudicate the cases concerned. However, developing countries should always use these lessons and experience flexibly to suit their domestic circumstances. 3.2.2
Refusal to License Pharmaceutical Patents Cases
3.2.2.1 Background When considering whether to attract inflows of technology transfer, developing countries should carefully evaluate the pro-competitive benefits of technology transfer and the anti-competitive effects of possible restrictions in technology transfer agreements. In the case of refusal to license, they may apply the flexibilities in the TRIPS Agreement still to get technology transferred, or at least to improve consumer benefits. If refusal to license by a firm holding a dominant position constitutes an abuse of the IPRs concerned under a developing country’s competition law, the TRIPS Agreement allows that country to grant compulsory licences to remedy such anti-competitive conduct. The developing country can thus still promote access to the technology in question. Three cases in South Africa, namely Hazel Tau v. GSK & BI,
83 84
It is worth noting that Croatia is a candidate country for EU membership. UNCTAD (2008), ‘Competition Policy and the Exercise of Intellectual Property Rights’, TD/B/COM.2/CLP/68, p. 7. 85 Many countries have been trying to use their domestic competition law against tying and other abusive conduct by Microsoft. See Cho, supra note 67, pp. 31–36 and 39–40; CUTS (2005), Multinational Competition Framework: in Need of a Fresh Approach, Jaipur: Jaipur Printers, p. 13.
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TAC v. BMS and TAC v. MSD & Merck, provide good examples, from which useful implications for other developing country Members could be derived. It is worth reiterating that IPRs give the holder a right to exclude others from exploiting her IP. In compliance with the TRIPS Agreement and other IPR-related conventions, developing countries must respect this principle. Refusal to license, in general, cannot by itself be in breach of the competition or IP law of a developing country. In Punzo-Flex86 in Mexico, the Federal Competition Commission concluded that the unilateral decision of a patentee to grant an exclusive licence to a firm and not to grant licences to competitors of that firm did not violate Mexican competition law, although the refusal might drive these competitors out of the market. In South Africa, when adjudicating on refusal to license information delivery software in DW Integrators v. SAS Institute,87 the Competition Tribunal of South Africa, referring to case law in the US, held: Caution is particularly well-advised when dealing with the interface between antitrust and intellectual property. We concur with the much-cited decision in Atari Games Corporation v Nintendo of America Inc … which warns that ‘the danger of disturbing the complementary balance struck by Congress is great when a court is asked to preliminarily enjoin conduct affecting patent and antitrust rights. A preliminary injunction entered into without a sufficient factual basis and findings, though intended to maintain the status quo, can offend the public policies embodied in both the patent and anti-trust laws.’
Based on this observation, one may argue that refusal to license in South Africa, as in the US and the EU, violates competition law only in exceptional circumstances. In this case, the Competition Tribunal held that the right holder did not have a dominant position in the information software market; thus there could be no abuse of a dominant position relating to that refusal.88 Nevertheless, how domestic competition authorities determine exceptional circumstances so as to condemn a refusal to license under domestic competition law is a difficult and complex question in the US and the EU, as seen in Section 2.4. This question is even more difficult and more complex in developing countries. In South Africa, under its Competition Act, a dominant firm is not permitted to ‘charge an excessive price to the detriment of consumers’ and ‘refuse to give a competitor access to an essential facility when it is economically feasible to
86
Case No. DE-18-97 and RA-07-98, analysed in OECD (2005), ‘Intellectual Property Rights’, DAF/COMP(2004)24, p. 149. 87 Case No. 14/NOV99, DW Integrators v. SAS Institute, para. 18, available at www.comptrib.co.za/comptrib/comptribdocs/28/14IRNOV99.pdf. 88 Ibid., para. 31.
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do so’.89 An excessive price of a product is defined as a price which ‘bears no reasonable relation to the economic value’ of the product and ‘is higher than the economic value’.90 Regarding the essential facility, it is ‘an infrastructure or resource that cannot reasonably be duplicated, and without access to which competitors cannot reasonably provide goods or services to their customers’.91 Furthermore, a firm may abuse its dominant position when it engages in exclusionary conduct if the anti-competitive effects of that conduct outweigh the technological, efficiency or other pro-competitive gains of the conduct. Exclusionary conduct is defined as conduct ‘that impedes or prevents a firm entering into, or expanding within, a market’.92 Additionally, according to Article 56.2 of the Patent Act of South Africa, a patent holder abuses her patent rights and compulsory licensing may be granted on the grounds of non-working, refusal to license, unsatisfied demand and excessive pricing. These four grounds, each of which may constitute an abuse of patent rights, are incompatible with neither the TRIPS Agreement nor the Paris Convention. But concerns have been raised about how to combine them with related provisions in competition law and how to enforce them in practice. Regarding refusal to deal in general, when adjudicating on this issue in Glaxo Wellcome,93 the Competition Appeal Court of South Africa considered similar case law in the US and the EU as well as the above-mentioned legislation. The court finally held that refusal to deal contravenes the Competition Act if five conditions are all met, namely: (i) the dominant firm refuses to give the complainant access to an essential facility (an infrastructure or a resource); (ii) the complainant and the dominant firm are competitors; (iii) the infrastructure or resource concerned cannot reasonably be duplicated; (iv) the complainant cannot reasonably provide goods or services without access to the infrastructure or resource; and (v) it is economically feasible for the dominant firm to provide its competitors with access to the infrastructure or resource. In substance, this five-condition test derives from the essential facility doctrine elaborated in case law both in the US and the EU and stipulated in Article 8(b) of the Competition Act of South Africa.94 This test is similar to
89 Competition Act of South Africa, Articles 8(a) and 8(b), available at www.comptrib.co.za/docs/Comp%20Amendment%20Act.doc. 90 Ibid., Article 1.1(ix). 91 Ibid., Article 1.1(viii). 92 Ibid., Articles 8(c) and 1.1(x). 93 Case No. 15/CAC/Feb02, Glaxo Wellcome and others v. National Association of Pharmaceutical Wholesalers and Others, para. 57, available at www.comptrib. co.za/list_judgement.asp?jid=521. 94 Ibid., paras 41–56.
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the Bronner test in the EU.95 However, it does not directly emphasize any objective justifications of the refusal to supply an essential facility because such refusal, provided it is economically feasible to supply, is considered per se illegal under Article 8(b).96 Consequently, this test can, at least in theory, be applied to IPRs without concerns relating to the balance between the IPRs of the right holder and the anti-competitive effects of the refusal to license. This is compatible with Article 56.2(d) of the Patent Act.97 The most important issue is to prove that technology protected under IP law is an essential facility for the competition purpose.98 In essence, the protected technology concerned, which is owned by a dominant firm in the relevant market, constitutes an essential facility if: (i) it is a resource that cannot be reasonably duplicated, and (ii) without access to it, competitors cannot compete in the downstream market. However, the Competition Appeal Court also stressed that IPRembodied products do not qualify as essential facilities. In addition to per se illegality of refusal to supply an essential facility under Article 8(b), Article 8(d)(ii) of the Competition Act requires the rule of reason because a dominant firm is not allowed to refuse ‘to supply scarce goods to a competitor when supplying those goods is economically feasible’ unless the firm can justify it by virtue of technological, efficiency or other pro-competitive gains which outweigh the anti-competitive effect of its refusal.99 So one may invoke the IPR-related essential facility doctrine under Article 8(b) of the Competition Act of South Africa to complain against refusal to license by a right holder. If that complaint is successful, compulsory licensing may be granted. However, concluding that IPRs are an essential facility is easily disputable; it may be simpler to invoke an excessive pricing allegation under Article 8(a). This is the substance of Hazel Tau v. GSK & BI and TAC v. BMS. In addition, a dominant firm refusing to license its IPRs, as in TAC v. MSD & Merck, may be alleged to have engaged in exclusionary conduct under
95 96 97
See supra Section 2.4.2.1. Glaxo Wellcome, supra note 93, para. 51. A compulsory licence may be granted ‘by reason of the refusal of the patentee to grant a license or licenses upon reasonable terms, the trade or industry or agriculture of [South Africa] or the trade of any person or class of persons trading in [South Africa], or the establishment of any new trade or industry in [South Africa], is being prejudiced, and it is in the public interest that a license or licenses should be granted’. Article 56.2(d) of the Patent Act of South Africa, supra note 60. 98 One may argue that, from the economic perspective, IP is not only an output, but also an input in the generation of further IP; thus, IP should itself be considered as an essential facility. Antonelli, Cristiano (2006), ‘Technological Knowledge as an Essential Facility’, DIME Working Papers on IPRs, available at www.dimeeu.org/files/active/0/IPR-WORKING-PAPER-3_Antonelli.pdf. 99 Glaxo Wellcome, supra note 93, paras 52.
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Article 8(c) if the anti-competitive effects of the refusal outweigh its technological, efficiency or other pro-competitive gains. 3.2.2.2 Hazel Tau v. GlaxoSmithKline and Boehringer Ingelheim In Hazel Tau v. GSK & BI,100 in September 2002, a group of individuals and organizations led by the Treatment Action Campaign (TAC) initiated a complaint against GlaxoSmithKline (GSK) and Boehringer Ingelheim (BI) with the Competition Commission of South Africa. The complainants alleged that these two pharmaceutical companies, which were dominant firms in the anti-retroviral (ARV) medicines markets for HIV/AIDS in South Africa, engaged in excessive pricing of ARV medicines to the detriment of consumers, which violated Section 8(a) of the Competition Act.101 In order to prove the dominant position of GSK and BI, the complainants argued that the relevant geographic market was the national South African market, because of requirements relating to registration and the authorization needed to sell and use medicines in South Africa together with the regulations of patent protection at the national level.102 For the relevant product market, by using the criteria of substitutability, they contended that the branded ARV medicines of GSK and BI were not substitutable by equivalent generics in South Africa due to patent protection. Additionally, according to standard regimens for HIV/AIDS treatment, each HIV/AIDS patient must take at least three ARV medicines simultaneously and must also be able to change to other ARV medicines, i.e. other regimens, in the case of unmanageable side effects or treatment failure. Consequently, ARV medicines cannot be considered substitutable for each other; each ARV medicine constitutes its own market. This means that GSK and BI were respectively alleged to have a dominant position (100 per cent of market share) in each such ARV medicine market regardless of each company’s market share in a particular therapeutic class of ARV medi100 Regarding Hazel Tau and Others v. GlaxoSmithKline and Boehringer Ingelheim, see Statement of complaint in terms of Section 49B(2)(b) of the Competition Act 89 of 1998, available at www.tac.org.za/Documents/ DrugCompaniesCC/HazelTauAndOthersVGlaxoSmithKlineAndOthersStatement OfComplaint.doc; Settlement Agreements between complainants and GSK and BI, available at www.tac.org.za/newsletter/2003/ns10_12_2003.htm; ALP and TAC (2003), ‘The Price of Life: Hazel Tau and Others vs GlaxoSmithKline and Boehringer Ingelheim: A Report on the Excessive Pricing Complaint to South Africa’s Competition Commission’, available at www.alp.org.za/modules.php?op=modload&name= News&file=article&sid=222; SACC (2003), ‘Competition Commission Finds Pharmaceutical Firms in Contravention of the Competition Act’, Media Release No. 29 of 2003, available at www.compcom.co.za/resources/media2003.asp?level= 1&child=5. 101 Statement of complaint, supra note 100, paras 17–19. 102 Ibid., para. 53.
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cines.103 The complainants tried to persuade the Competition Commission to interpret Article 7 of the Competition Act104 so that the dominance of a patent holder would be established if it were proved that there were no sufficient actual or potential close substitutes for the patent-embodied products. In any event, the complainants also showed that GSK and BI were dominant firms with respect to each therapeutic class. Based on information relating to turnover and units sold, they proved that the market share of GSK or BI in the relevant therapeutic class market was over 45 per cent, the threshold for a dominant position required under Article 7 of the Competition Act.105 As to the excessive pricing allegation, because there is no exception concerning prohibition of excessive pricing by a dominant firm under Article 8(a) of the Competition Act of South Africa, the complainants contended that ‘the existence of patent protection does not justify charging a price that bears no reasonable relation to the economic value’ of the patent-embodied products concerned.106 This was already indirectly accepted by the Competition Commission in its guidance relating to the approach determining excessive pricing for a competition analysis. The Competition Commission states: It may be necessary to take a pragmatic approach to the analysis of excessive pricing. Such an approach may be as follows: in order to establish economic value, a cost-based approach should be followed, taking the manufacturing costs of the particular product into account, with an industry norm profit margin added. It may also be necessary to add premiums for special circumstance, i.e. risk, cost of innovation or intellectual property, etc.107
Using the cost-based (cost-plus) approach, the complainants showed that the ARV medicine prices charged by both GSK and BI in South Africa were grossly disproportionate to the economic value of ARV medicines, which were calculated by adding production costs, R&D costs and/or licensing fees (where
103 104
Ibid., paras 54–56. Article 7 of the Competition Act of South Africa reads ‘a firm is dominant in a market if: (a) it has at least 45% of that market; (b) it has at least 35%, but less than 45%, of that market unless it can show it does not have market power; or (c) it has less than 35% of that market but has a market power’. Market power is defined under Article 1(1)(xiv) as ‘the power of a firm to control price, or to exclude competition or to behave to an appreciable extent independently of its competitors, customers or suppliers’. 105 Statement of complaint, supra note 100, para. 57. 106 Ibid., para. 59. 107 SACC (2001), ‘Excessive Pricing, Fairness and Economic Value’, Competition News, p. 7, available at www.compcom.co.za/resources/SeptNews.pdf (emphasis added).
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applicable), and an appropriate return.108 In particular, the prices of ARV medicines charged by GSK and BI to the private sector in South Africa were around 1.72 to 4.01 times higher than the economic value of these products. Moreover, the complainants also showed that the prices charged to the private sector were higher than the international best prices offered for equivalent branded products.109 Accordingly, the complainants blamed excessive pricing of GSK and BI and their refusal to license for ‘premature, predictable, and avoidable loss of life’.110 The complainants did not mention a demand-side approach, i.e. the relevant value of products to consumers, in order to determine the economic value and excessive pricing. But the facts in this case supported the complainants. Access to pharmaceutical products in general and ARV medicines in particular remains a challenge faced by HIV/AIDS patients in developing countries, including South Africa, due to the high prices charged by pharmaceutical companies.111 The Constitutional Court of South Africa affirmed that the Constitution of South Africa requires the government to ‘devise and implement within its available resources a comprehensive and co-ordinated programme to realize progressively’ the rights to have access to health services to combat HIV/AIDS.112 At the international level, as noted, the WTO also made a Declaration on the TRIPS Agreement and Public Health in 2001 to reaffirm the rights of WTO Members to use the flexibilities of the TRIPS Agreement to the full in order to promote access to medicines.113 Although the complainants could have made claims relating to refusal to supply essential facilities (through the refusal to license patents) under Article 8(b), or even an exclusionary act under Article 8(c) of the Competition Act, the single focus on excessive pricing was a good choice:
108 The complainants used the price charged by generic manufacturers as the production cost. For the R&D cost, they used the ratio R&D cost per total sales in financial reports of GSK and BI. Regarding profit, they used the average return on revenues in the pharmaceutical industry (16.2%). See Statement of complaint, supra note 100, paras 64–78. 109 Ibid., pp. 13, 15 and 26–27. 110 Ibid., para. 107. 111 SACC (2007), ‘Compulsory Licensing of Intellectual Property Rights in Pharmaceutical Products: What Grounds for Competition Law’, Competition News, p. 4, available at www.compcom.co.za/resources/publications_newsletters.asp? level=2&child=1. 112 Case CCT 8/02, Minister of Health v. TAC, para. 135, available at www.tac.org.za/Documents/MTCTCourtCase/ConCourtJudgmentOrderingMTCTP5July2002.pdf. 113 Doha Declaration on the TRIPS Agreement and Public Health, WT/MIN(01)/ DEC/2.
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[It was not simple] to avoid addressing difficult (and potentially complicating) legal issues, such as whether intellectual property constitutes an essential facility or a refusal to license – in certain circumstances – falls within the concept of an exclusionary act. Rather, the complainants believed that the manner in which they framed their case was most likely to get the respondent drug companies to take the matter seriously, because answering an excessive pricing claim would very likely result in the forced public disclosure of costing models. This, the complainants believed, was something that GSK and BI would seek to avoid at all costs. Further, it was the one ground – if properly approached – that was most likely to elicit broad public support, because it could avoid challenging the patent system head-on whilst still focusing on the abuse of exclusive rights in patents with which any person who has ever needed medical care could identify.114
Consequently, a competition case provided the basis for a larger public campaign attracting the attention of both local and international publicity. The Competition Commission of South Africa, after conducting the investigation, agreed with the complainants’ arguments. It even went further by concluding that GSK and BI had both abused their dominance and contravened not only Section 8(a) of the Competition Act, due to the excessive pricing complained of, but also Section 8(b), relating to refusal to supply an essential facility, and Section 8(c), regarding exclusionary acts. The Competition Commission, particularly, argued that first of all, although the competitive supply of the drugs was feasible, GSK’s and BI’s patented products were being sold in South Africa at prices which were unaffordable by almost all South Africans living with HIV/AIDS. The prices were five to fifteen times higher than those of generic equivalents. This conduct was illegal excessive pricing. Secondly, although it was economically feasible, GSK and BI had refused competitors access to their patents that were non-duplicable resources and which were necessary to enable the competitors to provide the drugs. This constituted a refusal to grant access to an essential facility. Finally, GSK and BI had impeded generic suppliers from entering the South African markets for ARV medicines by refusing to grant licences to them at reasonable royalty rates where there were no legitimate business reasons for such refusal, and where the anti-competitive effects of the refusal significantly outweighed any technological, efficiency or other pro-competitive gains from the refusal. This practice was an illegal exclusionary act.115 Faced with the three alleged violations, GSK and BI still refused to admit them but requested negotiations to settle the case. Finally, the Competition 114 Aavfia, Tenu et al. (2006), ‘The Ability of Select Sub-Saharan African Countries to Utilise TRIPS Flexibilities and Competition Law to Ensure a Sustainable Supply of Essential Medicines: A Study of Producing and Importing Countries’, pp. 29–30, available at www.iprsonline.org/resources/competition.htm (emphasis added). 115 SACC, supra note 100.
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Commission, GSK and BI and the complainants entered into agreements in December 2003. Under these agreements, GSK and BI agreed to grant voluntary licences of their ARV medicines-related patents to generic manufacturers. Those voluntary licences would permit both the manufacturing of patented ARV medicines in South Africa and their importation. Additionally, the agreements also allowed for the export of patented ARV medicines manufactured in South Africa to the sub-Saharan African countries. All of this is, from the competition law perspective, compatible with Article 31(k) of the TRIPS Agreement. In return for the obligations undertaken by GSK and BI, the complainants agreed to withdraw their complaint, and the Competition Commission agreed not to refer the case to the Competition Tribunal.116 3.2.2.3 TAC v. Bristol-Myers Squibb After its success in Hazel Tau v. GSK & BI, the TAC, the leading complainant in this case, threatened to bring an excessive pricing complaint against BristolMyers Squibb (BMS) in TAC v. BMS117 in 2005. The TAC, through correspondence with BMS, contended that the anti-fungal medicine Amphotericin B (AmB),118 which was marketed as Fungizone in South Africa by BMS, was being sold at an excessive price in comparison with prices of equivalent products taken from Brazil, the US and the United Kingdom. Moreover, although the medicine in question, unlike the ARV medicines in Hazel Tau v. GSK & BI, was no longer under patent protection in South Africa, BMS still enjoyed de facto monopoly for its Amphotericin B because generic products were not still available for sale in South Africa due to hurdles created by legal regulations. The case was quickly settled by the two parties after some ten weeks of communication. BMS finally agreed to a price reduction of more than 80 per cent. It appears that BMS acted sensibly in the face of Hazel Tau v. GSK & BI. Since its product was already off-patent, it could not invoke the ‘incentives to innovate’ argument to justify its high price setting. Additionally, its excessive pricing in South Africa was very clear by comparison with the prices of equivalent products, not only in an equivalent developing country but even in developed countries.
116 See Settlement Agreements between the complainants and GSK and BI, supra note 100. 117 Regarding TAC v. Bristol-Myers Squibb see the correspondence between the AIDS Law Project (ALP) and Bristol-Myers Squibb, available at www.tac.org.za/Documents/AmphotericinB/bms.htm. 118 According to the first letter of TAC to BMS on 16 February 2005, ibid., ‘AmB is the antifungal agent of choice to treat cryptococcal meningitis, a common cause of death amongst people living with HIV/AIDS in Africa having a mortality rate of between 25 and 40 per cent’.
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3.2.2.4 TAC v. MSD & Merck Knowing that competition law can be used to threaten pharmaceutical companies in order to gain access to essential pharmaceutical patents, the TAC filed a competition complaint against Merck, a multinational pharmaceutical company with headquarters in the US, and its South African subsidiary, MSD, with the Competition Commission of South Africa at the end of 2007.119 The TAC alleged that Merck and MSD had abused their dominant position in the market for the anti-AIDS medicine Efavirenz (EFV), an ARV medicine which is branded as STOCRIN, by refusing to license generic producers to manufacture and/or import and sell not only (i) the generic version of this medicine but also (ii) co-formulated and/or co-packaged generic products containing EFV and at least one other ARV medicine on reasonable and non-discriminatory terms in the South African market. The TAC, as in the two cases discussed above, invoked national competition law to attack the refusal to license. However, instead of focusing on excessive pricing as the consequence of refusal to license, as the TAC had done in the two previous cases, the TAC regarded the two types of refusal to license by Merck and MSD as exclusionary conduct under competition law. The TAC contended: In refusing to license on reasonable and non-discriminatory terms, the respondents have … threatened access to comprehensive treatment for HIV/AIDS in both public and private sectors, and in so doing have engaged in exclusionary acts where the anti-competitive effects of those acts outweigh their technological, efficiency or other pro-competitive gains, as prohibited by Section 8(c) of the Competition Act …120
In order to prove an infringement under Section 8(c) of the South African Competition Act, the complaint has to prove two conditions: first, the alleged infringer has a dominant position; and second, the alleged infringer’s conduct (i) is exclusionary conduct, (ii) has anti-competitive effects, and (iii) the anticompetitive effects outweigh any pro-competitive justifications for the conduct in question.121 Regarding the dominant position, the TAC applied the same arguments in Hazel Tau v. GSK & BI to prove the dominance of Merck and MSD as the 119 Regarding TAC v. MSD & Merck, see the TAC complaints to the South African Competition Commission about the anti-competitive conduct of the world’s largest pharmaceutical company (TAC Legal Submissions and TAC Statement of Complaint), available at www.tac.org.za/community/node/2127; Updated Fact Sheet: TAC v. MSD and Merck – complaint to the Competition Commission Regarding Access to Efavirenz, available at www.tac.org.za/community/files/UpdatedFactSheet TACvMSD-20080530.pdf. 120 TAC Legal Submissions, supra note 119, para. 2. 121 Articles 8(c), 7, and 1(1)(x) of the Competition Act of South Africa.
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patent holder of EFV in South Africa.122 The TAC contended that because ARV medicines are generally not substitutable for each other, EFV constitutes its own market in respect of manufacturers, marketers and consumers. In the alternative, the market share of MSD with respect to the relevant therapeutic class (non-nucleoside reverse transcriptase inhibitors: NNRTIs) in South Africa accounted for over 45 per cent in terms of both turnover and units sold.123 The second condition involves three sub-conditions, as noted. For the exclusionary nature of the refusal to license, the TAC argued that due to the refusal no firm (except Aspen and Adcock, two licensees of Merck and MSD) could import into, manufacture, use, offer to dispose of and/or dispose of in South Africa generic EFV products; and no firm (including Aspen and Adcock) could import into, manufacture, use, offer to dispose of and/or dispose of in South Africa co-formulated and/or co-packaged generic products containing EFV and at least one other ARV medicine.124 Therefore, the refusal of Merck and MSD impedes and prevents a generic producer from entering the generic EFV market and the co-formulated and/or co-packaged product market (or the fixed dose combination ARV medicine market) in South Africa. This argument satisfied Article 1.1(x) of the Competition Act, and the refusal to license was to be regarded as exclusionary conduct. For the second sub-condition, according to case law in South Africa anticompetitive effects are evaluated under a two-step test: (i) ‘evidence of actual harm to customer welfare’ and (ii) substantial or significant impact of the exclusionary conduct in terms of market foreclosure effects of the conduct on competitors.125 The TAC argued that Merck’s refusal to license additional generic producers unreasonably harmed consumer welfare and prevented new products for which there was a potential customer demand from entering the market. With respect to prices, Merck sold patented EFV-containing products
122 The South African Patent No. 93/5724 owned by Merck, which will expire in normal course on 6 Aug. 2013, also covers pharmaceutical compositions containing EFV; its use in the treatment of HIV/AIDS; its use in combination with the ARV medicines zidovudine (‘AZT’), didanosine (‘ddI’) and zalcitabine (‘ddC’); and a process for synthesizing EFV. See TAC Statement of Complaint, supra note 119, paras 7–8. 123 TAC Legal Submissions, supra note 119, paras 10–16. 124 TAC Statement of Complaint, supra note 119, para. 12. With the single exception of MSD’s three-in-one fixed dose combination (TDF/FTC/EFV combination: ATRIPLA), none of the co-packaged and/or co-formulated products would have been able to be placed on the South African market at the time of complaint. Updated Fact Sheet, supra note 119, p. 6. 125 Case 18/CR/Mar01, Competition Commission v. South African Airways (Pty) Ltd, para. 132, available at www.comptrib.co.za/comptrib/comptribdocs/110/ 18CRMar01final.pdf.
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in South Africa at its best international prices. However, the best prices of generic EFV-contained products outside South Africa were much lower than Merck’s prices.126 Furthermore, the TAC noted that generic companies ‘have been able to reduce their prices without having access to significant economies of scale’, which could in any event be gained if these companies could access the South African market, a substantial and increasingly expanding one. In other words, sufficient competition among generic companies by access to Merck’s EFV patent ‘would likely result in further price reductions’.127 Meanwhile, Aspen, one of Merck’s two licensees in South Africa, did not appear to be able and willing to undercut’s Merck’s best prices. And Adcock, Merck’s second licensee, seemed not to do so in practice.128 The TAC contended that consumers in South Africa suffered unreasonable harm not only in terms of prices but also in terms of access to new products. The complaint stated that the refusal to license blocked new products from entering the South African market: There appears to be no scientific reason why EFV could not be combined in a single pill with other ARV medicines that are also taken once daily and ordinarily form part of treatment regimens containing EFV. If this were done, [fixed dose combinations (FDCs)] such as FTC/EFV, 3TC/EFV, ddI/FTC/EFV and ddI/3TC/EFV could theoretically reach the market … the respondents’ refusal to license any generic company to import and/or manufacture [fixed dose combinations] containing EFV and at least one other ARV medicine is an absolute bar to products such as TDF/3TC/EFV reaching the South African market.129
Finally, the TAC observed that consumer welfare was harmed by shortages in supply of EFV as well as other ARV medicines, at least in South Africa and Botswana.130 It contended: By refusing to license further existing companies in South Africa, and by refusing to permit Aspen and Adcock to bring co-formulated and/or co-packaged generic products containing EFV and at least one other ARV medicine to market, the respondents have – without good cause – collectively threatened access to comprehensive treatment for HIV/AIDS in both public and private sectors by (a) preventing the market entry in South Africa of significantly cheaper generic EFV products; (b) preventing the market entry in South Africa of a range of co-formulated and/or co-packaged products containing EFV; and (c) placing the sustainability of supply of EFV products in South Africa under threat.131
126 127 128 129 130 131
TAC Statement of Complaint, supra note 119, paras 39–44. Ibid., paras 45–47. Ibid., paras 48–50. Ibid., para. 59. Ibid., paras 67–74. Ibid., para. 16.
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This meant that Merck’s refusal to license was anti-competitive. The next step should be weighing the anti-competitive effects and the pro-competitive justifications for the refusal. The TAC analysed case law in the US and the EU, especially the doctrine of refusal to supply in Magill, IMS Health and Microsoft v. Commission in the EU, and argued that ‘it is not enough for an exclusive right holder to justify exclusionary conduct solely on the basis of’ IP protection. Furthermore, the TAC also mentioned the fundamental issues relating to the rights to property, life, dignity and access to medicines in the context of the Constitution of South Africa and international law. Based on all of the reasoning, the TAC contended that Merck’s refusal to license violated Section 8(c) of the Competition Act. During the investigation by the Competition Commission of South Africa, Merck/MSD did: (i) license four generic drug companies, two local producers and two locally based importers, to bring stand-alone patented EFV products to the South African market; (ii) agree that all four licensees were entitled to bring co-packaged products containing EFV to the market; (iii) agree that all four licensees would not unreasonably be refused consent to bring co-formulated products containing EFV to the market; (iv) agree that all licensed products could be sold to both public and private sectors in South Africa and ten other southern African countries; and (v) waive any right to royalties. These Merck/MSD responses met the main demand of TAC’s complaint. So, on 30 May 2008, the TAC announced that Merck/MSD was no longer acting in an anti-competitive way; and the Competition Commission did not refer the complaint to the Competition Tribunal for adjudication.132 3.2.2.5 Remarks Hazel Tau v. GSK & BI, TAC v. BMS and TAC v. MSD & Merck show that competition law can be used to achieve a significant effect: reducing the prices of IPR-embodied products and/or gaining access to technology by compulsory or voluntary licences. However, these three cases, particularly Hazel Tau v. GSK & BI, where there was also active intervention from the South African competition authority, give rise to concerns relating to the relationship between competition law and IP law in a developing country. Effects of IPR-related competition law application The application of domestic competition law in a developing country may threaten the existence of IPRs and reduce innovation. The country may no longer attract investment in R&D or foreign investment (and even be subject to a WTO dispute). However, it should be recalled that the TRIPS Agreement, as well as the Paris
132
Updated Fact Sheet, supra note 119, p. 1.
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Convention incorporated in it, confirm that although right holders are granted a legal monopoly they should not abuse their IPRs. Such an abuse can take various forms, not limited to the failure to work, as the Supreme Court of the Philippines ruled.133 A developing country has a right to invoke this flexibility and stipulate it in domestic competition law and/or IP law in order to protect domestic consumer benefits. Regarding innovation and investment in R&D, technologies protected under domestic IP law in a developing country have mostly been invented in developed countries.134 In general, firms expect to make most of their potential profits in the markets of developed countries when making their decisions about R&D relating to these technologies. The pharmaceutical sector, an area requiring very large investments, costs and risks, may well illustrate this observation. According to a WHO report, the world sales of pharmaceutical products are very highly directed towards developed country markets. North America, Europe and Japan account for 85.6 per cent of global sales. Meanwhile, developing countries, accounting for more than 80 per cent of the world’s population, are responsible for only about 10 per cent of global sales; and Africa only 1.1 per cent.135 Frederick Abbott and Jerome Reichman, after carefully addressing the need to preserve incentives for R&D of new medicines, concluded: At the present time, originator pharmaceutical companies based in the OECD recover the great part of their R&D expenditures in the more affluent OECD markets, and invest a small part of their R&D budgets on diseases of special relevance to developing countries. Consequently, the use by developing countries of compulsory licensing to ensure public access to affordable medicines is unlikely to have a material effect on the level of research currently undertaken in the OECD.136
133 134
Smith Kline & French Laboratories, supra note 59. The total numbers of patent applications and of patent grants around the world in 2007 were around 1.85 million and 0.76 million respectively, of which patent applicants, or patent owners, from Japan, the US and the EU accounted for around 70%. Although there has been an increase in patent filings in developing countries, non-resident applicants accounted for the largest share of total filings in these countries. Moreover, out of around 110 billion US dollars of receipts for international licensing in 2004, the receipts going to the US, the EU and Japan accounted for more than 90%. See WIPO (2009), World Intellectual Property Indicators, Geneva: WIPO, pp. 8 and 88–94; Onodera, Osamu (2008), ‘Trade and Innovation Project: A Synthesis Paper’, OECD Trade Policy Working Paper No. 72, TAD/TC/WP(2008)6/PART1/ FINAL, p. 19. 135 WHO (2006), Public Health, Innovation, and Intellectual Property, Geneva: WHO, p. 15. 136 Abbott, Frederick and J.H. Reichman (2007), ‘Access to Essential Medicines: Lessons Learned since the Doha Declaration on the TRIPS Agreement and Public Health, and Policy Options for the European Union’, Report to the Director General for External Policies of the EU, pp. v and 42, available at www.law.duke.edu/news/pdf/ a-r_directorate_report.pdf (emphasis added).
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Therefore, reducing innovators’ monopoly rents in a developing country market, normally a small one, by way of competition law, may not have such a large cost in lost innovation as it would if the rents being reduced were those in a developed country market. Furthermore, the information disclosure function of an IP system is not very important in developing countries. Domestic firms in developing countries, in theory, may obtain information from the patent disclosures protected in developed countries. It is true from the economic perspective if one argues: [P]atenting in a small market is necessary in order for the inventor to appropriate rents from the small market. Since the information is available elsewhere, if the inventor does not obtain a patent, someone else could do so and exclude the inventor from the market. If no one obtains a patent, rents will be dissipated because the technology would be used freely by many. Thus restricting the market power of patent protection [by competition law] in small technology importing countries will lead to static gain, while the dynamic loss from discouraging innovation or less information disclosure would be close to zero.137
Additionally, in the 2008 hearing on the international enforcement of IPRs organized by the US Senate Committee on Finance, John Barton, in contrast to the call from representatives of IPR-related industries for stronger IPRs in the US and other countries all over the world, presented a link between international policies on IPRs and the global allocation of R&D costs. He observed that it is reasonable that the poor countries ‘should not have to pay as large a share of those research costs’ as the wealthy countries.138 In its complaint against Merck’s refusal to license in TAC v. MSD & Merck, the TAC also argued: In countries with comparative advantages based on the ability to conduct pharmaceutical R&D and bring innovative products to markets that are able to bear the cost of expensive new medicines, the balance between competition and IP law must necessarily guard against undermining any incentives to innovate. [However, in] countries such as South Africa, which ordinarily account for an insignificant fraction of total worldwide profits in respect of [innovative] pharmaceutical products, no such concern arises.139
137
Aoki, Reiko and J. Small (2004), ‘Compulsory Licensing of Technology and the Essential Facilities Doctrine’, Info. Econo. & Pol’y, 16(1), 19 (emphasis added). 138 John H. Barton’s Statement to the United States Senate Finance Committee Hearing on International Enforcement of Intellectual Property Rights and American Competitiveness, 15 July 2008, available at http://finance.senate.gov/sitepages/hearing071508.htm. 139 TAC Legal Submission, supra note 119, para. 44
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Case law in developed countries, as presented in Chapter 2, generally demonstrates that domestic competition can intervene where consumer harms, which are derived from the anti-competitive exercise of IPRs, exceed economic incentives for innovation. It is, consequently, unreasonable and unfair from either a legal or an economic perspective if developing countries cannot appropriately apply their competition law to remedy anti-competitive practices relating to refusal to license, or derivative conduct of refusal to license, while developed countries can do so. However, due to the complexity and difficulty of proving abuses of a dominant position by right holders, competition law should not be used alone where other flexibilities permitted under the TRIPS Agreement and national IP law, such as public health and public security grounds, can be used. The application of competition law to IPR abuses in developing countries, as in developed countries, should be the last resort to be used to protect consumer welfare, competition and innovation. For all that, in these cases, the adverse effects on foreign investment (if any) seem to be very small. Dominant position of a right holder Although it should not be presumed that IPRs create (or even increase) market power, the way in which the complainants and the Competition Commission of South Africa defined the relevant product market in Hazel Tau v. GSK & BI and TAC v. MSD & Merck may pose a threat to right holders. It seemed to be argued that the mere holding of a patent confers a monopoly on the patent holder in the patented product market. However, this concern is unsubstantiated. The Competition Commission of South Africa and/or the complainants in these two cases followed the view that each active ingredient formed a market on its own on the basis of the lack of substitutability between the various ARV active ingredients, rather than on the fact that each active ingredient was the subject of a patent.140 Similarly, the US Supreme Court in Eastman Kodak141 also held that a single brand of a product or service can be a relevant product market on the basis of lack of interchangeability available to consumers. It is correct for competition authorities to use the principle that a product market definition 140 See SACC (2004), ‘GSK and BI Issue Anti-retroviral Licences’, Competition News, p. 2, available at www.compcom.co.za/resources/CompCom%20News%20 March%20.ps1.pdf. 141 Eastman Kodak Co. v. Image Technical Services, Inc., 504 U.S. 451, 481–482 (1992). The US Supreme Court held that ‘because service and parts for Kodak equipment are not interchangeable with other manufacturers’ service and parts, the relevant market from the Kodak equipment owner’s perspective is composed of only those companies that service Kodak machines’ and ‘one brand of a product can constitute a separate market’. The proper market definition ‘can be determined only after a factual inquiry into the “commercial realities” faced by consumers.’
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depends on the substitutability (or interchangeability) of the relevant product with other comparable products from the consumer perspective regardless of whether or not a product is subject to IP protection.142 IPR-related excessive pricing and refusal to license under competition law Many developing countries, even the EU, stipulate in their domestic competition law and/or IP law that the excessive pricing of IPR-embodied products, which is detrimental to consumers, is an IPR abuse. But there is still controversy over the criteria determining this anti-competitive conduct. TAC v. BMS shows that if one can prove that the price of IPR-embodied products in the domestic market of a developing country is unreasonably higher than the price of a like product protected under IP law in a developed country or in another developing country that has economic conditions similar to the former developing country, it is clear that the right holder is engaging in excessive pricing in the first developing country market. In this case, in addition to permitting parallel import which, according to Article 6 of the TRIPS Agreement, is up to domestic legislation, competition authorities can (in combination with IPR authorities) require the right holder to reduce the price or grant compulsory licences. If the unreasonable difference in prices between these two countries is not proved, the competition authorities can combine both a cost-based and a demand-side approach in order to determine the economic value, and then compare it with the market price. In any event, the costs of innovation should be fully taken into account. The country–country comparison approach and the combination of both cost-based and demand-side approaches are similar to two out of the three alternatives determining dumping under Article VI of the GATT Agreement, namely the comparable price for the like product for export to any third country and the cost of production plus reasonable addition for selling cost and profit.143 Consequently, developing country Members may mutatis mutandis apply Article VI of the GATT Agreement and the Agreement
142
See also European Commission Notice on the definition of the relevant market for the purposes of Community competition law, OJ 1997 C 372/5. 143 Article VI.1 of the GATT Agreement reads ‘a product is to be considered as being introduced into the commerce of an importing country at less than its normal value, if the price of the product exported from one country to another (a) is less than the comparable price, in the ordinary course of trade, for the like product when destined for consumption in the exporting country, or, (b) in the absence of such domestic price, is less than either (i) the highest comparable price for the like product for export to any third country in the ordinary course of trade, or (ii) the cost of production of the product in the country of origin plus a reasonable addition for selling cost and profit’. See also the Agreement on Implementation of Article VI of the GATT 1994; Van den Bossche, Peter (2008), The Law and Policy of the World Trade Organization: Text, Cases and Materials, Cambridge: Cambridge University Press, pp. 515–526.
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on the Implementation of Article VI of the GATT Agreement to excessive pricing of IPR-embodied products that causes harm to consumers under their domestic competition law. It is worth noting that the excessive pricing in question is exploitative conduct that abuses a dominant position. It thus violates competition law. In contrast, mere high pricing violates neither competition law nor IP law. For example, in response to the request of the petitioners for a grant of a compulsory licence on the ground of public interests due to the high price of Glivec (a patented drug for treating leukaemia) in South Korea, the Commissioner of the Korean Intellectual Property Office held: If … a compulsory non-exclusive license is granted for [the patented drug] merely due to its high price, the basic purport of the patent system, which is to grant an exclusive right and interest to an inventor, thereby inspiring the public with inventive mind and striving for the development of technology and industry, will then become meaningless.144
The request was rejected because a compulsory licence due to high price was not considered to be necessary for the public interests as prescribed in the Korean Patent Act. However, if such high pricing by a dominant firm is determined to be unreasonable, it may indeed violate Korean competition law (Article 3-2(1)1 of the MRFTA). The grant of IPRs under domestic IP law gives the right holder the opportunity to ‘tax the economy’ so as to maximize her profits. But profit maximizing by the right holder should not go as far as ‘private avarice’145 if she really holds a dominant position in the relevant market. It should be reasonably related to the goals of public policy in the context of balancing social costs and innovations. In an economics-oriented analysis relating to the Hazel Tau v. GSK & BI case,146 Sean Flynn and others concluded that the Competition Commission of South Africa ‘correctly weighed the benefits and costs of monopoly pricing’ carried out by the two pharmaceutical companies in question. Regarding the refusal to license, it seems that the TAC in TAC v. MSD & Merck, basing itself on the case law of the EU, reasonably attacked the refusal to license as anti-competitive conduct under the Competition Act of South
144 Decision of the Commissioner of Korean Intellectual Property Office on the Request for Adjudication for the Grant of a Non-exclusive License, available at http://glivec.jinbo.net/Decision_CL_Glivec.htm. 145 Carstensen, Peter (2006), ‘Post-Sale Restraints via Patent Licensing: A “Seedcentric” Perspective’, Fordham IP Media & Ent. L. J., 16, 1079. 146 Flynn, Sean et al. (2008), ‘An Economic Justification for Open Access to Essential Medicine Patents in Developing Countries’, p. 25, available at www.wcl. american.edu/pijip_static/documents/flynn05222008.pdf?rd=1.
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Africa. The ‘new product’ requirement was appropriately exploited to prove the elimination of competition in the downstream market, which harms consumer welfare. It is neither fair nor logical to raise complaints against a developing country which appropriately applies the experience of competition law enforcement in a developed country in similar circumstances. Application of competition law under pressure of publicity One may think that the finding of the Competition Commission of South Africa in Hazel Tau v. GSK & BI was just a visceral reaction to the case in question and may provide insufficient guidance for later cases. Additionally, the success in the three South African cases has been regarded as mainly due to the pressure of publicity concerning a major social (public health) problem. To put it differently, it ‘was largely based on sentiment and not on sound legal and economic principles’.147 Assuming that such a finding was reasonable under competition law, its implication may be limited to essential medicines-related patents. It could not be generally applied to other technology protected under IP law. However, as analysed above, the Competition Commission’s finding and the main arguments of the complainants in the cases are quite reasonable under the competition law of South Africa. It was also all compatible with the flexibilities allowed under the TRIPS Agreement. The primary purpose of competition law is to protect consumer welfare. Even if the cases were supported by publicity relating to access to essential medicines, this does not close the door to other kinds of technology. In general, if prices of IPR-embodied products are exorbitant and harm consumer welfare, or if refusal to license without any objective justification eliminates competition in the downstream market and prevents the appearance of new products having a potential customer demand, the TRIPS Agreement does not prevent domestic competition law and domestic competition authorities from prohibiting such anti-competitive conduct. Nevertheless, competition law should be used as a last resort or in combination with other exceptions and/or limitations of IPRs in IP law. Remedies against anti-competitive excessive pricing and refusal to license Even if excessive pricing and refusal to license are found to be in breach of the competition law of a developing country, it may be difficult to find an effective way to correct these anti-competitive practices if local firms do not have the capacity to use the technology which may be compulsorily licensed. In this situation, in addition to fines and administrative sanctions and/or cooperation with the right holder, the second-best remedy is to allow importation of technology-embodied products from a third country that has also granted compul-
147
SACC, supra note 140, p. 2.
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sory licences of the technology in question due to the anti-competitive practices of the technology holder in that third country (if any). This remedy is feasible and compatible with the TRIPS Agreement because local firms in the third country under Article 31(k) of the TRIPS Agreement are not obliged to supply technology-embodied products predominantly for their domestic market. Another solution can be derived from the proposed Article 31bis of the TRIPS Agreement148 and EU Regulation No. 816/2006 on compulsory licensing of patents relating to manufacturing of pharmaceutical products for export to countries with public health problems.149 Developed countries should be able to regulate and grant compulsory licences permitting manufacture of IPRembodied products in those countries for export to developing countries with insufficient or no manufacturing capacity where IPR-related anti-competitive conduct of the right holders has been condemned under these developing countries’ competition law. Simply put, the proposed Article 31bis of the TRIPS Agreement should be extended to all anti-competitive cases rather than limited to public health cases. However, in order to implement this solution, another amendment of the TRIPS Agreement, like the proposed Article 31bis, would need to be negotiated among WTO Members. Briefly, the three IPR-related competition cases in South Africa clearly demonstrate that developing country Members can properly use domestic competition law to promote access to technology. 3.2.3
Abbott’s Withdrawal of Drug Registration Application
Thailand has recently taken advantage of the public health-related flexibilities of Article 31 of the TRIPS Agreement to authorize compulsory licences for pharmaceutical patents in order to increase access to medicines.150 In January 2007, Thailand granted compulsory licensing on the ground of public use for a patented ARV medicine, which is a combination of Lopinavir and Ritonavir, owned and sold by Abbott Laboratories under the trade name Kaletra. In response to Thai compulsory licensing, Abbott, in March 2007, withdrew registration of seven different medicines, including Aluvia, which is a new
148 149 150
Article 31bis of the TRIPS Agreement (amended), WT/L/641. OJ 2006 L 157/1. See Thai Ministry of Public Health and National Health Security Office (2007), ‘Facts and Evidence on the 10 Burning Issues Related to the Government Use of Patents on Three Patented Essential Drugs in Thailand’, available at www.moph.go.th/hot/White%20Paper%20CL-EN.pdf; Thai Ministry of Public Health and National Health Security Office (2008), ‘The 10 Burning Questions on the Government Use of Patents on the Four Anti-cancer Drugs in Thailand’, available at www.moph.go.th/hot/White%20paper%20CL%20II%20FEB%2008-ENG.pdf.
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heat-stabilized version of Kaletra, from the Food and Drug Administration of Thailand. Abbott announced that it would refuse to market Aluvia as well as other medicines in Thailand. In April 2007, Thai HIV/AIDS treatment activists made a complaint to the Competition Commission of Thailand, alleging that Abbott’s withdrawal of registration applications for several medicines, especially Aluvia, in Thailand was a violation of the Competition Act of Thailand, in particular Sections 25(3) and 28. However, in December 2007, the Competition Commission concluded that Abbott’s withdrawal of drug registration applications did not violate the Competition Act.151 3.2.3.1 Section 25(3) complaint Under Section 25(3) of the Competition Act of Thailand, a firm having a dominant position (or market domination) is prohibited from ‘suspending, reducing or restricting services, production, purchase, distribution, deliveries or importation without justifiable reasons, destroying or causing damage to goods in order to reduce the quantity to that lower than the market demand’. There is an infringement of Section 25(3) if three requirements are all met: (i) a dominant position, (ii) refusal to supply, and (iii) no objective justification. The conduct of Abbott’s withdrawal of registration application seems to constitute refusal to supply. It is worth noting that Abbott stopped the registration of Aluvia, an improvement on the existing product named Kaletra which Abbott had already marketed in Thailand. Aluvia, in comparison with Kaletra, had high potential consumer demand, since this new version did not require refrigeration, which many poor people in a tropical country like Thailand may lack.152 Regarding the dominant position, one may apply the substitutability test and arguments in the South African competition cases relating to patented ARV medicines which are analysed in Section 3.2.2 to confirm that for most anti-AIDS ARV medicines, and for Kaletra in particular, other ARV medicines in the same therapeutic class are not effective substitutes. This means that Kaletra, and its new version Aluvia, for instance, constitute a single branded relevant market under competition law. Furthermore, one may argue: [Kaletra], particularly in its heat-stable form [Aluvia], has added properties [which] make substitution more difficult. [It] is the only brand name protease inhibitor that includes the essential booster ritonavir in a fixed dose combination (i.e. single pill). 151 Decision of the Competition Commission of Thailand on the complaint against Abbott, available at www.wcl.american.edu/pijip_static/documents/competitioncommission12072007.doc?rd=1. 152 Flynn, Sean (2007), ‘Thailand’s Lawful Compulsory Licensing and Abbott’s Anticompetitive Response’, p. 11, available at www.wcl.american.edu/pijip_static/ documents/Thailandreport426.2_001.pdf?rd=1.
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The fixed dose application is often the best option for developing countries and people with low pill tolerance. It thus likely has over 50% market share among protease inhibitors sold in Thailand. In addition it is the only branded ritonavir boosted protease inhibitor that, in its new form, does not require refrigeration – a key advantage in a resource poor tropical country. These properties give [Kaletra/Aluvia] added market power and justify treating it as a single market for the purposes of determining dominance.153
Regarding the objective justification, the complainants and their supporters argued that Abbott’s withdrawal of the Aluvia registration application was retaliation for the compulsory licensing granted by the Thai government. This compulsory licensing is legitimate under Thai patent law and Article 31 of the TRIPS Agreement.154 Abbott could have appealed the compulsory licensing decision and the royalty determined in the decision if it had found either to be unreasonable. The withdrawal of the Aluvia registration application should not be regarded as justifiable. UCB,155 a case settled by the Competition Commission of Thailand in 2000, supports the complaint in question. The Competition Commission in that case found that UCB, a monopolist in the national cable television market after a legally approved merger, had refused to supply a low cost package to new customers. This conduct was regarded as potentially unlawful under Section 25(3). Similarly, Abbott was refusing to offer the new version of Kaletra, a product having a high potential demand among poorer consumers. However, there was no specific definition of a dominant position (market domination) in the Competition Act or in secondary legislation until February 2007. The Competition Commission did not decide that UCB had violated the Competition Act, and no sanction could be applied.156 In contrast, in the Abbott case, the Competition Commission applied its notifications,157 which state that a firm has a dominant position only if it has a market share in the
153 154
Ibid., pp. 13–14. See Thai Ministry of Public Health and National Health Security Office, supra note 150; WHO Mission (2008), ‘Improving Access to Medicines in Thailand: The Use of TRIPS Flexibilities’, available at www.moph.go.th/hot/ THAIMissionReport%20FINAL15feb08.pdf. 155 See the summary of the UCB case in Williams, Mark (2004), ‘Competition Law in Thailand: Seeds of Success or Fated to Fail?’, World Comp., 27(3), 477–478; UNCTAD (2005), ‘Review of Recent Experiences in the Formulation and Implementation of Competition Law and Policy in Selected Developing Countries: Thailand, Lao, Kenya, Zambia, Zimbabwe’, UNCTAD/DITC/CLP/2005/2, pp. 22–23. 156 Ibid. 157 Notifications of the Competition Commission of Thailand on Criteria for Business Operator with Market Domination, available at www.dit.go.th/otcc/ upload/Criteria%20for%20Market%20Domination.doc.
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previous year of over 50 per cent and at least 1,000 million Baht turnover, to rebut the complaint against Abbott under Section 25(3). The Competition Commission found that Abbott’s turnover in the Thai market was below the threshold; Abbott thus did not have market domination. Moreover, Abbott had not yet obtained the required certificate of product registration; this was what made products unavailable in the market. Therefore, Abbott’s conduct could not be regarded as refusal to supply, according to the Competition Commission’s view.158 3.2.3.2 Section 28 complaint Section 28 of the Competition Act prohibits international firms from implementing conduct restricting Thai consumers’ access to goods or services supplied internationally.159 It seems to require that a firm with international business relations doing business in Thailand has a responsibility to give consumers there the same opportunities for access to products as the opportunities given to consumers elsewhere. The complainants and their supporters argued that Abbott, an MNC, had been doing business in Thailand. Abbott’s withdrawal of registration application inevitably led to the fact that Thai customers could not access Abbott’s medicines there, so the withdrawal was alleged to violate Section 28.160 However, the Competition Commission found that Abbott’s withdrawal was not intended to cause harm to Thai consumers. It argued that drug registration was subject to the decision of the Food and Drug Administration of Thailand. Besides, due to the need for medical prescriptions, there would never be direct orders from Thai consumers to Abbott’s head office in the US. As a consequence, the conduct in question did not violate Section 28.161 3.2.3.3 Remarks The decision of the Competition Commission on Abbott’s withdrawal has been appealed. Regardless of the final result of the case, it appears that the application of the Competition Act by the Competition Commission was too rigid and may conflict with the application of IP law intended by the Thai 158 159
Abbott decision, supra note 151. Section 28 of the Competition Act of Thailand states that ‘[a] business operator who has business relations with business operators outside the Kingdom … shall not carry out any act in order that a person residing in the Kingdom and intending to purchase goods or services for personal consumption will have restricted opportunities to purchase goods or services directly from business operators outside the Kingdom’. 160 Flynn, Sean (2007), ‘Abbott’s Refusal to Register Medicines as a Contravention of Section 28 of the Thailand Competition Act’, available at www.wcl.american.edu/pijip/documents/Section28pdf.pdf?rd=1. 161 Abbott decision, supra note 151.
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government. It may be quite easy for the competition authority to determine whether or not a firm has a dominant position on the basis of the criteria of market share and turnover alone rather than on engaging in a fully fledged consideration of several factors, including the market position of the firm in question and its competitors, expansion and entry barriers, and countervailing buyer power.162 But the market share and turnover criteria are not determinative and cannot reflect the real market and competition in the market. Further, inferring from the conclusion of the competition authority, one may argue that Abbott’s patents could not have a big impact on the Thai market and consumer welfare. Thus the Thai government should not have granted the compulsory licensing. Moreover, the Competition Commission did not take into account the fact that Aluvia had been registered and accepted for sale almost everywhere in the world. There is no doubt that it would have passed the safety control of the Food and Drug Administration of Thailand if Abbott had not withdrawn its registration application. Abbott’s withdrawal prevented Thai consumers from accessing a new product having a potential demand. It is worth noting that in the AstraZeneca decision in the EU,163 the European Commission contended that AstraZeneca’s conduct of selectively withdrawing its LOSEC capsules, replacing them with LOSEC tablets, and requesting the deregistration of the marketing authorization for the capsules violated Article 82 EC. This conduct raised the costs of AstraZeneca’s competitors and blocked generic products and parallel imports. According to Section 29 of the Competition Act of Thailand, a firm is prohibited from implementing conduct which ‘has the effect of destroying, obstructing, impeding, or restricting business operation of other business operators or preventing other persons from carrying out business’. Therefore, Abbott by its withdrawal of the registration application could be similarly attacked under Section 29 using the same arguments as those raised against AstraZeneca under Article 82 EC. In addition, as the HIV/AIDS medicine-related competition cases in South Africa demonstrated, Abbott could have been attacked with an excessive pricing argument under Section 25(1) of the Thai Competition Act, which prohibits a dominant firm from unreasonably fixing or maintaining selling prices. The competition case against Abbott was unsuccessful before the Competition Commission of Thailand; and it seems that it will not be successful on appeal since Abbott clearly has not had a dominant position on the grounds of market share and turnover alone, as determined by the Competition Commission in accordance with its competence under the Competition Act. 162 163
See Article 82 EC Guidance, paras 9–13. Case COMP/A.37.507/F3, AstraZeneca, OJ 2006 L 332/24 (pending as Case T–321/05).
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However, this case may have an effect as a deterrent on any firm which holds IPRs and has a dominant position in an IPR-related market from abusing its dominant position in the market. This case, like the three cases in South Africa, paves the way for using competition law to promote access to technology. Moreover, the Abbott case may reflect the relationship between the application of IP law and competition law on access to technology. In addition to the shortcomings of Thai competition law preventing the success of the case in question, one fact which should be taken into account is that access to the patent held by Abbott was achieved via compulsory licensing under IP law. If the patent holder continues to be attacked under competition law, this will cause concern to both the patent holder and the international community. As noted in Section 1.2.1, the TRIPS Agreement recognizes the built-in limitations of and exceptions to IPRs; a developing country Member, through domestic IP law, can use those limitation and exceptions. If that Member is not able to apply those limitations and exceptions, it can find another solution through its domestic competition law, since the enforcement of competition law requires a variety of legal and economic analyses to avoid defects in enforcement. It is better for a developing country Member to use domestic competition law as a last resort. 3.2.4
Philips’ Taiwan Package Licensing Case
3.2.4.1 Background Philips Electronics, a Dutch company, and two Japanese companies, Sony and Taiyo-Yuden, together owned around one hundred patents relating to the technology for manufacturing recordable compact discs (CD-Rs) under technical standards jointly created by Philips and Sony (the so-called Orange Book). These three companies organized a patent pool, whereby the two Japanese companies licensed their patent rights to Philips; then Philips, acting as an exclusive licensor, bundled those patent rights with its patent rights for licensing to other CD-R producers. Regarding royalty amounts, the patent pool arrangement stipulated royalties to be paid as 3 per cent of the net selling price with a minimum of 10 Japanese Yen per licensed product. Philips, Sony and Taiyo-Yuden would take respectively 60 per cent, 25 per cent, and 15 per cent of the royalties received from the package licensing.164 At the time of signing
164 TFTC, ‘A complaint alleged that the CD product patent licensing practices in Chinese Taipei by Koninklijke Philips Electronics, N.V. (the Netherlands), Sony Corporation (Japan), and Taiyo-Yuden Co., Ltd. (Japan) were in violation of the Fair Trade Law’, Decision of 11 Jan. 2001, Kung Chu Tzu No. 021(Philips I), available at www.apeccp.org.tw/doc/Taipei/Case/D0575201.htm; Presentation made by Len-Yu
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the licenCe agreements between Philips and the Taiwanese CD-R producers, CD-R market prices were high; but later the prices fell substantially, and the 10 Japanese Yen royalty per licensed product accounted for at least 20–30 per cent of CD-R selling prices. The Taiwanese CD-R producers, after the failure of negotiations with Philips seeking to adjust the amount of royalties, filed a competition complaint with the TFTC. After its investigations, the TFTC in 2001 and 2002 concluded that the conduct of Philips, Sony and Taiyo-Yuden, including joint and package licensing, methods of setting royalties and refusal to disclose important trading information relating to the licence agreements, violated the Fair Trade Act of Taiwan.165 First, joining the patent pool and package licensing arrangement gave Philips the role as the exclusive licensor of important patents on CD-R technology and by fixing royalties, Philips, Sony and Taiyo-Yuden had engaged in a horizontal concerted action which prevented CD-R producers from freely choosing licensors and from negotiating royalties with licensors. This concerted conduct was anti-competitive and was not submitted to the TFTC for exemption; so the joint and package licensing arrangement violated Article 14 of the Fair Trade Competition Act. Second, the patent pool created by Philips, Sony and Taiyo-Yuden gave them an overwhelming position of dominance in the CD-R licensing market which enabled them to exclude other competitors from it. As a result, these three companies were monopolistic firms in the CD-R patent licensing market.166 They did not adjust their method of calculating royalties irrespective of substantial market changes. This conduct, which constituted one carried out by a monopolistic firm that improperly set and maintained prices, violated Article 10(2) of the Fair Trade Act.
Liu, TFTC Commissioner before the public hearing organized by the US FTC and DOJ on 23 May 2002, in Transcript of the Public Hearing on Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy – Part II: Asian Perspective on 23 May 2002, pp. 72–73, (Liu’s presentation), available at www.ftc.gov/opp/intellect/020523trans.pdf. 165 The Philips I decision, supra note 164, was appealed to the Executive Yuan, which found the market determination in Philips I unconvincing and remanded the case back to the TFTC. On 25 April 2002, The TFTC delivered a second decision (Philips II) with the same conclusion as Philips I. See Shieh, Ming-Yan (2004), ‘A Discussion of the Relationship between the Patent Law and the Fair Trade Law in Taiwan with a Review of the Philips CD-R Decisions’, in Tzong-Leh Hwang and C. Chen (eds), The Future Development of Competition Framework, The Hague: Kluwer Law International, p. 161; Liu, supra note 79. 166 According to Article 5-1(3) of the Fair Trade Act of Taiwan, if the combined market share of three firms in the relevant market is 75% or more, these firms are regarded as a monopolistic firm.
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Third, Philips, Sony and Taiyo-Yuden by way of the patent pool arrangement constituted a monopolistic firm, and Philips acted as an exclusive licensor. In negotiations to reach licence agreements with Taiwanese licensees, Philips refused to supply key trading information, including detailed information regarding the content of the licensed patents, their scope and their duration. The licence agreements also contained a non-challenge clause. In general, the Taiwanese licensees were compelled to sign the licensing agreements and pay royalties. These actions of Philips, together with Sony and Taiyo-Yuden, violated Article 10(4) of the Fair Trade Act, which prohibits other abusive conduct by a monopolistic firm. This TFTC decision was appealed. In August 2005, the Taipei High Administrative Court, by finding that the patent pool was not a concerted action because the members of the pool did not compete with each other, reversed the decision.167 The TFTC then appealed to the Supreme Administrative Court of Taiwan. In April 2007, the Supreme Administrative Court upheld the Taipei High Administrative Court by ruling: [T]he term “concerted action” used in Article 14 of the Fair Trade Act refers to the action of enterprises with a competitive relationship. Such competitive relationship will be deemed to exist where the goods or services provided by the enterprises are substitutable by each other’s goods or services. Since the CD-R manufacturers must use the orange book-compliant techniques covered by the patents owned by Philips, Sony and Taiyo Yuden in combination in order to produce CD-Rs, and since CD-Rs cannot be produced using any one of the patents alone, the Court held that the patents owned by Philips, Sony and Taiyo Yuden are complementary to each other rather than substitutable for each other. As such, there is no competitive relationship among them.168
According to this ruling, the patent pool and package licensing established by Philips, Sony and Taiyo-Yuden were complementary rather than substitutable. They could not result in a concerted action. Furthermore, package licensing may give rise to pro-competitive benefits such as one-stop technology shopping and transaction cost reductions.169 3.2.4.2 Other cases involved Interestingly, the Philips Taiwan package licensing case first brought under the 167 OECD (2006), ‘Competition Law and Policy in Chinese Taipei’, p. 2, available at www.oecd.org/dataoecd/18/22/36875564.pdf. 168 Ruling of the Supreme Administrative Court of Taiwan on 4 April 2007 on the TFTC Philips decision, reported in ‘Taiwan: Fair Trade Act allows CD-R patent pool licensing’, Managing IP, available at www.managingip.com/Article/1376998/FairTrade-Act-allows-CD-R-patent-pool-licensing.html. 169 Ibid.
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competition law of Taiwan gave rise to a compulsory licensing case under IP law in Taiwan, an IPR–antitrust case in the US, and an IPR case in the EU.170 Due to the substantial fall in CD-R prices leading to very high royalties as noted, some producers in Taiwan, including Gigastorage, stopped paying royalties, and raised the competition complaint against Philips with the TFTC. Philips responded by terminating its licence agreement with Gigastorage in April 2001. However, Gigastorage continued to produce CD-Rs, and in June 2001 it applied to the Intellectual Property Office of Taiwan (TIPO) for a compulsory licence of the Philips-owned patents. According to Article 76 of the Patent Act of Taiwan, one of the grounds under which the TIPO can grant compulsory licensing is ‘an applicant’s failure to reach a licensing agreement with the patentee concerned under reasonable commercial terms and conditions within a considerable period of time’. On this premise, the TIPO, in July 2004, decided to grant a compulsory licence to Gigastorage for CD-R-related technology patents owned by Philips.171 While appealing this decision before the Taipei High Administrative Court, Philips also filed two complaints in the US and the EU respectively. In the US, Philips brought an action against Gigastorage with the US International Trade Commission (ITC), alleging that Gigastorage was violating Section 337(a)(1)(B) of the Tariff Act of 1930 by importing into the US certain CD-Rs (and rewritable compact discs: CD-RWs) that infringed Philips’s patents.172 In the EU, Philips submitted a complaint to the European Commission alleging that Article 76 of the Patent Act of Taiwan infringed Article 28 of the TRIPS Agreement, by permitting compulsory licensing which was not justified by, and even violated, Article 31 of the Agreement.173 Regarding Philips’s complaint in the US, it was indisputable that Gigastorage had infringed Philips’s patents. However, Gigastorage counterclaimed that 170 See US Philips Corp. v. ITC, 424 F.3d 1179, 1193 (Fed. Cir. 2005), cert. denied, 547 U.S. 1207 (2006); European Commission (2008), ‘Examination Procedure Concerning an Obstacle to Trade, within the Meaning of Council Regulation (EC) No. 3286/94, Consisting of Measures Adopted by the Separate Customs Territory of Taiwan, Penghu, Kinmen and Matsu Affecting Patent Protection in Respect of Recordable Compact Discs, Report to the Trade Barriers Regulation Committee’ (Philips EU Report), available at http://trade.ec.europa.eu/doclib/docs/2008/ january/tradoc_137633.pdf. 171 This compulsory licensing decision was upheld by the Committee of Appeal of the Ministry of Economic Affairs of Taiwan on 16 June 2006. 172 19 U.S.C. 1337(a)(1)(B). 173 Philips complained under Council Regulation (EC) No. 3286/94, OJ 1994 L 349/71, as last amended by Council Regulation (EC) No. 356/95, OJ 1995 L 41/3, laying down Community procedures in the field of the common commercial policy in order to ensure the exercise of the Community’s rights under international trade rules, in particular those established under the auspices of the WTO.
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Philips’s conduct of package licensing was a patent misuse and illegal anticompetitive practice. The ITC observed that Philips’s package licensing contained both licences to patents essential to CD-R manufacturing and licences to patents not essential to that activity. Therefore, the ITC contended that the patent package licensing in question was per se patent misuse, because it ‘did not give prospective licensees the option of licensing individual patents (presumably for a lower fee) rather than licensing one or more of the patent packages as a whole’. Furthermore, the ITC argued that the package licensing also constituted patent misuse under the rule of reason. The ITC reasoned that including such non-essential patents in the licensing packages could foreclose alternative technologies and injure competitors, who sought to license such alternative technologies to parties in need of the licences of Philips’s essential patents; thereby, ‘the anticompetitive effects of including non-essential patents in the packages of so-called essential patents outweighed the procompetitive effects of that practice’.174 However, as noted in Section 2.3.2, package licensing provides pro-competitive benefits, particularly the reduction of licensing transaction costs; so the Federal Circuit applied the rule of reason when reviewing this case. This court held that the ITC’s rule of reason analysis was flawed, because there was no evidence on competition foreclosure, and the benefits of package licensing, regarding the reduction of transaction costs, were not addressed. The court remanded the decision to the ITC in September 2005.175 The ITC, after re-examining the case in accordance with the Federal Circuit’s ruling, and under the influence of the Supreme Court’s judgment in Illinois Tool Works in 2006,176 rejected Gigastorage’s patent misuse defence and entered an exclusion order prohibiting the unlicensed importation of infringing CD-Rs in February 2007.177 After that, Philips and Gigastorage reached an agreement to settle the US litigation.178 It is worth noting that on the other side of the Atlantic the European Commission launched a competition investigation on a similar CD-R package licensing agreement administered by Philips in the EU in 2003. Faced with this investigation, Philips agreed to discontinue the package licensing with Sony and Taiyo-Yuden. It also agreed to offer individual licences, the Philips Only License Agreement, on revised terms. Philips further agreed to reduce 174 US Philips, supra note 170, at 1183–1184. However, the ITC did not address issues relating to the reasonableness of a patent pool, royalty fixing according to the patent pool, or the royalty structure as the TFTC did. 175 Ibid., at 1188–1189. 176 Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006). 177 US ITC General Exclusion Order and Order to Cease and Desist of 5 Feb. 2007, Investigation No. 337-TA-474, available at http://info.usitc.gov/ouii/public/ 337inv.nsf/RemOrd/474/$File/337-ta-474.pdf?OpenElement. 178 Philips EU Report, supra note 170, para. 24.
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the rate of royalties. As a result, the Commission closed the investigation in February 2006.179 Regarding Philips’s complaint in the EU, the European Commission, after an investigation, concluded that Article 76 of the Patent Act of Taiwan, which permits the grant of compulsory licensing in circumstances where there has been no more than a failure to reach an agreement on reasonable commercial terms and conditions within a reasonable period of time, is inconsistent with Article 28 of the TRIPS Agreement.180 According to the Commission, a mere refusal to license by a patent holder cannot lead to compulsory licensing. By analysing the right to exclude of patent holders under EU law as well as other jurisdictions in the context of the WTO, the Commission observed: [T]he requirement of attempted negotiations was seen as a procedural requirement … not a substantial condition permitting the grant of a compulsory license … At the time of conclusion of the [TRIPS Agreement] most (if not all) jurisdictions had a doctrine that a refusal to deal by a patent holder is a perfectly permissible activity, that might only be considered illegal where the patent owner was in a position of market power and the refusal was linked to [an] abuse of that market power.181
Furthermore, the Commission also contended that the interpretation of various procedural requirements relating to the decision of the authorities of Taiwan granting compulsory licensing in the case in question were inconsistent with Article 31 of the TRIPS Agreement.182 As a result, the Commission threatened to bring the case to the WTO dispute settlement system. In March 2008, the Taipei High Administrative Court reversed the TIPO decision. This court held that the interpretation and determination of ‘reasonable commercial terms and conditions’ should take into account not only the amount of royalties but also the profit margin of parties, shared risks, the scope and period of the licence and market competition. However, when granting the compulsory licence in question to Gigastorage, the TIPO based itself on the calculation of royalties alone.183 The TIPO has contacted the European Commission to settle the EU concerns and decided not to appeal the court’s
179 180 181 182 183
See European Commission press release IP/06/139, 9 Feb. 2006. Philips EU Report, supra note 170, para. 107. Ibid., paras 102–103. Ibid., paras 145, 154, and 202. Ruling of the Taipei High Administrative Court on granting compulsory licences of Philips’s patents to Gigastorage on 13 March 2008, reported in ‘Taiwan: Decision to grant compulsory licenses to Gigastorage reserved’, available at www.managingip.com/Article.aspx?ArticleID=1940998. See also Lin, Ching-Fu (2008), ‘Filling in Gaps of the TRIPS Agreement: Reflections on the Taiwan-Philips CD-R Compulsory Licence Case’, Asian J . WTO & Int’l Health L. & Pol’y, 3, 557.
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ruling.184 At the end of 2008, the TIPO proposed to revise the compulsory licensing-related provisions of the Patent Act of Taiwan. According to this proposal, compulsory licensing will be granted only on three grounds, namely: (i) national emergencies, (ii) use of a patent for enhancement of public welfare (and not for profit) or a dependent patent, and (iii) as a remedy against a competition infringement by a patent holder.185 3.2.4.3 Remarks The facts of the Philips Taiwan package licensing case, as well as the compulsory licensing case in Taiwan, involve licensees having to pay high royalties despite the appreciable reduction of selling prices, and the licensors thus receiving greatly increased total licensing revenues due to growth in demand in the CD-R market. The main concern of the TFTC appears to be the licensors’ refusal to renegotiate lower royalty rates, although the focus of the case in question was the licensors’ abuse of market power through the patent pool rather than the very high royalties as such.186 However, it seems that the licensees had an unreasonable business strategy regarding royalty calculation when they signed licence agreements with Philips. They did not predict the substantial fall in selling prices of CD-Rs. As a result, the royalties were reasonable and affordable at the time of signing the licence agreements; and became too costly and unaffordable only after a period of time. The licensees wanted to escape the contractual obligations relating to royalties by using competition law. However, the final result demonstrates that this is very difficult. One may argue that due to the strong (even dominant) position of Philips, the licensees were faced with a take-all-or-nothing licensing offer. They were forced to accept all terms and conditions offered by Philips, including the royalty calculation. But this, at least from the perspective of profit predictability, merely reflects a risky decision made by the licensees. Competition law hardly helps firms to correct mistakes in their business decision-making. The mere fact that royalties to be paid to a patent holder have not been reduced proportionally to the decrease of market prices for patent-embodied products is not an abuse of a dominant position in the relevant market.
184 European Commission (2009), ‘General Overview of Active WTO Dispute Settlement Cases Involving the EC as Complainant or Defendant and of Active Cases under the Trade Barriers Regulation, 08 May 2009’, p. 28, available at http://trade.ec.europa.eu/doclib/docs/2007/may/tradoc_134652.pdf. 185 TIPO (2008), ‘TIPO Holds Public Hearing for Compulsory Licensing Draft Amendment on 18 August 2008’, available at www.tipo.gov.tw/en/ News_NewsContent.aspx?NewsID=3018. 186 Liu’s presentation, supra note 164, p. 75; OECD, supra note 167, p. 2.
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Regarding the interpretation of competition law, as the Supreme Administrative Court of Taiwan ruled, the TFTC, when evaluating the patent pool and package licensing established by Philips and the two Japanese companies, did not take into account other factors affecting competition in the CD-R technology market. The TFTC did not weigh and balance anti-competitive effects, on which it mainly relied, and the pro-competitive benefits, which the Court highlighted. Meanwhile, in its Guidelines on technology licensing arrangements, the TFTC states that it follows the simple rule of reason by considering many factors in addition to the reasonableness of the provisions of a licensing arrangement.187 If it does not respect the rule of reason when scrutinizing anti-competitive restrictions on technology transfer, it is inevitable that its decision will be vacated and remanded on appeal. The Philips Taiwan package licensing case and the TIPO decision to grant compulsory licensing indicate that there was no cooperation between the authorities responsible for competition law and IPRs in Taiwan. One of the grounds for granting compulsory licenses under Article 76 of the Patent Act of Taiwan is to remedy the anti-competitive conduct of a patent holder. At the time the TIPO considered the application submitted by Gigastorage for compulsory licensing, the TFTC had concluded that Philips (and the two Japanese companies) had violated competition law. However, the TIPO did not invoke this decision, regardless of the fact that the decision was under appeal. If the TIPO had combined the competition ground with the ground relating to the applicant’s failure to reach a licence agreement under reasonable commercial terms and conditions, the TIPO decision to grant compulsory licensing of Philips’s patents to Gigastorage would have been more persuasive; and it could have been more difficult for the EU to protest the decision under the TRIPS Agreement and the WTO dispute settlement mechanism. Moreover, it is worth noting that the licence agreements between Philips and the licensees in Taiwan had been registered at the TIPO.188 If the TFTC had had the cooperation of the TIPO, the TFTC (and the TIPO) might have noticed the debatable nature of these agreements under competition law and could have begun investigations earlier, which could then have focused on the abuse of IPRs through package licensing rather than high royalties. The final outcome of the Philips Taiwan package licensing case and the grant of compulsory licensing in question in Taiwan show the influence of US and EU views on Taiwanese courts’ rulings. It seems that the Supreme Administrative Court of Taiwan followed the holding of the US Federal Circuit in US Philips v. ITC, as well as the final decision of the ITC, with
187 188
TFTC Guidelines, supra note 27, para. 4.3. Philips EU Report, supra note 170, paras 139–140.
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respect to the application of the rule of reason to package licensing in the context of the Fair Trade Act of Taiwan and the explanation of the term ‘concerted action’ in package licensing. Regarding the compulsory licensing issue, perhaps under pressure from the EU to bring the dispute to the WTO, the Taipei High Administrative Court concluded that the concept ‘reasonable commercial terms and conditions’ contains many aspects; royalty rates alone cannot effectively determine this concept. It appears that the decision of the Taipei High Administrative Court and the proposal to amend the provisions for granting compulsory licences in the Patent Act of Taiwan are consistent with both competition law and the TRIPS Agreement. In any event, the decisions and rulings relating to the Philips Taiwan package licensing case elaborate the application of competition law to technology licensing in Taiwan, with respect to both vertical agreements between Philips and Taiwanese licensees and horizontal agreements between Philips and the two Japanese companies. This helps to pave the way for the TFTC to investigate Philips’s other anti-competitive practices relating to the package licensing.189 Additionally, this case and the other cases mentioned above reflect the international dimension of technology transfer-related competition issues and the need for international cooperation on IPRs and competition law.
3.3 3.3.1
IPRS, TECHNOLOGY TRANSFER AND COMPETITION LAW IN VIETNAM – A CASE STUDY Background
3.3.1.1 Overview The Vietnamese economy prior to 1986 has been described as a centrally planned and command economy. It was dominated by state-owned enterprises, which operated inefficiently under subsidizing policies in markets insulated by many types of barriers and distorted by a variety of administrative regulations
189 On 20 April 2006, the TFTC delivered a decision stating that as part of the package licensing of CD-R technology under a new licensing agreement, Philips required licensees to provide information such as licensees’ operational costs which was not closely related to collection of royalty fees. The information might help Philips to compete unfairly with the licensees. This conduct was held to infringe Article 24 of the Fair Trade Act. On 4 January 2007, the TFTC concluded that Philips’s package licensing of recordable DVD technology was compatible with competition law, since Philips did not have a monopoly position and the package licensing created pro-competitive benefits while Philips would be able to delete any non-essential patents from the package, if any. These two decisions are available at www.apeccp.org.tw/doc/Taipei.html#Case.
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and interventions. In such an economy, private ownership, property rights and IPRs were restricted; and competition did not exist. However, Vietnam implemented the reform (doi moi) process from 1986 so as to change the economy to a market economy.190 This led to major changes in Vietnam’s legal system. According to the Constitution of Vietnam of 1992, as amended in 2001, private ownership, property rights, including IPRs, and the right to set up enterprises and freely engage in business are clearly recognized and protected.191 Moreover, the Constitution states that the rule of law is fully respected, and the administration of society is based on law.192 Many laws and by-laws have been promulgated and/or amended to set forth in detail, and to comply with, the basic principles regulated in the Constitution and to serve the reform process.193 In tandem with, and on the basis of, the reform process, Vietnam has increasingly integrated itself into the regional and international economy. It became a member of the Association of South East Asian Countries (ASEAN) and the Asia Pacific Economic Cooperation Forum (APEC) in 1995 and 1997 respectively. Most significantly, Vietnam officially joined the WTO on 11 January 2007 as the 150th WTO Member. In addition, Vietnam has signed bilateral trade agreements with many countries all over the world.194 This international economic integration has been one of the keys to Vietnam’s prosperity. But it has also confronted the country with new challenges. It has directly affected the development and improvement of laws and regulations in Vietnam, especially those in the area relating to economic management. Moreover, the international treaties and agreements signed by Vietnam have gradually become an integral part of Vietnam’s legal system. During the process of reform and international economic integration, the development and improvement of civil and economic law has played, and continues to play, an important role in establishing, step-by-step, a competitive economy. As the Strategy for the development and improvement of Vietnam’s legal system to the year 2010 and direction for the period up to 2020 indicates,
190 It has been called a ‘socialist-oriented market economy’. See Article 15 of the Constitution of Vietnam of 1992, amended in 2001. 191 Articles 21, 57, and 58 of the Constitution of Vietnam. 192 Articles 2 and 12 of the Constitution of Vietnam. 193 See the Resolution No. 48-NQ-TW of the Politburo of the Communist Party of Vietnam of 24 May 2005 on the Strategy for the development and improvement of Vietnam’s legal system to the year 2010 and direction for the period up to 2020. Regarding the hierarchy of legal normative documents in Vietnam’s legal system, see Article 2 of Law No. 17/2008/QH12 of 3 June 2008 on enactment of legal normative documents. 194 See Abbott, Philip et al. (2009), ‘Trade and Development: Lessons from Vietnam’s Past Trade Agreements’, World Development, 37(2), 342–346.
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one of the priorities is to develop and improve the law on ownership and freedom of business activities, the law for creating comprehensive markets, and the law on IP protection in compliance with the TRIPS Agreement.195 Accordingly, the development, enforcement and improvement of IP law and competition law have been, and continue to be, hot and timely issues in Vietnam. 3.3.1.2 IP law in Vietnam Prior to 1986, Vietnam had almost totally lacked IP protection. The first regulation on IPRs was the government decree on technical innovations, production rationalization and inventions promulgated in 1981, which was followed by a decree on trademarks in 1982.196 However, they were rarely applied in practice. From 1986 until early 1995 many sub-law normative documents on IPRs were promulgated, but most of them were not consistent with the TRIPS Agreement.197 A milestone in the development of Vietnam’s IP regime was the Civil Code enacted by the National Assembly on 28 October 1995 (Civil Code 1995). On the basis of the Constitution of 1992, the Civil Code 1995 established a legal foundation for ownership, property rights and civil transactions. It recognized IPRs as civil rights and property rights.198 Out of eight parts of the Civil Code 1995, Part Six addressed IPRs and technology transfer and also repealed all previous IPR-related regulations. The Civil Code 1995 provided a legal framework for the protection of copyright and related rights, patents, utility solutions, industrial designs, trademarks and appellations of origin.199 However, it did not expressly provide for the protection of other IPRs such as trade secrets, trade names, plant varieties, layout designs of integrated circuits (and unfair competition). Instead, it mentioned those IPs as ‘other subject matters’ and authorized the Standing Committee of the National Assembly and Government to stipulate in detail the concept of those subject matters, and how they would be protected.
195 196
Resolution No. 48-NQ-TW, supra note 193. Decree No. 31/CP of the Government of 31 Jan. 1981 promulgating the Regulation on technical innovations, production rationalization, and invention; Decree No. 197/H?BT of the Council of Ministers of 14 Dec. 1982 promulgating the Regulation on trademarks. 197 WTO (2008), ‘Minutes of Meeting of the TRIPS Council’, IP/C/56, para. 5. See also NOIP (2002), ‘National Office of Industrial Property: 20 Years of Development (1982–2002)’, available at www.noipvietnam.com. 198 See Articles 47 and 188 of the Civil Code 1995. 199 Article 786 of the Civil Code 1995 used the term ‘appellations of origin’ whose definition was, to some extent, similar to the term ‘geographical indications’ in Article 22.1 of the TRIPS Agreement.
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Accordingly, from 1996 to early 2005 many further legal normative documents were promulgated to set out in detail the provisions on IPRs in the Civil Code 1995. This basically met the TRIPS Agreement’s requirements, at least with respect to the scope of protection. However, in order fully to comply with the substantive minimum standards of IP protection under the TRIPS Agreement, and further promote the creative activities and enhance the competitiveness of the economy, Vietnam has continued to improve and develop the legislative framework in this area. On 14 June 2005, the National Assembly enacted the Civil Code of 2005 (Civil Code 2005)200 replacing the Civil Code 1995. The Civil Code 2005, particularly its Part Six (Articles 736 to 757) addresses IPRs and technology transfer, as did the Civil Code 1995. However, the Civil Code 2005 provides for only the basic issues of civil rights and property rights of IPRs.201 On 29 November 2005, the National Assembly adopted the Law on Intellectual Property (IP Law 2005),202 which is a comprehensive law on IPRs, including provisions on copyright and related rights, industrial property rights, protection of plant varieties and enforcement of IPRs. The IP Law 2005, together with the Civil Code 2005, establish a complete and consistent IP regime which replaces almost all previous regulations.203 Moreover, the National Assembly also enacted the Law on Technology Transfer in 2006204 and the Law on High Technology in 2008.205 The Government of Vietnam has also promulgated a series of decrees laying down detailed rules for the implementation of the IP Law 2005.206 Furthermore, Vietnam has become party to many international conventions on IPRs.207 Vietnam also concluded bilateral agreements concerning IP protection with
200 201
Law No. 33/2005/QH11 of 14 June 2005. Articles 51 (rights to create and innovate as civil rights), 181 (IPRs are property rights), 736–743 (copyright), 744–749 (related rights), 750–753 (industrial property rights and rights to plant varieties), and 754–757 (technology transfer) of the Civil Code 2005. 202 Law No. 50/2005/QH11 of 29 Nov. 2005 203 See WTO (2006), ‘Accession of Vietnam’, Report of the Working Party on the Accession of Vietnam, WT/ACC/VNM/48, paras 390–471; UNCTAD (2008), ‘Investment Policy Review: Vietnam’, UNCTAD/ITE/IPC/2007/10, pp. 77–80. Animal breeders’ rights are currently protected in Vietnam under the Ordinance No. 16/2004/PL-UBTVQH11 of 24 March 2004 on animal breeds. 204 Law No. 80/2006/QH11 of 29 Nov. 2006. 205 Law No. 21/2008/QH12 of 13 Nov. 2008. 206 Regarding governmental decrees and other by-laws on IPRs enacted on the basis of the IP Law 2005 see Vietnam’s Notifications of laws and regulations under Article 63.2 of the TRIPS Agreement, WTO documents IP/N/1/VNM/1, IP/N/1/VNM/2, and IP/N/1/VNM/3. 207 Vietnam has become a party to the Paris Convention for the Protection of Industrial Property (since 1949); the Madrid Agreement on International Registration
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certain countries.208 As prescribed in Article 5.3 of the IP Law 2005, in case of differences between Vietnamese laws on IPRs and international treaties to which Vietnam is a party, the provisions of the latter will be applied.209 Briefly, Vietnam has significantly overhauled its legal framework on IPRs as part of the process of joining the WTO. Vietnam’s current legislation on IPRs, as recognized by many WTO Members in the review of Vietnam’s legislation in two meetings of the TRIPS Council in 2008,210 basically meets the minimum standards of protection and enforcement of IPRs in the TRIPS Agreement. However, as mentioned in the Strategy for the development and improvement of Vietnam’s legal system, Vietnam will continue to make its legislation on IPRs fully consistent with the TRIPS Agreement in order to facilitate the development of its economy. In addition to its efforts on legislative reform regarding IPRs, Vietnam is focusing on improving enforcement mechanisms and increasing public awareness of IP protection and striving for closer coordination among the relevant competent authorities enforcing IPRs. 3.3.1.3
Competition law in Vietnam
Overview It is common knowledge that promoting and maintaining competition assists the development of a market economy and society. Competition creates incentives for market participants to act in a manner consistent with greater efficiency. And it also ensures that any efficiency gained from competition is passed through the supply chain to benefit consumers.211 By impleof Marks (1949); the Convention establishing WIPO (1976); the Patent Cooperation Treaty (March 1993); the Berne Convention for the Protection of Literary and Artistic Works (26 Oct. 2004); the Geneva Convention for the Protection of Producers of Phonograms against Unauthorized Duplication of their Phonograms (6 July 2005); the Brussels Convention relating to the Distribution of Programme-Carrying Signals Transmitted by Satellite (12 Jan. 2006); the Protocol relating to the Madrid Agreement concerning the international registration of marks (11 July 2006); the International Convention for the Protection of New Varieties of Plants (24 Dec. 2006); and the International Convention for the Protection of Performers, Producers of Phonograms and Broadcasting Organizations (1 March 2007). 208 Chapter 2 of the Agreement between Vietnam and the US on trade relations signed on 13 July 2000 and the Agreement between Vietnam and the US on Copyright signed on 27 June 1997; the Agreement between Vietnam and Switzerland on IPRs signed on 7 July 1999; Chapter 9 of the Agreement between Vietnam and Japan for an economic partnership signed on 25 Dec. 2008. 209 See Article 6.1 of Vietnam’s Law No. 41/2005/QH11 of 14 June 2005 on signing, accession to and implementing international treaties. 210 See the minutes of meeting of the TRIPS Council, IP/C/M/56, paras 4–22 and IP/C/M/57, paras 5–21. 211 Taylor, Martyn (2006), International Competition Law: A New Dimension for the WTO, Cambridge: Cambridge University Press, p. 14.
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menting the process of reform and international economic integration Vietnam has, since 1986, established, step-by-step, a competitive business environment and a level playing field, not only for domestic firms but also as between domestic and foreign firms. The Constitution and both the Civil Codes 1995 and 2005, as noted, recognize the right of free business and the development of a multi-sectoral market economy in Vietnam. This is the foundation for protecting and encouraging competition in the Vietnamese market. However, market participants, sometimes with the help of administrative authorities, tend to endanger the competition process by anti-competitive conduct seeking to control the Vietnamese market, which in turn yields monopoly profits for a small group of people. As Adam Smith put it more than two hundred years ago, ‘[p]eople of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, or in some contrivance to raise prices’.212 Such anti-competitive conduct became increasingly rampant when foreign firms, particularly MNCs, started to operate in Vietnam’s emerging markets. They have thus threatened the legitimate rights and interests of enterprises and consumers and hampered the business environment and the socio-economic development of Vietnam. Knowing the adverse effects of such anti-competitive conduct and the lack of a legal system to curb it, Vietnam’s Socio-Economic Development Strategy for the period 2001–2010, endorsed by the Ninth Congress of the Communist Party of Vietnam and the National Assembly, has identified the need to: establish in a synchronised manner and continue developing and completing different kinds of market in parallel with the formation of a legal and institutional framework for the market to operate dynamically, efficiently, and orderly in a competitive, open, and transparent environment in which anti-competitive practices shall be controlled and prevented.213
This means that competition law is now regarded as an important element in establishing a legal framework for a more coherent and effective competitive economy. So, with the encouragement and technical support of the UNCTAD and the United Nations Development Programme (UNDP), the Law on Competition of Vietnam (VLC) was promulgated on 3 December 2004 and came into effect on 1 July 2005.214 The VLC was the result of a four-year drafting process with fifteen drafts on the basis of model laws promoted by the 212 Quoted in Utton, Michael A. (2005), Market Dominance and Antitrust Policy, Cheltenham: Edward Elgar, p. 149. 213 Communist Party of Vietnam (2001), ‘The Strategy for Socio-Economic Development (2001–2010)’, Report presented by the Central Committee (8th Tenure) to the 9th Party Congress. 214 VLC, Law No. 27/2004/QH11 of 3 Dec. 2004.
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UNCTAD and World Bank, as well as experience from both developed and developing countries.215 Since the promulgation of the VLC, the Government of Vietnam has enacted many decrees providing detailed rules and regulations for the implementation of the VLC in an effort to put it into practice.216 The overall goal of the VLC is to promote a competitive business environment and socio-economic development in Vietnam as well as to protect the legitimate interests of the state, enterprises and consumers in Vietnam.217 Its scope is large and ambitious. It applies not only to anti-competitive practices, including: (i) anti-competitive agreements/concerted practices, (ii) abuses of a dominant position and of a monopoly position, and (iii) economic concentration (mergers and acquisitions), 218 but also to unfair competition219 and even anti-competitive decisions/behaviour by state administrative agencies or their officials taking advantage of their authority.220 The VLC also addresses competition case handling procedures and sanctions for infringements.221 The VLC applies to all enterprises, including foreign enterprises, and trade associations (professional associations) operating in Vietnam.222 The terms ‘enterprise’ and ‘trade association’, as explained in the VLC, are similar respectively to the terms ‘undertaking’ and ‘association of undertakings’ in EU
215 Pham, Alice (2006), ‘The Development of Competition Law in Vietnam in the Face of Economic Reforms and Global Integration’, Nw. J. Int’l L. & Bus., 26, 551. 216 Decree No. 116/2005/ND-CP of 15 Sept. 2005 providing detailed regulations for implementation of a number of Articles of the VLC; Decree No. 120/2005/ND-CP of 30 Sept. 2005 on dealing with breaches of competition law; Decree No. 05/2006/ND-CP of 9 Jan. 2006 on functions, duties, powers and organizational structure of the Competition Council; Decree No. 06/2006/ND-CP of 9 Jan. 2006 on functions, duties, powers and organizational structure of the VCAD. 217 Article 4 of the VLC. 218 See Articles 8–10, 11–15, and 16–24 of the VLC. 219 Article 39 of the VLC non-exhaustively lists unfair (unhealthy) competition practices, including: (i) misleading indications, (ii) infringement of business secrets, (iii) forcing customers of an enterprise or other enterprises to stop dealing (or not dealing) with that enterprise, (iv) discrediting other enterprises, (v) disturbing business activities of other enterprises, (vi) advertising for the purpose of unfair competition, (vii) sale promotion for the purpose of unfair competition, (viii) discriminations by trade associations, and (ix) illegitimate multi-level sale. However, some unfair competition practices listed, (iii) and (viii) for instance, are defined as anti-competitive practices. Moreover, since there is no separation between unfair competition practices and anti-competitive practices, the VLC was regarded as a law on unfair competition by many Vietnamese CEOs. VCAD (2009), Report on Results of the Research and Survey on Community’s Awareness Level about Competition Law, Hanoi: VCAD, pp. 18 and 33. 220 Article 6 of the VLC. 221 Chapter 5 (Articles 56–121) of the VLC. 222 Article 2 of the VLC; Article 2 of Decree 116/2005/ND-CP.
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competition law. They focus on economic activities performed by entities rather than their legal status.223 However, the VLC does not have extraterritorial effect since it merely covers operations or practices of enterprises in Vietnam. Regarding hierarchy, the VLC, as lex specialis, prevails over other laws and regulations in the field of competition in Vietnam.224 With respect to competition agencies, the Competition Administration Department (VCAD) and the Competition Council are to apply the VLC. The VCAD, which is a department of the Ministry of Industry and Commerce, has investigative power; and the Competition Council, through its ad hoc Competition Case Handling Council (CCHC) which acts as an ad hoc competition tribunal, has adjudicative power.225 Anti-competitive agreements/concerted practices Article 8 of the VLC lists eight types of practices regarded as anti-competitive agreements or concerted practices: (1) price fixing; (2) market sharing/allocation; (3) quantity control/ limitation; (4) technological development or investment control/restriction; (5) imposing on other enterprises conditions on conclusion of contracts or forcing other enterprises to accept obligations which have no direct connection with the subjects of such contracts; (6) market foreclosure (preventing, restricting, disallowing other enterprises to enter the market or develop business); (7) driving enterprises other than parties to the agreement out of the market; and (8) bid rigging/collusive tendering.226 In accordance with Articles 9–10 of the VLC, agreements which establish bid rigging, drive other enterprises out of the market or foreclose the market (the agreements which belong to types 6, 7, and 8 mentioned above) are per se illegal and prohibited regardless of the market share of each party, or combined market share of the parties, concerned in the relevant market(s). Other anti-competitive agreements (agreements which belong to types 1 to 5)
223 Regarding the terms ‘undertaking’ and ‘association of undertakings’ in EU competition law see, e.g., Case C–41/90, Klaus Höfner and Fritz Elser v. Macrotron GmbH, [1991] ECR I–1979, para. 21; Case C–309/99, Wouters, [2002] ECR I–1577, paras 46–49 and 57–59. 224 Article 5 of the VLC. 225 Articles 49–55 of the VLC. See also UNCTAD, supra note 203, pp. 75–77. It should be noted that the VCAD has duties and powers not only in the field of competition law, but also in the fields of anti-dumping, anti-subsidy and application of selfprotective measures with respect to goods imported into Vietnam, and protection of consumers’ rights. See Article 2 of Decree 05/2006/ND-CP. 226 These anti-competitive agreements/concerted practices are elaborated in Articles 14–21 of Decree 116/2005/ND-CP. To some extent, this list is similar to that in Article 81(1) EC. However, this list seems to be regarded as exhaustive, while the list in Article 81(1) EC is clearly non-exhaustive.
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are prohibited only if the combined market share of the parties to the agreement in question in the relevant market is 30 per cent or more. However, these type 1 to 5 agreements may be exempted, through application of an individual exemption, if such agreements satisfy one of the following conditions in order to reduce costs and benefit consumers: (i) rationalizing organizational structures or business models and increasing efficiency; (ii) promoting technical or technological improvements/developments and improving the quality of goods/services; (iii) promoting uniform application of quality standards and technical norms (standard setting); (iv) harmonizing terms and conditions on trading, goods delivery and payment which have no connection with prices and pricing factors; (v) enhancing the competitiveness of small and mediumsized enterprises; and (vi) enhancing the competitiveness of Vietnamese enterprises in the international market.227 Articles 8–10 of the VLC establish the legal framework regulating collusive/multi-enterprise conduct in Vietnam. However, these provisions contain several shortcomings and/or ambiguities. First, there is no clear differentiation between horizontal and vertical agreements. Article 9.2 of the VLC states that an anti-competitive agreement which falls into the category of agreements of types 1 to 5 mentioned above is prohibited only if the ‘combined market share’ of the parties to the agreement is at least 30 per cent in the relevant market. The term ‘combined market share’ is defined in Article 3.6 of the VLC as ‘aggregate market share’ of the parties to the agreement in the relevant market. This means that the parties to the agreement must operate at the same trade level in order to be able to calculate their ‘aggregate’ or ‘combined’ market share. In other words, they are competitors, and the agreement in question is a horizontal agreement. This interpretation may lead to a conclusion that the prohibition in Article 9.2 merely covers horizontal agreement. Vertical agreements which fall into the category of agreements of types 1 to 5 cannot be prohibited.228 They will only be prohibited if they fall into the category of agreements of types 6 to 8. Meanwhile, bid rigging agreements (agreements of type 8) are likely to be horizontal. Therefore, only vertical agreements which have the object and/or effect of market foreclosure or of competitor elimination (agreements of types 6 and 7) are prohibited, and per se illegal, under the VLC. This interpretation is supported by the fact, as mentioned below, that the VLC defines an enterprise holding a dominant position as one having a market share of 30 per cent or more in the relevant market. Since the same market share threshold (30 per cent) is used to prohibit collusive or unilateral 227 228
Article 10.1 of the VLC. However, agreements of type 5 which are addressed in Article 8.5 of the VLC and elaborated on in Article 18 of Decree 116/2005/ND-CP, tying for instance, are often vertical agreements.
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conduct,229 anti-competitive effects caused by a vertical agreement with one of the parties having a market share of 30 per cent or more will be scrutinized under the provisions relating to abuses of a dominant position rather than those relating to anti-competitive agreements. Even if all vertical agreements, not only vertical agreements which fall into the category of agreements of types 6 and 7, are subject to scrutiny under Articles 8–10 of the VLC, these Articles do not provide any distinction between horizontal and vertical agreements regarding their anti-competitive effects on competition. It is well recognized, at least in US and EU case law, that horizontal anti-competitive agreements have more anti-competitive effects than vertical ones. The provisions relating to anti-competitive agreements in the VLC may thus prevent the development of pro-competitive vertical agreements because the VLC seems to scrutinize both horizontal and vertical agreements similarly. Second, the per se rule and the rule of reason are not appropriately regulated. They are applied in the provisions relating to anti-competitive agreement in the VLC. An agreement which falls into the category of agreements of types 6 to 8 is per se illegal and prohibited. However, an agreement which falls into the category of agreements of types 1 to 5 where the parties to which have a combined market share of 30 per cent or more in the relevant market may be exempted under Article 10.1. This means that the rule of reason is, to some extent, applied. Regarding the illegal per se rule, it may be reasonable per se to condemn bid rigging agreements/concerted practices, since bid rigging is a clear, intentional and hard-core violation of competition law, and detecting it is very difficult. However, the per se prohibition of agreements foreclosing markets or eliminating competitors (agreements falling into Articles 8.6 and 8.7) is totally unreasonable. If the anti-competitive effects of such agreements are not appreciable, competition law should not prohibit them. In the EU for instance, the ECJ has ruled that an agreement falls outside the prohibition in Article 81 EC, even Article 81(1) EC, ‘when it has only an insignificant effect on the markets, taking into account the weak position which the persons concerned have on the market of the product in question’.230 Moreover, an 229 Without taking into account factors affecting competition in the relevant market other than market share, the market share threshold for an infringement of competition law by unilateral conduct is generally higher than the threshold for an infringement of competition law by collusive conduct. The US Supreme Court has held that ‘[m]onopoly power under Section 2 requires, of course, something greater than market power under Section 1’. Eastman Kodak, supra note 141, at 481. 230 Case 5/69, Franz Völk v. S.P.R.L. Ets J. Vervaecke, [1969] ECR 295, paras 5–7. According to the European Commission’s Notice on agreements of minor importance which do not appreciably restrict competition under Article 81(1) EC, OJ 2001 C 368/13, an agreement is not prohibited by Article 81: (i) if the aggregate market share
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agreement having the anti-competitive effects of market foreclosure or competitor elimination may have other pro-competitive effects, which may outweigh the anti-competitive effects. That is why in the US after the Leegin ruling, as analysed in Section 2.1.2.1, all vertical agreements are to be scrutinized under the rule of reason rather than the per se rule. The per se illegality of agreements falling into Articles 8.6 and 8.7, according to Article 9.1 of the VLC, is too strict and irrational. It will prevent many pro-competitive agreements, particularly pro-competitive vertical ones. Furthermore, it is contrary to one of the objectives of the VLC relating to enhancing the competitiveness of small and mediumsized enterprises, because these enterprises often need exclusive agreements or exclusive dealing (non-compete obligations) to develop. Article 10.1 of the VLC paves the way for the application of the rule of reason regarding anti-competitive agreements falling outside the category of per se illegal agreements. However, parties to such an agreement have to apply for an individual exemption. They have to prove that: (i) the agreement satisfies one of the conditions listed in Article 10.1; and (ii) it reduces production costs and benefits consumers. At first glance, these two requirements for an individual exemption are similar to two out of the four requirements stipulated in Article 81(3) EC, i.e. efficiency gains and a fair share for consumers. However, Article 10.1 of the VLC does not require the two further conditions that Article 81(3) EC does, namely indispensability and no elimination of competition. This means that an anti-competitive agreement may be exempted under Article 10.1 of the VLC; but (i) it may impose on the enterprises concerned restrictions which are not indispensable to the attainment of the two requirements of Article 10.1, and/or (ii) it may afford the enterprises concerned the possibility to eliminate competition with respect to the products in question. Therefore, Article 10.1 does not provide a framework for weighing and balancing the pro-competitive benefits and anti-competitive effects of the restrictions in the agreement at issue. It merely focuses on the pro-competitive benefits and almost ignores the extent of any anti-competitive effects. This is not the rule of reason in the strict sense.231
held by the parties to the horizontal agreement does not exceed 10 % on any of the relevant markets; or (ii) if the market share held by each of the parties to the vertical agreement does not exceed 15 % on any of the relevant markets. Where in a relevant market competition is restricted by the cumulative effect of agreements entered into by different suppliers or distributors, the market share thresholds above are reduced to 5 %, both for horizontal and vertical agreements. In this case, individual suppliers or distributors with a market share not exceeding 5 % are in general not considered to contribute significantly to a cumulative foreclosure effect; and a cumulative foreclosure effect is unlikely to exist if less than 30 % of the relevant market is covered by parallel (networks of) agreements having similar effects. 231 Article 85.1(d) of Decree 116/2005/ND-CP concerns the positive impact of an
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In brief, the current provisions prohibiting anti-competitive agreements in the VLC are not appropriate. On the one hand, they are too strict. They can prohibit pro-competitive agreements, particularly pro-competitive vertical ones. On the other hand, they are too lax in terms of the requirements for exemption. Enterprises can circumvent the law and get an exemption for their essentially anti-competitive agreements. This can reduce the effectiveness, fairness and applicability of the VLC in practice. Abuse of a dominant position/monopoly position According to Article 11.1 of the VLC, an enterprise shall be considered to hold a dominant position if it either has a market share of at least 30 per cent or is capable of substantially restricting competition in the relevant market. The VLC does not address the concept relating to the capability of an enterprise substantially to restrict competition. However, according to Article 22 of Government Decree 116/2005/ND-CP, this capability can be determined on the basis of certain factors, such as (i) the financial capacity of the enterprise, or of the organizations and individuals who have established or control that enterprise, including the parent company; (ii) its technological capacity, industrial property rights; and (iii) the scale of the enterprise’s distribution network. Moreover, the VLC also provides for a collective dominant position for a group of enterprises having a total market share of at least 50 per cent for two enterprises, 65 per cent for three, and 75 per cent for four, in the relevant market.232 Article 13 of the VLC lists six unilateral practices which are regarded as prohibited abuses of a dominant position, or a collective dominant position: (1) predatory pricing: selling goods or services at prices lower than total costs in order to eliminate competitors; (2) excessive/irrational pricing or minimum resale price maintenance: imposing excessive/irrational selling or purchase prices or fixing minimum resale prices to the prejudice of customers; (3) limiting production, distribution, markets or technical/technological development to the prejudice of customers; (4) imposing or applying dissimilar business conditions to equivalent transactions with other enterprises, thereby placing them at a competitive disadvantage; (5) imposing on other enterprises conditions on conclusion of contracts or forcing other enterprises to accept obligations which
anti-competitive practice on the development of the economy as a mitigating circumstance in deciding fines (and remedies) against that practice. However, such positive impacts should be regarded as an efficiency gains factor when evaluating the total impact of anti-competitive collusion, rather than a mitigating circumstance. The European Commission Guidelines on the method of setting fines, OJ 2006 C 210/2, para. 29, do not contain any mitigating circumstance like that in Article 85.1(d) of Decree 116/2005/ND-CP. 232 Article 11.2 of the VLC.
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have no direct connection with the subjects of such contracts; and (6) preventing new competitors from entering the market.233 The VLC also addresses the conduct of enterprises holding a monopoly position. If an enterprise has no competitors in the relevant market in which it does business, i.e. it has a de facto monopoly or a market share of 100 per cent in the relevant market, it is regarded as having a monopoly position. In this case, its conduct violates the VLC if: (i) it falls into the list of conduct being the abuses of a dominant position which is noted above; or it is regarded as (ii) imposing disadvantageous conditions on customers, or (iii) an abuse of the monopoly position to modify unilaterally or cancel concluded contracts without legitimate justification.234 Furthermore, if enterprises operate in statemonopolized sectors, their activities will be controlled not only by the VLC but also by other governmental policies and decisions relating to prices, quantities, volumes and market scope.235 These regulations will curb abuses of dominant position/monopoly position in Vietnam. However, there are some concerns about the reasonableness and applicability of these regulations. First, there are concerns about the factors determining a dominant position: the main factor for determining a dominant position under the VLC is the market share. This may make enforcement easier and be more convenient for a country which has just introduced competition law, as has Vietnam. However, from the theoretical perspective of both economics and competition law, a dominant position cannot be based on market share alone, especially when the market share threshold is quite low, 30 per cent for single firm dominance as the VLC states. In the EU, a dominant position is defined as a position of economic strength ‘enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers’.236 This means that a firm has a dominant position only if it enjoys substantial market power over a period of time which makes its decisions relating to prices, output, innovation, the variety or quality of goods or 233 These abuses of a dominant position are elaborated in Articles 23 to 31 of Decree 116/2005/ND-CP. This list is similar to that in Article 82 EC. However, this list seems to be regarded as exhaustive, while that in Article 82 EC is clearly non-exhaustive. 234 Articles 12 and 14 of the VLC. 235 Article 15 of the VLC. Regarding price control see the Ordinance on Prices No. 40/2002/UBTVQH10 of 10 May 2002, which is elaborated in Government Decree No. 170/2003/ND-CP of 25 Dec. 2003, amended by Government Decree No. 75/2008/ND-CP of 9 June 2008. 236 See Case C–202/07 P, France Télécom v. Commission, Judgment of 2 April 2009, not yet reported, para. 103; Article 82 EC Guidance, paras 9–15.
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services, or other parameters of competition ‘largely insensitive to the actions and reaction of competitors, customers and, ultimately, consumers’.237 Therefore, the assessment of a dominant position must take into account the competitive structure of the relevant market, including many factors such as (i) the market position of the allegedly dominant undertaking and its competitors, (ii) barriers to entry and expansion, and (iii) countervailing buyer power. The market share of an allegedly dominant undertaking is a useful and important factor for the assessment of a dominant position but, taken separately, it is not decisive.238 According to EU case law and the European Commission’s experience, there is almost always no dominant position if the undertaking’s market share is below 40 per cent of the relevant market. However, in some specific cases where competitors cannot effectively constrain the conduct of the allegedly dominant undertaking, this undertaking may have a dominant position although its market share is below 40 per cent.239 Similarly, a dominant position or monopoly power in the parlance of US antitrust law is defined as the ‘power to control prices or exclude competition’240 on the relevant market. Monopoly power in the US is often demonstrated through high market share and high entry barriers.241 US case law shows that a monopoly power is unlikely to exist where the defendant’s market share in the relevant market is below 50 per cent. The US DOJ contends that, in theory, a firm having a market share below 50 per cent may have monopoly power in some rare circumstances; but it is not worth seeking out such circumstances in practice because the costs of doing so may exceed the benefits.242 Thus, the market share of 30 per cent as a threshold to determine a dominant position of a single enterprise under the VLC leads to the fact that unilateral conduct may be over-regulated. Moreover, as noted, the VLC also uses a market share threshold to determine a collective dominant position. The more enterprises participate in the alleged collective dominance, the higher the threshold. This is also unreasonable because what matters with respect to a collective dominant position is that these enterprises are able to adopt a common policy/conduct and implement it, as a collective entity, to a considerable extent independently of their competitors, their customers and their 237 238 239 240 241
Article 82 EC Guidance, para. 10. Ibid., paras 10–18. Ibid. para. 14. Eastman Kodak, supra note 141, at 481. A firm ‘cannot possess monopoly power in a market unless that market is also protected by significant barriers to entry’. US v. Microsoft Corp., 253 F.3d 34, 82 (DC Cir. 2001). 242 US DOJ (2008), Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act, available at www.justice.gov/atr/public/reports/ 236601.pdf, p. 24.
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consumers.243 Simply put, a collective dominant position should be determined, at least where market share is the key concern, like a single-enterprise dominant position. A single-enterprise dominant position may also be determined, according to the VLC, through the capability of the enterprise to restrict competition substantially, which can be evaluated on the basis of factors such as financial capacity, IPRs and the scale of distribution network as mentioned above. In theory, an enterprise which has a market share of below 30 per cent in the relevant market but has one or more of these factors may be regarded as having a dominant position. This seems strange from the economic perspective of competition law since, again, the influence of its competitors and customers/buyers and the extent of market entry barriers are not considered. To sum up, it is very easy for enterprises in Vietnam to be regarded as having a single dominant position. On the other hand, it is difficult for a group of enterprises to be considered as having a collective dominant position, since the market share threshold in this case is much higher than the one for a single dominant position. It is thus very difficult to prevent abusive conduct in oligopolistic markets in Vietnam. Second, there are concerns on abusive conduct: Article 13 of the VLC lists six categories of prohibited practices which are regarded as abuses of a dominant position. The structure and wording of this Article suggest that these categories are comprehensive. However, in practice, there are many other unilateral practices which fall outside such categorization, such as bundled discounts and loyalty discounts, refusal to deal with current customers, etc. Furthermore, it seems that the six categories of prohibited practices listed in Article 13 focus over much on prejudice to competitors and intermediate customers, rather than consumers or competition in general. 3.3.2
Technology Transfer-related Competition Law Issues in Vietnam
3.3.2.1 From the perspective of IP law Before the enactment of the Civil Code 1995, technology transfer was regulated by the Ordinance on the Transfer of Foreign Technology into Vietnam of 1988.244 Although this ordinance aimed at encouraging technology transfer
243
Regarding a collective dominance position in the EU see, e.g., Joined Cases C–395/96 P and C–396/96 P, Compagnie maritime belge transports SA, [2000] ECR I–1395, para. 36; Joined Cases C–68/94 and C–30/95, French Republic and Société commerciale des potasses et de l’azote (SCPA) and Entreprise minière et chimique (EMC) v. Commission, [1998] ECR I–1375, para. 221. 244 The Ordinance on the Transfer of Foreign Technology into Vietnam of 5 Dec. 1988, elaborated by Decree No. 49-HDBT of 4 March 1991.
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and foreign direct investment into Vietnam, it provided for very tight controls on technology transfer contracts and a variety of administrative interventions. It required a technology transfer contract to be approved by competent authorities; the duration of the contract could not be longer than seven years. In particular, it prohibited foreign transferors from incorporating into the contract certain conditions which appeared to be anti-competitive or to limit the freedom of Vietnamese transferees, including: (i) obligations on the transferee to purchase raw materials, equipment, intermediate goods and parts or to use manpower from sources specified by the transferor; (ii) restrictions on production quantities, prices or terms for the sale of products; (iii) restrictions on the markets to which the transferee might export its products, except for markets in which the transferor had already manufactured or sold similar products, or had granted an exclusive licence to a third party; and (iv) restrictions on R&D on transferred technology or on the acquisition of competitive technology from other sources.245 These controls on technology transfer are quite similar to those in other developing countries in the 1970s–1980s as shown in Section 3.1.1. It seems that, through such controls, Vietnam tried to protect its enterprises from being exploited by allegedly abusive and ruthless right holders. These controls also reflected the fact that Vietnamese enterprises, most of them state-owned, lacked managerial and negotiation skills in comparison with their foreign partners. After the enactment of the Civil Code 1995, technology transfer was still strictly scrutinized on account of the desire for state control over technological development in Vietnam. There was no provision on the relationship between IPRs and competition law, but the Civil Code 1995 did address compulsory licensing. The grounds for compulsory licensing were very broad, including failure to work, public security and public health, and refusal to license after negotiations on reasonable terms and conditions.246 However, the anti-competitive practices of right holders were not directly mentioned as a ground for compulsory licensing. The provisions on technology transfer contracts in the Civil Code 1995 and Government Decree 48/1998/ND-CP,247 which expanded on those provisions, continued to require the approval or registration of technology transfer contracts. The duration of such contracts was limited to seven to ten years.248 With respect to royalties, Decree 48/1998/ND-CP stipulated that royalties
245 246 247
Ibid., Articles 7, 10 and 13. Article 802 of the Civil Code 1995. Decree No. 48/1998/ND-CP of 1 July 1998 providing detailed provisions on technology transfer. 248 Articles 809 and 810 of the Civil Code 1995; Articles 32 and 15 of Decree 48/1998/ND-CP.
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could not exceed 5 per cent of prices of technology-embodied products or 25 per cent of after-tax profits during the period of validity of the contract. If the transfer involved foreign direct investment and the value of the technology was the capital contribution of the foreign party, royalties could not exceed 8 per cent of the total invested capital or 25 per cent of the nominal charter capital (registered capital).249 Regarding anti-competitive conditions or conditions which would restrict the freedom of Vietnamese transferees, Decree 48/1998/ND-CP also listed seven per se prohibited conditions: (1) forcing the transferee to buy or receive from the transferor, or from a third party specified by the transferor, raw materials, parts, manufacturing equipment, means of transportation, intermediate products, industrial property rights or employees with a low level of technical skills; but such conditions may be incorporated into the contract if they are reasonable; (2) forcing the transferee to accept some limitations on the quantity of products manufactured, selling prices and distributors; (3) restricting the local market, export market, quantity and types of exported products; (4) forcing the transferee not to develop the transferred technology or not to receive technology from the transferor’s competitors; (5) forcing the transferee to grant back improvements unconditionally; (6) granting the transferor immunity from faults and mistakes relating to the technology transfer or machines and equipment supplied by the transferor; and (7) prohibiting the transferee from using the transferred technology after the expiry of the contract, except for IPRs which are still within the term of protection in Vietnam.250 These conditions were even more numerous than those regulated in the Ordinance on the Transfer of Foreign Technology into Vietnam of 1988. However, they did not cover all anti-competitive practices in technology transfer; and the link to IPR abuses was not clear. Furthermore, most of them were treated both inflexibly and in favour of transferees without fully taking into account transferors’ rights. Such regulation did not consider the IPRs conferred on right holders and the pro-competitive effects of technology transfer. It basically applied the per se illegality approach to most of the anticompetitive clauses or those restricting transferees’ freedom. During the negotiations on Vietnam’s WTO accession, WTO Members noted the TRIPS Agreement inconsistency of Decree 48/1998/ND-CP.251 Moreover, if obliged to comply with such per se prohibitions, few right holders would be ready to license their technology into Vietnam. 249 250
Article 813 of the Civil Code 1995; Article 23 of Decree 48/1998/ND-CP. Article 13 of Decree 48/1998/ND-CP. Certain of these prohibitions were stated in the Ordinance on foreign technology transfer to Vietnam of 1988 (Article 7) and Decree No. 49-HDBT (Article 8). 251 WTO, supra note 203, para. 441.
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On 2 February 2005, the Government of Vietnam enacted Decree 11/2005/ND-CP to replace Decree 48/1998/ND-CP. In this new decree on technology transfer, the restrictions and controls of Decree 48/1998/ND-CP were totally abolished. This is a drawback of the new decree since, at the time of its enactment, the VLC, the IP Law 2005 and the Law on Technology Transfer 2006 had not come into effect or been enacted. So the anti-competitive effects of technology transfer were not controlled. After the IP Law 2005 and the Law on Technology Transfer 2006 came into effect, all technology transfer-related issues were subject to these two laws, which prevail over the prior regulations discussed above. Generally, these two laws give full discretion to the parties concerned with respect to technology transfer provided that the exercise of IPRs shall neither be prejudicial to the state’s interests, public interests, or the legitimate rights and interests of other organizations and individuals, nor violate other provisions of law, the VLC for instance.252 Regarding technology transfer contracts, there is neither any limitation on royalties nor a regime of approval or registration. However, the parties to a technology transfer contract have a right to register the contract in order to get preferential treatment (if any).253 The Law on Technology Transfer 2006 does not list forbidden conditions, but states that a technology transfer contract shall not contain any anti-competitive restrictions prohibited by the VLC.254 Regarding anti-competitive practices of right holders as a ground for granting compulsory licences, the IP Law 2005 indeed recognizes those practices as one of the grounds for granting compulsory licences of patents or rights to use plant varieties.255 However, at least in theory, anti-competitive practices of holders of other IPRs may be mutatis mutandis regarded as a ground for granting compulsory licences of those IPRs on the basis of the principles of IP Law 2005. But Decree No. 100/2006/ND-CP, which lays down detailed rules for the implementation of the Civil Code 2005 and the IP Law 2006 relating to copyright and related rights, does not mention the possibility of granting
252
Article 7.2 of the IP Law 2005; Article of the Law on Technology Transfer
2006. 253
Article 25 of the Law on Technology Transfer 2006; Article 148 of the IP Law
2005. 254 Article 20 of the Law on Technology Transfer 2006. It should be noted that Article 20.2 of this Law, which addresses transferors’ obligations, states that a transferor has an obligation not to engage in anti-competitive practices prohibited by the VLC; but Article 21.2, which addresses transferees’ obligations, does not provide such an obligation for transferees. This appears to be unreasonable. However, it does not mean that a transferee can freely impose anti-competitive clauses in a technology transfer contract. 255 Articles 145.1(d) and 195.1(c) of the IP Law 2005.
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compulsory licensing on the basis of anti-competitive practices of copyright/related rights holders. It thus seems difficult to correct the anti-competitive abuse of copyright and related rights, from the competition law perspective, by granting compulsory licensing in Vietnam.256 Currently, Circular No. 01/2007/TT-BKHCN enacted by the Ministry of Science and Technology257 is the only legal document clearly addressing compulsory licensing on the ground of anti-competitive practices committed by patent holders. According to this circular, a third party affected by a patent holder’s anti-competitive practices has a right to submit a dossier to the National Office of Intellectual Property of Vietnam (NOIP) in order to apply for compulsory licensing. However, that party has the burden of proving the patent holder’s anti-competitive practices under competition law.258 In order to prove it, that party must present a valid decision issued by the competition authority condemning the patent holder’s anti-competitive practices. Royalties payable to the patent holder in this case are decided by the NOIP but may not exceed 5 per cent of the net selling prices of products manufactured under the compulsory licence.259 Although the IP Law 2005 and Circular 01/2007/TTBKHCN address compulsory licensing on the ground of patent holders’ anticompetitive practices, they do not indicate whether such practices are unilateral or collusive ones. Normally, only unilateral practices abusing IPRs and infringing competition law are subject to compulsory licensing. In brief, the IP Law 2005 and the Law on Technology Transfer 2006 provide a general framework for curbing anti-competitive practices relating to the exercise of IPRs and technology transfer. They leave the issue of how to regulate and control such anti-competitive practices to the VLC. 3.3.2.2 From the perspective of competition law The VLC has no provision explicitly addressing the relationship between competition law and IPRs. But, at least in theory, anti-competitive practices relating to IPRs or technology transfer are subject to scrutiny under the VLC. However, there are some uncertainties or even paradoxes preventing the appropriate application of the VLC to IPRs or technology transfer-related anticompetitive practices.
256 It should be noted that limitations and exceptions with respect to copyright under IP law are often wide. See Articles 25–26 of the IP Law 2005. 257 Circular No. 01/2007/TT-BKHCN of 14 Feb. 2007 of the Ministry of Science and Technology guiding the implementation of Decree No. 103/2006/ND-CP of 22 Sept. 2006 detailing and guiding the implementation of a number of articles of the IP Law 2005. 258 Sections 50–52 of Circular No. 01/2007/TT-BKHCN. 259 Article 24.2 of Decree No. 103/2006/ND-CP.
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First, there is a presumption of market power of IPR holders. As noted, a dominant position of an enterprise under the VLC can be determined not only by a market share threshold in the relevant market but also by way of IPRs held by the enterprise. It can be inferred that there remains a presumption of market power or a dominant position for IPR holders in the competition law context. This presumption is no longer correct from the economic perspective and from the experience of the US, the EU, and even many developing countries as presented. If this presumption in Decree 116/2005/ND-CP is not eliminated, it will prevent right holders from legitimately exercising their IPRs in Vietnam. Second, refusal to deal, particularly refusal to license, is not properly addressed. Article 13 of the VLC lists six categories of prohibited abuses of a dominant position. Two of these categories include limitations on distribution and market foreclosure, which may involve refusal to deal/license. But Decree 116/2005/ND-CP, which elaborates on these abuses of a dominant position, does not mention refusal to deal/license.260 Therefore, refusal to deal or license may be regarded as not constituting an abuse of a dominant position under the current competition law of Vietnam. In contrast, the IP Law 2005 permits the grant of compulsory licensing of patents and rights to plant varieties if the parties cannot reach an agreement on reasonable commercial terms and conditions within a reasonable period of time.261 This rather weak ground for compulsory licensing is similar to the one in Article 76 of the Patent Act of Taiwan, which was strongly protested by the EU and will be repealed by a new amendment as noted in Section 3.2.4.2. From the experience of Taiwan one can argue that it will be very difficult to apply this ground for compulsory licensing under the IP Law 2005 because Vietnam will be faced with disputes with other WTO Members before the WTO. This means that Vietnam appears to have no way of dealing with IPR-related abuses relating to refusal to license if the current competition regulation on this issue is not revised. Third, excessive pricing of IPR-embodied products by a dominant enterprise may not violate the VLC. Article 13.2 of the VLC prohibits a dominant enterprise from imposing excessive/irrational selling prices. However, Decree 116/2005/ND-CP explains this unilateral conduct as excessive/irrational increasing of selling prices within a specific period of time.262 This means that the charging of excessive prices by a dominant enterprise in the beginning (when it enters Vietnam’s market) may not fall under the VLC.
260 See Article 13(3) and 13(6) of the VLC; Articles 28 and 31 of Decree 116/2005/ND-CP. Article 28.3(a) of Decree 116/2005/ND-CP merely prohibits a dominant enterprise from purchasing patents, utility solutions or industrial designs in order to destroy them or keep them from being used. 261 Articles 145.1(c) and 195.1(b) of the IP Law 2005. 262 Article 27 of Decree 116/2005/ND-CP.
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Fourth, all kinds of exclusivity in technology transfer contracts may be per se prohibited. In technology transfer agreements, transferees (licensees) often want to have an exclusive licence of the technology in a given territory in order to reduce risks involved in their investments in the commercialization of the technology transferred and to prevent intra-technology freeriding. A transferee will often take more and greater risks than a ‘mere’ distributor in a vertical agreement, since the transferee has to invest both in the production and the distribution of technology-embodied products. From the perspective of right holders, they prefer to have exclusive dealing (or non-compete obligations) from transferees to ensure both that the transferees will indeed invest in commercialization of the technology transferred and that inter-technology free-riding will be prevented.263 Therefore, exclusive licensing and exclusive dealing in technology transfer agreements often encourage technology transfer and create pro-competitive benefits. However, they also have market foreclosure effects and will be per se prohibited under Articles 8.6 and 8.7 of the VLC. In contrast, the Law on Technology Transfer 2006 permits parties to a technology transfer agreement to agree on exclusive licensing and a territory where the transferee can sell the technology-embodied product.264 This means that exclusive licensing is legal under the Law on Technology Transfer 2006 but the VLC, as lex specialis, prevails over it. Exclusivity in technology transfer agreements, therefore, appears to be per se prohibited under the VLC. Such a per se prohibition will certainly discourage technology transfer in Vietnam. Fifth, other anti-competitive clauses in technology transfer agreements may be easily exempted. Parties to a technology transfer agreement can argue that the technology transfer has pro-competitive benefits. It promotes technical or technological developments, improves the quality of goods/services, and gives consumers opportunities to access new products. In other words, it is quite easy to prove efficiency gains and a fair share for consumers from technology transfer owing to its pro-competitive benefits. Meanwhile, the requirements of indispensability and no elimination of competition, as noted, are not obligatory under Article 10.1 of the VLC. So all anti-competitive clauses in technology transfer contracts except exclusivity may be exempted by Article 10.1 of the VLC. Sixth, the competition authorities of Vietnam seem to have no power to grant compulsory licensing to correct anti-competitive practices of right holders. In addition to fines, they can impose remedies to correct patent-related anti-competitive practices on a patent holder who has infringed the VLC. One of the remedies is to impose measures to overcome the competition restric-
263 264
See supra Section 2.3.4. Article 17.2 of the Law on Technology Transfer 2006.
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tions created by the anti-competitive practices.265 When providing guidance on these measures, Decree 120/2006/ND-CP states that the right holder in question may be forced to use or re-sell industrial property, including patents, utility solutions and industrial designs which have been bought but have not been used by the right holder.266 This provision is not clear. It is not a real provision on compulsory licensing. It may not apply to IPRs developed by the right holder; and it addresses some industrial property only, not copyright and other IPRs (if possible). Furthermore, as noted above, the current IP law of Vietnam clearly states that the NOIP has the exclusive power to grant compulsory licensing if patent holders have infringed competition law, provided that the applicant for the compulsory licensing has submitted a dossier containing sufficient evidence. Accordingly, the competition authorities of Vietnam cannot directly grant compulsory licensing as a remedy to correct anti-competitive practices conducted by right holders. To conclude, due to the inherent shortcoming of the VLC as well as the regulations in the governmental decrees, especially Decree 116/2005/ND-CP, the application of the VLC to technology transfer may not work appropriately, at least in theory. IPRs and technology transfer in Vietnam are subject to competition rules which are rigid and severe in some cases, but lax and liberal in others.267 Vietnamese competition authorities may not take into account the special characteristics of IPRs. This is contrary to the current worldwide bestaccepted principles for the application of domestic competition law to IPRs/technology transfer. 3.3.2.3 Relevant cases After more than twenty years of the reform process, Vietnam has many socioeconomic achievements to its credit. However, its technological capability is still low. According to the Global Competitiveness Report 2008–2009, Vietnam’s technological readiness is ranked 79th out of 134 countries/ economies.268 The number of technology transfer agreements in Vietnam is quite small. In 2007, there were only 135 licence agreements and 454 assignment agreements relating to industrial property registered in Vietnam. In terms of the number of patents, there were only 6794 patents granted by the NOIP
265 266
Article 117 of the VLC. Article 4.4 of Decree No. 120/2005/ND-CP of 30 Sept. 2005 on dealing with infringements of competition law. See also Article 28.3(a) of Decree 116/2005/ND-CP. 267 Nguyen, Tu T. (2006), ‘Competition Law and Intellectual Property Rights in Vietnam’, CUTS C-CIER Briefing Paper, p. 6, available at www.cuts-international. org/pdf/comp_law3-2006.pdf. 268 World Economic Forum (2008), The Global Competitiveness Report 2008–2009, Geneva: WEF, p. 346.
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from 1981 to 2007.269 As of 1 October 2009, Vinapco, decided on 14 April 2009, which related to a refusal to supply aviation fuel, was the sole decision made by the Competition Council under the VLC, although the law came into effect in July 2005. So there is no technology transfer-related competition law case in Vietnam. However, there are two cases relating to IPRs and competition policy, namely the threat of compulsory licensing of Tamiflu at the end of 2005 and the exclusive distribution of pharmaceuticals in 2004, which may provide some experience in the area of the intersection of IPRs and competition law/policy in Vietnam. In addition, THP v. VBL, the competition case which was complained of and investigated for the first time under the VLC and is currently pending before Vietnam’s Competition Council, may give an overview of obstacles in the application of the VLC to IPRs/technology transfer. And Vinapco, the sole competition decision, signalled the enforcement of the VLC in practice. Compulsory licensing of Tamiflu Tamiflu (oseltamivir phosphate) is a patented medicine for the treatment and prevention of viral influenza in many countries, including Vietnam. Tamiflu patents are owned by Gilead Sciences, a research-based bio-pharmaceutical company. But Hoffmann-La Roche has the exclusive right to manufacture and sell Tamiflu worldwide according to a development and licence agreement between these two companies.270 From 2003 to 2005, avian influenza (bird flu H5N1) outbreaks took place in Vietnam and many countries in East and South East Asia. Forty-two people died of this disease during this period in Vietnam. According to the WHO’s warning, if a pandemic of avian influenza occurred, 10 per cent of the Vietnamese population could be infected, and 1 per cent would die of this disease.271 Therefore, Vietnam was in need of a large amount of Tamiflu, the only effective medicine against avian influenza. However, Hoffmann-La Roche could not meet the high demand for Tamiflu from Vietnam and other coun-
269 NOIP (2008), Hoat doˆng so’’ hu˜ ’u trí tueˆ 2007 [IP Activities 2007], Hanoi: ˙ NOIP, pp. 32 and 49–50. ˙ ˙ 270 See Report (Form 8-K and Exhibit 99.1, Exhibit 99.2) of Gilead Sciences to the US Securities and Exchange Commission, 23 June 2005, available at www.gilead.com/pdf/gilead_8k_062305.pdf. 271 See WHO (2008), ‘H5N1 Avian Influenza: Timeline of Major Events’, available at www.who.int/csr/disease/avian_influenza/Timeline090727.pdf; Ministry of Health of Vietnam (2005), ‘Báo cáo tình hình beˆ nh cúm A (H5N1)’ [Report on the ˙ Situation of Avian Influenza (H5N1)], No. 9823/BYT-VP1 of 30 Nov. 2005.
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tries.272 The Ministry of Health of Vietnam tried to persuade Hoffmann-La Roche to license Vietnamese pharmaceutical companies to produce Tamiflu; but Hoffmann-La Roche, in the beginning, did not agree. The Ministry of Health then threatened to apply the provisions on compulsory licensing under Article 802 of the Civil Code 1995, which stated that a competent authority could grant compulsory licensing to meet the needs of health or other urgent needs of society. Finally, the Ministry of Health and Hoffmann-La Roche reached an agreement under which the company undertook to license its patents for producing Tamiflu to Vietnamese generic drug manufacturers selected by it. It was hoped this would pave the way for Vietnam to be the first country in the world to produce Tamiflu under licence.273 However, since 2006 there have been no further outbreaks of avian influenza in Vietnam; and the licence has not been granted yet. It should be noted that in 2005 the IP regime in Vietnam was still subject to the Civil Code 1995, in which the regulation on compulsory licensing was unclear and controversial.274 Furthermore, at that time, Vietnam was negotiating joining the WTO and in need of support from many WTO Members, especially from developed country Members. However, the Ministry of Health clearly indicated that Vietnam could decide to issue compulsory licensing for the purpose of public health if Hoffmann-La Roche did not agree to Vietnam’s request. It effectively forced Hoffmann-La Roche to undertake to sub-license Tamiflu patents. This is the first case in which the provisions on compulsory licensing have been invoked in Vietnam. It will hopefully embolden the competent authorities of Vietnam to apply them, or at least threaten to do so, not only on the ground of public health but also on other appropriate grounds, e.g. the ground of correcting anti-competitive practices in the area of IPRs, because the current IP law of Vietnam clearly allows it, and such compulsory licensing is compatible with the TRIPS Agreement. However, as noted above, there is no cooperation mechanism between competition authorities and the NOIP in this matter. This may hinder application in practice. Moreover, the competition authorities of Vietnam appear not to have the power to grant compulsory 272 According to Gilead Sciences, Hoffmann-La Roche seemed not to devote its best efforts to commercializing Tamiflu substantially in all markets in the world. See the Report of Gilead Sciences, supra note 270. 273 See Official Letter No. 8186/QLD-DK of the Pharmaceutical Administration Department of the Ministry of Health of 9 Nov. 2005 setting out the contents of the meeting on 7 Nov. 2005 between the Ministry of Health and Hoffmann-La Roche. 274 See Article 802 of the Civil Code 1995; Article 51 of Government Decree No. 63/CP of 24 Oct. 1996 providing detailed rules on industrial property; Section 21 of Circular No. 3055/TT-SHCM of the Ministry of Science, Technology, and Environment of 31 Dec. 1996 providing guidance on Decree No. 63/CP.
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licensing directly as a remedy to correct anti-competitive practices of right holders. This may lead to it taking time for the NOIP to decide to grant compulsory licensing even after having appropriate decisions from the competition authorities. Besides, the proactive participation of Vietnamese enterprises in this process of compulsory licensing is needed. One of the reasons which prevented the implementation of the agreement between the Ministry of Health and Hoffmann-La Roche to sub-license Tamiflu patents into Vietnam, beyond a lack of further outbreaks of bird flu, was that Vietnamese pharmaceutical companies did not actively pursue this agreement. Exclusive distribution of pharmaceuticals and high pharmaceutical prices In Vietnam’s commitments on joining the WTO, it undertook to open the market in distribution services. However, the distribution of pharmaceuticals is excluded from the commitments.275 As a result, from 1 January 2009, all enterprises in Vietnam, including foreign-invested enterprises, have a full right to import pharmaceuticals into Vietnam; but only Vietnamese-owned enterprises have a right to distribute them.276 Under the Law on Pharmaceuticals of Vietnam,277 the pharmaceutical industry, including distribution of pharmaceuticals, is heavily regulated. Pharmaceutical companies have a right to determine prices and to compete on prices. But prices and any changes of prices must be registered with the competent authorities.278 Such prices cannot be higher than those in countries having similar conditions to Vietnam’s. Additionally, Article 9.7 of the Law on Pharmaceuticals prohibits any abuses of monopoly in the pharmaceutical industry with the purpose of seeking or securing unlawful profits. In practice, pharmaceutical prices in Vietnam are generally very high.279 Moreover, they have continued to increase, especially the prices of imported patented medicines. There are five factors that have made pharmaceutical prices in Vietnam increase, one of which is monopoly in the distribution of
275
WTO (2006), ‘Working Party on the Accession of Viet Nam: Schedule CLX – Vietnam – Part II – Schedule of Specific Commitments in Services: List of Article II MFN Exemptions’, WT/ACC/VNM/48/Add.2, p. 32. 276 See Report of the Working Party on the Accession of Viet Nam, supra note 203, Table 8(b) and para. 137; Decree No. 23/2007/ND-CP of 12 Feb. 2007 on trading rights of foreign-invested enterprises; Circular No. 06/2006/TT-BTY of 16 May 2006 of the Ministry of Health on import and export of pharmaceuticals and cosmetics. 277 Law on Pharmaceuticals No. 34/2005/QH11 of 14 June 2005. 278 See Joint Circular No. 11/2007/TTLT-BYT-BTC-BCT of 31 Aug. 2007 providing guidance on state management of pharmaceutical prices. 279 Regarding the prices of ARV medicines in Vietnam see Kuanpoth, Jakkrit (2007), ‘Patent and Access to Antiretroviral Medicines in Vietnam after World Trade Organization Accession’, J. World IP, 10, 204.
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pharmaceuticals.280 In that respect, the Zuellig Pharma case may well illustrate the impact of this factor on pharmaceutical prices in the Vietnamese market. Zuellig Pharma is an MNC specializing in pharmaceutical distribution. In 1999, it established Zuellig Pharma Vietnam (ZPV), a 100 per cent foreign-owned company in Vietnam. In May 2000, ZPV was permitted to import, export and distribute pharmaceuticals in the Vietnamese market by the Hanoi Industrial and Export Processing Zone.281 Since then, ZPV has signed exclusive distribution agreements to distribute its products in Vietnam with many big foreign pharmaceutical companies. This was the main reason that led to the unprecedented rise in pharmaceutical prices, especially the rise of imported patented pharmaceutical prices, in Vietnam in 2003–2004.282 Without considering whether or not there was collusion between big foreign pharmaceutical companies when they decided to conclude exclusive distribution agreements with ZPV, the fact that ZPV enjoyed such exclusivity raises concerns from the perspective of current competition law. At that time, ZPV contended that its market share on the pharmaceutical distribution market of Vietnam was below 30 per cent;283 therefore, it could not have a dominant position or monopoly power. However, the VLC, as well as competition law in many other countries, regards the relevant product market for a competition analysis in the pharmaceutical industry, for any given condition, as the set of drugs which are substitutes in the treatment of that condition.284 As presented in the pharmaceutical cases in South Africa in Section 3.2.2, in some exceptional circumstances a patented medicine may constitute a separate relevant product market. Furthermore, it is worth noting that parallel import of pharmaceuticals in Vietnam was not permitted until the middle of 2004.285 So the most important 280 Trinh, Hoa Binh et al. (2007), ‘Application of Economic Modelling to Measure the Likely Impact of Stronger Intellectual Property Rights (IPR) Protection on Medicine Prices in Vietnam’, Research Report, Hanoi: Ministry of Health and WHO. 281 Hanoi Industrial and Export Processing Zone had no power to permit ZPV to distribute pharmaceuticals in the Vietnamese market. Therefore, Vietnam’s Prime Minister concluded that ZPV would just have a right to distribute imported pharmaceuticals for three years from the date it started its business. See Official Letter No. 2080/VPCP-QHQT of 15 May 2001. 282 See the plan on implementation of some urgent solutions to stabilize pharmaceutical prices issued under Decision No. 1353/QD-BYT of the Ministry of Health of 16 April 2004. 283 Currently, the market share of ZPV on the pharmaceutical distribution market of Vietnam is around 20%: Zuellig Pharma Vietnam & Cambodia Profile 4 Services, available at www.zuelligpharma.com/offices_vietcam_pro&ser.html. 284 OECD (2001), ‘Competition and Regulation Issues in the Pharmaceutical Industry’, DAFFE/CLP(2000)29, p. 54. 285 Decision No. 1906/2004/QD-BYT of 28 May 2004 of the Ministry of Health providing the regulation on parallel import of pharmaceuticals.
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issue in the Zuellig Pharma case was whether among the pharmaceutical products exclusively distributed by ZPV any set of drugs could be regarded as a separate relevant market. If the answer were positive, the act of raising excessively the prices of pharmaceuticals which were exclusively distributed by ZPV might infringe the VLC. In 2004, when the VLC was in the drafting process, the Ministry of Health concluded that the unprecedented rise in pharmaceutical prices in Vietnam was partly due to the monopoly of ZPV in pharmaceutical distribution. However, at that time, there was no competition law in Vietnam, so ZPV suffered no punishment. Currently, excessive pricing by a dominant firm may be subject to the VLC. However, neither the Ministry of Health nor the competition authorities of Vietnam had made any official reaction to the increase in pharmaceutical prices although the network for exclusive distribution of patented pharmaceuticals still existed in the Vietnamese market. In a report on anticompetitive practices in pharmaceutical distribution in the Vietnamese market circulated in March 2009, ZPV and a few foreign owned pharmaceutical distribution companies were alleged to abuse their exclusivity in the distribution (through Vietnamese partners) of imported pharmaceuticals into Vietnam by imposing excessive prices. However, the report indicated that it is very difficult to determine whether or not these companies have in practice a dominant position.286 The first competition case: THP v. VBL287 Vietnam Brewery Ltd (VBL) is a joint venture between a Vietnamese company, which owns a 40 per cent stake in VBL, and Asia Pacific Breweries Ltd, a joint venture in Singapore between the Fraser and Neave Group and Heineken International, which owns the remaining 60 per cent. VBL produces premium beer brands, namely Heineken, Tiger and others in Vietnam. VBL has concluded agreements with many restaurants, bars, pubs, hotels (premises for the sale and consumption of beer: on-premises beer market or on-trade beer market288) to have the exclusive rights to sell, exhibit, introduce and market VBL’s beer products at these sites
286 VCAD (2009), Báo cáo Pháp luaˆ t canh tranh d-ieˆ`u chi’nh hành vi pha’ n ca nh ˙ ta˙ i thi tru o` ng Vieˆt Nam [Report on Anti˙ ´ˆ i du’o’c phaˆm tranh trong heˆ tho´ˆ ng phân pho ’ ’ ˙ ˙ ˙ ˙ ˙ competitive Practices in the Distribution of Pharmaceuticals in the Vietnamese Market], Hanoi: VCAD, pp. 87 and 92–93. 287 In the interest of disclosure, the author is counsel for THP. 288 A beer market can be divided into the on-premises beer market (or on-trade beer market) and off-premises beer market (or off-trade beer market: retail channels’ beer market). See Case C–234/89, Stergios Delimitis v. Henninger Bräu AG, [1991] ECR I–935, para. 16; Case COMP/C.37.750/B2, Brasseries Kronenbourg, Brasseries Heineken, OJ 2005 L 184/57, paras 24–26.
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in exchange for compensating the owners of these sites.289 Tan Hiep Phat Ltd (THP), a Vietnamese company, launched Laser, a new premium beer, in the Vietnamese market at the end of 2003. However, owing to the exclusive dealing or non-compete obligation, sites for the sale and consumption of beer that have signed agreements with VBL cannot sell THP’s Laser. One restaurant agreed to sell THP’s Laser, but was then sued by VBL before the People’s Court of Ho Chi Minh City. This court, in the middle of 2004, held under the then prevailing Vietnamese law that the restaurant selling THP’s Laser infringed the exclusive dealing clause in the agreement between itself and VBL. The court required the restaurant to stop selling THP’s Laser.290 This decision, on appeal, was upheld by the People’s Supreme Court.291 As a result, THP’s new premium beer cannot access the on-trade beer market in Vietnam. In July 2005, right after the VLC came into effect, THP tried to complain about VBL’s anti-competitive practices, which prevented THP, a new competitor, from entering the market as per Article 13.6 of the VLC. However, at that time, the competition authorities had not been established by the Prime Minister as called for by the VLC. So THP could not complain about VBL. In January 2007, after the VACD and Competition Council were established and governmental decrees providing detailed guidance on the implementation of the VLC were enacted, THP officially complained to the VCAD. According to Articles 58 and 59 of the VLC, which are elaborated on in Articles 45 and 46 of Decree 116/2005/ND-CP, within seven days from the date of receipt of the complaint dossier from the complainant, the VCAD has to decide whether to accept the complaint, then decide whether to carry out a preliminary investigation. If the complaint dossier does not conform to complaint forms, or it lacks infringement evidence, the VCAD can notify the complainant and require him to supplement the complaint dossier. The VLC and Decree 116/2005/ND-CP do not clearly state how many times the VCAD can require the complainant to supplement the complaint dossier. But as a governmental agency in a law-based state, the VCAD should respect the principle that governmental agencies have a right to do only what is permitted by, and stipulated in, laws. Furthermore, the VCAD does have the power to refuse 289 The amount of money that VBL pays to each site depends on the site’s estimated beer sale revenue. 290 VBL v. Cay Dua Restaurant, Judgment No. 130/XX-KTST of the People’s Court of Ho Chi Minh City of 18 May 2004. See also Nguyen, Tu T. (2004), ‘Tho’a thuaˆn không canh tranh trong hop d-oˆ`ng cung ca´ˆp-phân phoˆ´i và Vu? án Quán Cây du`a’ ˙ ˙ Obligation in˙ the Supply and Distribution Agreement ˙ [Non-Competitive and the Court Case Cay Dua Restaurant], Tap chí Nghiên cu´’u Laˆp pháp [Legislative Study Journal], ˙ ˙ 8, 47–56. 291 VBL v. Cay Dua Restaurant, Judgment No. 51/KTPT of the People’s Supreme Court of 5 Oct. 2004.
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the complaint if the complainant does not supplement it with documents as required by the VCAD; and the preliminary investigation is the process by which the VCAD initially evaluates the complaint.292 So it seems that the VCAD cannot abuse its power by requiring the complainant to supplement the complaint dossier several times; it has, in principle, the power to require the complainant to supplement the complaint dossier only once. In THP v. VBL, the VCAD, nevertheless, required THP to supplement it with documents three times.293 In VCAD’s three notifications requiring further documents, the VCAD asked THP to submit documents and evidence to determine: (i) the relevant market, including the relevant product market and the relevant geographical market; (ii) the market share of VBL (the defendant); and (iii) the anti-competitive practices of VBL. The VACD asked THP to submit either the original contracts, which contained exclusive dealing arrangements between VBL and restaurants, bars, pubs, and hotels, or certified copies of these contracts. Although the VCAD is an investigative authority under the VLC, it acted, in this case, as a court to handle the case. THP, as a private complainant to the competition authority, could not find and submit all the documents and evidence required by the VCAD. Submitting the original contracts or even certified copies of them was almost impossible. Only the VCAD could obtain them through the investigative powers granted it by the VLC. Furthermore, it is worth noting that: Competition cases are characterised by a very asymmetric distribution of the available information and the necessary evidence: it is often very difficult for claimants to produce the required evidence, since many of the relevant facts are in the possession of the defendant or of third persons and are often not known to claimants in sufficient detail.294
However, THP tried to meet the VCAD’s requirements, and in August 2007 the VCAD decided to undertake a preliminary investigation.295 After the preliminary investigation, the VCAD found there were signs showing that: (i) the relevant market is the premium beer market in Vietnam; (ii) VBL’s market
292 It is worth noting that a complainant has to pay in advance 30% of the fees of handling an anti-competitive case (30 million VND, approximately 2000 US dollars). See Article 59.3 of the VLC; Article 53 of Decree 116/2005/ND-CP. 293 VCAD Notification Letter No. 01/TB-QLCT of 5 Feb. 2007, No. 03/TBQLCT of 29 March 2007, No. 04/TB-QLCT of 18 May 2007. 294 European Commission Staff Working Paper accompanying the White Paper on Damages actions for breach of EC antitrust rules, SEC(2008) 404, para. 66, available at http://ec.europa.eu/competition/antitrust/actionsdamages/files_white_paper/ working_paper.pdf. 295 VCAD Decision No. 40/QD-QLCT of 16 Aug. 2007.
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share in the relevant market exceeds 30 per cent; and (iii) the exclusive dealing arrangement in agreements between VBL and many restaurants, bars, pubs and hotels constitutes an infringement under Article 13.6 of the VLC. As a result, in October 2007, the VCAD decided to investigate the case officially.296 According to the VLC, the time limit for an official investigation of a competition case made by the VCAD is 180 days from the date of issue of the VCAD’s decision to investigate. In case of necessity, this time limit may be extended by the head of the VCAD no more than twice, each time for a maximum of 60 days.297 This means that the maximum period of time for the official investigation is 300 days (around ten months). After the termination of an official investigation, the VCAD shall transfer its investigation report and all documents relating to the competition case to the Competition Council. The president of the Competition Council shall then set up a CCHC to adjudicate the case.298 However, in the THP v. VBL case, by 1 October 2009, around one year after the termination of the maximum official investigation period, there had been no decision or notification relating to the case from either the VCAD or the Competition Council. One may argue that in this case the VCAD and/or the Competition Council did not comply with the time limit laid down in the VLC.299 Regardless of the final result of the THP v. VBL case, it is the first competition case complained of and investigated under the VLC, so the delay in investigating and handling it may be acceptable.300 But it reflects the fact that although adoption of competition law is very difficult, its implementation is much more so. Both aspects of the law need political support for and public
296 297
VCAD Decision No. 49/QD-QLCT of 12 Oct. 2007. Article 90 of the VLC. In the THP v. VBL case, the head of the VCAD decided to extend the official investigation period twice as permitted by the VLC. See VCAD Decision No. 16/QD-QLCT of 26 March 2008 and Decision No. 39/QD-QLCT of 30 May 2008. 298 Articles 98–99 of the VLC. 299 The Regulation on organization and operation of the Competition Council, which is required under Decree No. 05/2002/ND-CP, was enacted by the Competition Council and ratified by the Ministry of Industry and Commerce in Decision No. 293/QD-BCT of 15 Jan. 2009. In addition, one may argue that: (i) the VLC does not create a time limit for the period from the termination of an official investigation to the time the VCAD transfers an investigation report and all relevant documents to the Competition Council; and (ii) the VLC does not regulate the period from the time the Competition Council receives the investigation report and documents to the time the President of the Competition Council makes a decision to establish a CCHC. 300 In the current legal system and context of Vietnam, the principle ‘justice delayed is justice denied’ seems inapplicable.
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awareness of competition law.301 Moreover, the VCAD should work proactively. It should not leave the burden of proof to complainants. In this context, Vietnam is in need of independent and strong competition authorities. The first competition decision: Vinapco Although THP v. VBL was the first competition case complained of and investigated under the VLC, Vinapco302 was an extraordinary decision made by the Competition Council through a CCHC. The decision related to a refusal to supply by Vietnam Air Petrol Company (Vinapco), which is the sole supplier of aviation fuel in Vietnam and a subsidiary of Vietnam Airlines – a state-owned airline company holding a dominant position in the domestic airlines market. Due to a dispute over fuel pumping fees in which Vinapco was alleged to discriminate against Pacific Airlines by charging that carrier higher fees than it charged Vietnam Airlines, Vinapco, on 1 April 2008, unilaterally suspended the supply of fuel to Pacific Airlines. This refusal resulted in the delaying of some of Pacific Airlines’ flights, affecting more than 5000 passengers. The Prime Minister of Vietnam then ordered Vinapco to resume its supply to Pacific Airlines, and the VCAD, on its own initiative, decided to investigate the case under the VLC. On 14 April 2009, the CCHC decided that Vinapco had abused its monopoly position in the aviation fuel market in Vietnam by unilaterally cancelling its supply agreement with Pacific Airlines without legitimate justification and by imposing disadvantageous conditions on its customer, which violated respectively Article 14.3 and 14.2 of the VLC. The Council fined Vinapco 3.37 billion Vietnamese dong (around 200,000 US dollars) and petitioned the Vietnamese government to sever the relationship between Vietnam Airlines and Vinapco and allow other companies to supply aviation fuel in the Vietnamese market. It appears that the facts of Vinapco are much clearer than those of THP v. VBL. Although there is no debate over the anti-competitive practices of either Vinapco or VBL, the monopoly position of Vinapco in the relevant market is obvious, while the dominant position of VBL is still controversial due to the difficulty of determining the relevant market and market shares. That difficulty will certainly appear in a technology transfer-related competition case in the future. Besides, it is worth noting that the VCAD detected the infringement of Vinapco and decided to investigate the case by itself, while in THP v. VBL it investigated the case only after receiving the THP’s complaint. In any case, the Vinapco decision marked a successful ‘take-off’ of the VLC. 301
A survey on public awareness of competition law showed that in Vietnam it was limited to the knowledge that there was the so-called VLC (53.4% of intervewees knew of the existence of the VLC and 44.8% did not). VCAD, supra note 219, pp. 21 and 30. 302 Available at www.hoidongcanhtranh.vn/Tin-Tuc-Chi-Tiet&action=view News&id=967.
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Remarks
Competition law, IP law and above all the enforcement of these laws are quite new to Vietnam. So determining a reasonable balance between competition law and IPRs and building appropriate IPR-related competition law to meet Vietnam’s specific circumstances are important. This can help attract and encourage inward technology transfer, especially modern technology transfer from developed countries, as well as establish a competitive business environment protecting both consumer welfare and the nation as a whole. However, this is proving a difficult task for Vietnamese legislators and policy makers. The current Vietnamese laws and regulations in this area contain many shortcomings. The IP Law 2005, the Law on Technology Transfer 2006 and the relevant governmental decrees all address IPR-related anti-competitive practices by right holders and refer these issues to competition law. These regulations are compatible with the competition rules in the TRIPS Agreement. However, the VLC and governmental decrees elaborating the VLC currently cannot deal with these issues in an appropriate manner. As the WTO Director-General, Pascal Lamy, said in his welcome address on the event of Vietnam’s WTO accession: Becoming a fully-fledged member of the [WTO] family, Viet Nam will be able to benefit from the market access and global trading rules developed over the past 50 years. It will also be able to use the WTO Dispute Settlement to solve its differences with other Members and fully participate in the on-going negotiations to design the trade rules of the future.303
How Vietnam, as a developing country Member, can use the competition flexibilities in the TRIPS Agreement in re-designing and enforcing its domestic competition law to promote access to technology and control abuses of IPRs is not only a legal question but also an economic and political one. Because modern competition law is global competition law,304 Vietnam can learn from the experience of developed countries and other developing countries. In any case, the efforts of the government to build and maintain a competitive business environment play an important role in the process of improving Vietnamese competition law and its application in practice.
303
Welcome Address by Pascal Lamy, the WTO Director-General, to Vietnam at the General Council meeting of 7 Nov. 2006, available at www.wto.org/english/ news_e/news06_e/gc_dg_stat_07nov06_e.htm. 304 Elhauge, Einer and D. Geradin, (2007), Global Competition Law and Economics, Oxford: Hart Publishing, p. v.
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3.4
OBSTACLES FOR DEVELOPING COUNTRIES
Most developing countries have a relatively short history of competition law. Although the TRIPS Agreement gives WTO Members the right to use their domestic law to control IPR abuses, and technology transfer-related anticompetitive practices may be regulated by both domestic IP law and/or competition law in developing countries, enforcement is rare in practice. Developing countries are faced with many daunting obstacles, both internal and external, in their quest to apply domestic competition legislation to the exercise of IPRs and inward technology transfer. 3.4.1
Internal Obstacles
3.4.1.1 Lack of capacity The application of competition law to technology transfer is a very complicated matter, which requires considerable resources, expertise and infrastructure. It is also difficult to implement in practice. Sophisticated knowledge and skills relating to both IPR-related competition law and the international agreements concerned, particularly the TRIPS Agreement, are needed. However, it is well recognized that there is a lack of effective competition agencies, internal capacities, and skilled industry and competition law experts in developing countries, which hinders these countries from being able rationally, consistently and fairly to enforce the law. Many developing countries are ‘experiencing difficult challenges in the formulation and implementation of competition [laws and] policies, due to lack of adequate financial, material and skilled human resources’.305 These capacity constraints can manifest themselves in many ways, including lack of requisite technical skills, limited expertise in competition, economic and statistical analyses, scarce budgetary resources and lack of independence in competition law enforcement. Enforcement of domestic competition law in the area of IPRs and technology transfer is even more complex and involves more economic analyses. The lack of capacity in this area is thus more serious and troublesome. 3.4.1.2 Deficiency of legislation Some developing countries have enacted guidelines for the application of competition law to IPRs/technology transfer, but most developing countries have not. Meanwhile, competition laws of some developing countries contain provisions exempting the application of competition law to the exercise from
305 UNCTAD (2008), ‘Report of the Intergovernmental Group of Experts on Competition Law and Policy on Its Ninth Session’, TD/B/COM.2/CLP/72.
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IPRs. This may suggest that IPR-related conduct is immune from competition law. Additionally, competition provisions in IP law, if any, are often vague. In many cases, the most important barrier to compulsory licensing in general, as well as to compulsory licensing to correct IPR-related anti-competitive practices in particular, is the absence of simple, clear and straightforward legislative and administrative procedures.306 Thailand and Vietnam may be examples of the deficiency of competition legislation. Thailand promulgated the Competition Act in 1999. To date, few cases have been investigated by the Competition Commission of Thailand. In addition to the case of Abbott’s withdrawal of drug registration applications presented in Section 3.2.3, there have been two other cases relating to anticompetitive practices constituting an abuse of dominance under Section 25 of the Act. However, the criteria or thresholds used to determine a dominant position were not enacted by the Competition Commission until 2007.307 So these two cases ended in stalemate even though the market share of one of the firms being investigated in one case was approximately 80 per cent.308 Meanwhile, the Patent Act of Thailand, as amended in 1999, does not address compulsory licensing on the ground of anti-competitive practices by patent holders.309 The enforcement of competition law in the field of IPRs and technology transfer seems very difficult in Thailand, and this is mainly due to the current deficiencies in the legislation. Using competition law to address anti-competitive refusal to license seems especially hard to do. In Vietnam, the delay in enacting by-laws and their ambiguity, as discussed in Section 3.3, also illustrate the deficiency in legislation. Besides, the competition laws of most developing countries have been built on the basis of developed countries’ models. The laws do not consistently and adequately confront and solve all challenges faced by competition authorities in developing countries in their specific domestic contexts. Furthermore, competition laws in developing countries often contain provisions on unfair competition law.310 When rules prohibiting anti-competitive restrictions on trade and those against unfair competition are mixed, confusions in law 306
Commission on Intellectual Property Rights (2002), Integrating Intellectual Property Rights and Development Policy, London, available at www.iprcommissionorg/papers/pdfs/final_report/CIPRfullfinal.pdf, p. 44. 307 See Notifications of the Competition Commission of Thailand on Criteria for Business Operator with Market Domination, supra note 157. 308 Nikomborirak, Deunden (2006), ‘The Political Economy of Competition Law: The Case of Thailand’, Nw. J. Int’l. L. & Bus., 26, 597. 309 See Sections 45–52 of the Thai Patent Act of 1979, amended in 1992 and 1999, WTO document IP/N/1/THA/I/1/Rev.1. 310 Liu, Lawrence S. (2004), ‘In Fairness We Trust? Why Fostering Competition Law and Policy Ain’t Easy in Asia’, available at http://ssrn.com/abstract=610822.
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enforcement increase, particularly in the field of IPRs. It is very easy for developing countries to think that the part of competition law controlling IPR abuses is laws and regulations controlling counterfeiting and pirated products. The regulations on application of competition law to anti-competitive IPRrelated conduct are often neither sufficiently developed nor effectively clear. 3.4.1.3 Absence of competition culture Competition culture, or the socio-economic ideology of competition,311 may be defined as an awareness of the general public, including governments, politicians, business communities, civil society organizations, and consumers about competition law and the benefits of competition. It plays an important role as ‘a means of supplementing and reinforcing the positive effects of implementing a competition law and policy’.312 The OECD has concluded that ‘for developing countries without well established competition regimes, promoting competition principles to the general public is an ongoing task, and indeed perhaps the most important task’.313 However, there is a lack of such a competition culture in many developing countries.314 Moreover, the political will to establish a strong competition regime seems not to be strong enough because protection of specific sectors is considered paramount. Regarding IPRs and technology transfer, both public awareness and political will in developing countries mainly focus on the quantity and quality of technologies imported and on how to increase them because attracting foreign investment and inflows of technology is the priority. Public concerns about IPR-related anti-competitive practices are, at the moment, not a major or serious concern in most developing countries. 3.4.1.4
Lack of cooperation between competition authorities and IP authorities For a variety of reasons, such as the lack of binding regulations on inter-
311
See Gal, Michal (2004), ‘The Ecology of Antitrust: Preconditions for Competition Law Enforcement in Developing Countries’, in UNCTAD, ‘Competition, Competitiveness and Development: Lessons from Developing Countries’, UNCTAD/DITC/CLP/2004/1, p. 24. 312 Report (1998) of the Working Group on the Interaction between Trade and Competition Policy to the General Council, WT/WGTCP/2, para. 53. 313 Winslow, Terry (2004), ‘Competition Law and Policy in Chile: A Peer Review’, p. 56, available at www.oecd.org/dataoecd/43/60/34823239.pdf. 314 See OECD (2004), ‘Challenges/Obstacles Faced by Competition Authorities in Achieving Greater Economic Development Through the Promotion of Competition’, CCNM/GF/COMP(2004)3; Mehta, Pradeep S. et al. (2007), Politics Trumps Economics: Lessons and Experiences on Competition and Regulatory Regimes from Developing Countries, Jaipur: CUTS, pp. 40–41.
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agency cooperation as well as the lack of relevant technical expertise and limited resources, there is often no dialogue between competition authorities and IP authorities in developing countries. There is in fact little understanding of the other’s field and the need for cooperation between these two groups of authorities. Consequently, it is difficult to deal with the overlap between IP law and competition law. This certainly hinders the application of competition law to technology transfer in developing countries. 3.4.2
External Obstacles
Since developing countries are net importers of technology, their application of domestic competition law to IPRs/technology transfer may affect MNCs headquartered in developed countries. MNCs under investigation for alleged IPR-related anti-competitive practices may lobby their home governments to exert political pressure on host countries, claiming unfair discrimination or abuses of domestic competition law in breach of the host countries’ obligations under the TRIPS Agreement. Developing countries may thus have to suffer pressures from developed countries, including threats of using either WTO mechanisms or those in bilateral agreements. 3.4.2.1 Argentina–US mutually agreed solution In Argentina, the Law on Patents and Utility Models, like the IP law of some other developing countries, regulates the grant of compulsory licences on the ground of anti-competitive practices of right holders. Article 44 of this Law states: The right of exploitation conferred by a patent shall be granted without permission from the owner thereof where the competent authority has established that the said owner has engaged in anti-competitive practices … For the purposes of this Law, the following practices among others shall be considered anti-competitive: (a) the setting of prices for the patented products that are excessive in relation to the market average or discriminatory, particularly where alternative proposals exist for supplying the market at prices significantly lower than those charged by the patent owner for the same product; (b) refusal to supply the local market on reasonable commercial terms; (c) the slowing down of marketing or production activities; (d) any other act capable of being included among the practices considered punishable by Law [of Defence of Competition].315
315 Article 44 of Argentina’s Law on Patents and Utility Models (Law No. 24.481 as amended by Law No. 24.572), WTO document IP/N/1/ARG/I/2 and IP/N/1/ARG/I/2/Corr.1 (emphasis added).
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As analysed, the TRIPS Agreement, as well as the Paris Convention, do not regulate the procedures or substantial tests for determining IPR-related anticompetitive practices, provided the requirements of consistency and appropriateness are met. The list of anti-competitive practices in Article 44 is not incompatible with the TRIPS Agreement. In theory, the National Institute of Industrial Property (INPI), the IP authority of Argentina, can be the competent authority under Article 44, which can decide that a patent holder has abused her patent rights and then grant compulsory licences. However, the Argentina–US mutually agreed solution does not permit this. In 1999 and 2000, the US brought requests for consultations with Argentina to the WTO DSB in accordance with the DSU respectively concerning: (i) Argentina’s patent protection for pharmaceuticals and test data protection for agricultural chemicals,316 and (ii) certain of Argentina’s measures on the protection of patents and test data.317 Although the matter relating to Argentina’s application of its competition law to IPR-related anti-competitive practices was not raised in the requests for consultations by the US under the DSU, the mutually agreed solution between US and Argentina did mention it. The solution says: Argentina has confirmed that if any of the situations defining ‘anti-competitive’ practices in [Article 44 of the Law on Patents and Utility Models] were found to exist, such a finding will not in and of itself warrant an automatic determination that a patent owner is engaging in an ‘anti-competitive’ practice. Pursuant to Article 44 of Decree 260/96, in order to justify the granting of a compulsory license by INPI under this authority where one of these defined situations is established, a prior decision must have been handed down by the [National Commission on the Defence of Competition] analyzing the practice in question based on [the Law of Defence of Competition]. According to this law, the existence of an abuse of a dominant position in the market must be established in order for a practice to be considered ‘anti-competitive’.318
Under the mutually agreed solution, Argentina seems to ‘have been coerced into agreeing to amend the use of anti-competition provisions in its patent acts’.319 From the perspective of procedural law, the National Institute of 316 Argentina – Patent Protection for Pharmaceuticals and Test Data Protection for Agricultural Chemicals, WT/DS171/1, 10 May 1999. 317 Argentina – Certain Measures on the Protection of Patents and Test Data, WT/DS196/1, 6 June 2000. 318 Notification of mutually agreed solution according to the conditions set forth in the agreement, WT/DS171/3 and WT/DS196/4, point 1. 319 Shanker, Daya and R. Castle (2008), The TRIPS Agreement and Developing Countries: Fault Lines in the World Trade Organization, Saarbrücken: VDM Verlag Dr Müller, pp. 197–198 (noting that Argentina, at the time of the disputes, was in a state of economic crisis and in need of financial help from the International Monetary Fund and the US).
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Industrial Property may not decide by itself that a practice of a patent holder is anti-competitive. It must wait for an affirmative decision from the National Commission on the Defence of Competition – the competition authority – before granting a compulsory licence. From the perspective of substantive law, in order to condemn a patent-related anti-competitive practice an abuse of a dominant position in the relevant market by the patent holder must be established. One may argue that the mutually agreed solution just reiterates what Decree 260/96 stipulated. However, Decree 260/96 is an executive regulation, which cannot circumscribe an Act adopted by Argentina’s Parliament. In this case, the mutually agreed solution under the DSU can be regarded as a bilateral agreement between Argentina and the US that would bind Argentina and prevail over Argentina’s Law on Patent and Utility Models. From the DSU perspective, this mutually agreed solution is in breach of the DSU. Article 3.6 of the DSU states that ‘all solutions to matters formally raised under the consultation … shall be notified to the DSB’, while Article 4.4 states that ‘requests for consultations shall be notified to the DSB [and] submitted in writing and shall give the reason for the request, including identification of the measures at issue and an indication of the legal basis for the complaint’. So Article 3.6, read in conjunction with Article 4.4, requires that all matters in a mutually agreed solution must be raised in requests for consultations.320 However, the patent-related competition matter in the mutually agreed solution between the US and Argentina was not raised in the US requests for consultations.321 Accordingly, without analysing the reasonableness of Argentina’s obligation relating to the patent-related competition provision under the mutually agreed solution, it is likely that the application of domestic competition law to technology transfer in developing countries may
320 The WTO dispute settlement in European Communities – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs, WT/DS174/R, 15 March 2005, may illustrate this observation. On 1 June 1999, the US requested consultations with the EC pursuant to Article 4 of the DSU and Article 64 of the TRIPS Agreement regarding EC Council Regulation No. 2081/92 on the protection of geographical indications (GIs) and designations of origin for agricultural products and foodstuffs, as amended. On 4 April 2003, the US supplemented its earlier request with a request for additional consultations with the EC pursuant to Article 4 of the DSU, Article 64 of the TRIPS Agreement and Article XXII of the GATT, regarding the protection of trademarks and GIs for agricultural products and foodstuffs in the EC pursuant to Regulation 2081/92, as amended, and its related implementing and enforcement measures. The US had to supplement the second request under Article 4 of the DSU because the content of the second request was different from the content of the first request. 321 See US requests for consultation with Argentina, WT/DS171/1, supra note 316 and WT/DS196/1, supra note 317.
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often give rise to pressure from developed countries.322 In particular, developed countries would like to limit developing countries’ invoking of Article 31(k) of the TRIPS Agreement. 3.4.2.2
Communications from the EC relating to the Anti-monopoly Law of China As noted in Section 3.1.2.1, the exercise of IPRs is subject to competition law under Article 55 of the Anti-Monopoly Law of China. During the drafting period of the Anti-Monopoly Law, China was advised not to incorporate this provision into that Law.323 Shortly after the Law’s enactment, the European Communities (EC) raised concerns about the application of Article 55 in practice and the compatibility of that Article with the TRIPS Agreement. In October 2007 and October 2008 respectively, the EC required China to clarify these issues in two EC communications to the TRIPS Council, which state: [The Anti-Monopoly Law of China] refers to the concept of ‘abuse of intellectual property rights’ in particular in Article 55. Can China clarify what this concept means in practice? Can China confirm that this concept does not go beyond what the TRIPS Agreement considers as abusive practices under Article 31(k) (compulsory licensing) and Article 40 (competition)? Can China confirm that the implementing provisions of the Anti-Monopoly Law will clarify this concept?324
Since the TRIPS Council works, among other things, as a forum that ‘afford[s] Members the opportunity of consulting matters relating to the traderelated aspects’ of IPRs,325 the questions raised by the EC are considered as normal activities within the TRIPS Council. However, they reflect the concerns of the EC and developed country Members in general, about the increasing tendency to apply domestic competition law to IPRs in developing
322 In addition to the cases concerning the mutually agreed solution between Argentina and the US under the DSU, the Brazil – Measures Affecting Patent Protection case WT/DS199/4, relating to a ‘local working’ requirement in Brazil’s Industrial Property Law, to some extent also reflected pressures of the US to prevent a developing country from applying competition provisions in IP law to correct IPR abuses. See, i.e., Carvalho, Nuno P. (2005), The TRIPS Regime of Patent Rights, The Hague: Kluwer Law International, pp. 195–205 (against Brazil); Champ, Paul and A. Attaran (2002), ‘Patent Rights and Local Working under the WTO TRIPS Agreement: an Analysis of the U.S.–Brazil Patent Dispute’, Yale J. Int’l L., 27, 365 (in favour of Brazil). 323 See infra Section 4.1.2. 324 WTO (2008), ‘Transitional Review Mechanism of China – Communication from the EC’, IP/C/W/521, para. 29; WTO (2007), ‘Transitional Review Mechanism of China – Communication from the EC’, IP/C/W/503, para. 23. 325 Article 68 of the TRIPS Agreement.
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country Members. On the one hand, it is a good sign that China should fully respect the TRIPS Agreement when it makes such an application. On the other hand, China may be faced with pressures from developed country Members when it enacts regulations or guidelines to set out in detail the application of Article 55. In addition to the TRIPS Council forum, the IPR-related competition rules of a WTO Member may be questioned and challenged by other Members through the trade policy review mechanism.326 For example, in the trade policy review of China in the WTO in 2008, Japan posed a question on how China would formulate guidelines on the application of the Anti-Monopoly Law in the area of IPRs; and the EU, again, asked China about the concept of ‘abuse of patents’ in Chinese laws and regulations.327 Thus, one may observe that, with respect to the adoption and enforcement of their domestic IPRrelated competition laws and regulations, developing country Members can be challenged by developed country Members through WTO mechanisms. 3.4.2.3 Bilateral agreements and TRIPS-plus standards In addition to direct intervention by complaining or threatening to bring complaints to the WTO DSB, developed countries may force developing countries to accept TRIPS-plus standards,328 which may affect regulations on IPRrelated anti-competitive practices and the use of compulsory licensing to correct such practices in developing countries, by way of bilateral/regional trade, investment or economic partnership agreements. There are cases where developing countries formally renounce their use of the TRIPS flexibilities as a condition for obtaining further trade advantages through bilateral agreements. According to the US model Bilateral Investment Treaty of 2004 (BIT),329 which is oriented primarily towards protecting investors’ expectations, IPRs and IPR licences are regarded as forms of investment, which are subject to wider protection under the national treatment and MFN treatment of bilateral agreements with the US than those under the equivalent principles of the TRIPS Agreement.330 In the IP chapters or articles of some free trade agreements 326
Regarding the Trade Policy Review Mechanism in the WTO see Article III.4 of the Marrakesh Agreement Establishing the WTO and the Annex 3 of this Agreement. 327 WTO (2008), ‘Trade Policy Review – China,’, WT/TPR/M/199/Add.1, pp. 65 and 221. 328 Over 50% of bilateral trade and investment agreements contain IPR-related provisions going beyond the TRIPS minimum obligations. See UNCTAD (2007), ‘Intellectual Property Provisions in International Investment Arrangements’, UNCTAD/WEB/ITE/IIA/2007/1, p. 5. 329 US model BIT of 2004, available at www.state.gov/documents/organization/38710.pdf. 330 The national treatment and MFN treatment of the TRIPS Agreement are
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(FTAs) signed before mid-2003 between the US and developing countries, Vietnam, Jordan and Singapore for instance, there are provisions equivalent to Article 31(k) of the TRIPS Agreement, which allow these countries to grant compulsory licensing to correct patent-related anti-competitive practices.331 This means that such compulsory licensing, which is granted in compatibility with the TRIPS Agreement and the IP chapter/article of FTAs, is allowable in the domestic law of the developing country partners. However, FTAs signed after mid-2003 between the US and other developing countries, such as Chile, the Dominican Republic, Bahrain, South Korea and Panama, do not contain such provisions in their IP chapters.332 In the investment chapter of these FTAs, similar to the one in the US model BIT, the grant of compulsory licensing to correct patent-related anti-competitive practices under national competition law is not presumed to be an act of appropriation.333 However, it is stipulated that the IP chapter shall prevail over the investment chapter in the event of any inconsistency between them.334 Consequently, these developing countries have cause to be greatly concerned when they invoke Article 31(k) of the TRIPS Agreement.335 Besides, even if an FTA signed between a developing country and the US may declare TRIPS Agreement-consistent compulsory licences nonexpropriatory, the developing country may be faced with the challenge of proving that its decision to grant such a compulsory licence would not amount
applied to protection of IPRs including matters affecting the availability, acquisition, scope, maintenance, enforcement, and use of IPRs. In the meantime, Articles 3 and 4 of the US model BIT require the national treatment and MFN treatment for the establishment, acquisition, expansion, management, conduct, operation and sales or other disposition of IPRs as a form of investment. See also Barton, John H. (2008), ‘Antitrust, Patents, and Developing Nations’, in Neil Weinstock Netanel (ed.), The Development Agenda: Global Intellectual Property and Developing Countries, New York: OUP, p. 409. 331 See Article 7.8(K) Chapter II of the Agreement between the US and Vietnam on Trade Relations (signed on 13 July 2000); Article 4.20(a) of the US–Jordan FTA (signed on 24 Oct. 2000); Article 16.7(6)(a) of the US–Singapore FTA (signed on 6 May 2003). 332 See Chapter 17 of the US–Chile FTA (signed on 6 June 2003); Chapter 15 of the US–Dominican Republic FTA (signed on 13 May 2004); Chapter 14 of the US–Bahrain FTA (signed on 14 Sept. 2004); Chapter 18 of the US–South Korea FTA (signed on 20 June 2007); Chapter 15 of the US–Panama TPA (signed on 27 June 2007). 333 See, e.g., Article 8.3(b)(ii) of the US model BIT, supra note 329; Article 10.5(3)(b)(ii) of the US–Chile FTA; Article 11.8(3)(b)(ii) of the US–South Korea FTA. 334 See, e.g., Article 10.1(2) of the US–Chile FTA; Article 11.2(1) of the US–South Korea FTA. 335 Barton, supra note 330, pp. 409–410.
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to indirect expropriation before FTA tribunals.336 Additionally, the US model BIT as well as some FTAs concluded between the US and some developing countries require developing country partners to recognize that IPRs do not necessarily confer market power on the right holder.337 This at least forces developing countries to be more prudent in determining anti-competitive practices relating to IPRs. Furthermore, there are likely to remain differences between the TRIPS Agreement and the US model BIT or investment chapters in FTAs with the US relating to the remuneration obligations subsequent to the issue of a compulsory licence as a remedy against IPR-related anti-competitive practices. Article 31(h) of the TRIPS Agreement requires only the payment of adequate remuneration, taking into account the economic value of the authorization for a compulsory licence, not the economic value of the IPRs concerned. In cases of granting compulsory licences to correct anti-competitive practices, ‘the need to correct anti-competitive practices may be taken into account in determining the amount of remuneration in such cases’.338 Royalty payments determined by competent authorities, who decide to grant such a compulsory licence, should be commensurate with the expected economic value which could be brought through usage of the specific compulsory licence, taking into account its objective to prevent IPR-related anti-competitive practices and even impose fines on the right holder. The royalty determined is often smaller than the market value of the IPRs. However, the US model BIT and some FTAs require that compensation shall be equivalent to ‘the fair market value’ of the IPRs expropriated or compulsorily licensed.339 Therefore, these investment chapters may result in a TRIPS-plus standard relating to the amount of the remuneration for compulsory licences against IPRs as a form of investment.340
336 See Biadgleng, Ermias Tekeste (2006), ‘IP Rights under Investment Agreements: the TRIPS-Plus Implications for Enforcement and Protection of Public Health’, South Centre, pp. 16–19, available at www.southcentre.org/index2. php?option=com_docman&task=doc_view&gid=26&Itemid=69. 337 See, e.g., note 11 of the US model BIT; note 16–12 of the US–Singapore FTA; note 6 in the investment chapter of the US–South Korea FTA. 338 Article 31(k) of the TRIPS Agreement. 339 See, e.g., Article 6.2 of the US model BIT; Article 10.1 of the US–Vietnam Agreement on Trade Relations; Article 11.6(2) of the US–South Korea FTA. Article 11.6(5) of the US–South Korea FTA states that the requirement of compensation on the basis of fair market value does not apply to the issue of compulsory licences granted in relation to IPRs in accordance with the TRIPS Agreement to the extent that such issue is consistent with the IP chapter. However, as noted, the IP chapter of the US–South Korea FTA does not mention compulsory licences as a remedy to correct patent-related anti-competitive practices, while this chapter prevails over the investment chapter. 340 See Biadgleng, supra note 336, p. 19.
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CONCLUDING REMARKS
In an era of trade liberalization and globalization, all developing countries would like to attract foreign investment and inflows of technology from developed countries in order to speed up domestic economic growth. In the process of importing technology, developing countries are also faced with the IPR-related anti-competitive practices. The TRIPS Agreement gives WTO Members leeway to enact and apply domestic competition law to control and correct these practices. However, applying domestic competition law against such practices is very complicated and difficult for both developed and developing country Members. There are many challenges, from both inside and outside, preventing developing countries from properly enforcing their competition law to control anti-competitive restrictions in technology transfer agreements and abuses of IPRs. Merely adopting competition law and IPR-related competition provisions, therefore, is not a panacea. Enforcing them plays a very important role. Specific cases analysed in this chapter may provide some implications for developing country Members. First, the Microsoft tying cases in South Korea, Taiwan and Croatia show that anti-competitive practices in technology transfer agreements can be effectively prevented. If a developing country Member does not have adequate competition law-related resources of its own, it can reasonably use relevant decisions or judgments from developed country Members to force MNCs to stop their anti-competitive practices in its territory. Second, the cases relating to refusal to license pharmaceutical patents in South Africa show that developing country Members can apply, or at least threaten to apply, domestic competition law in order to promote access to technology. Third, the failure of the application of domestic competition law in the case of Abbott’s withdrawal of its drug registration application in Thailand and the Philips package licensing case in Taiwan highlight the importance of IPRrelated competition regulations, the capacity of competition authorities, the relationship between competition law and IP law, and of the cooperation between competition authorities and IP authorities, as well as the need for the application of the rule of reason in the cases in question. If a developing country pro-actively uses the flexibilities allowed in the TRIPS Agreement, together with experience from developed countries, it can protect its consumer welfare, have technology transferred, and develop its economy in compliance with the TRIPS Agreement. Developing countries should, and deserve to, design and enforce their IPR-related competition law in a way that suits the facts of their markets and responds to their contexts, objectives and development needs.341 In this case, development and dissemi-
341
Fox, Eleanor M. (2008), ‘Economic Development, Poverty and Antitrust: the
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nation-oriented competition laws and policies are a reasonable choice for developing countries. However, in order to apply competition law to technology transfer, developing countries should minimize internal obstacles, avoid external ones, and have technical assistance provided by developed countries. In particular, developing countries should set priorities in their application of domestic competition law to technology transfer in case of scarce enforcement resources. They should focus on IPR-related abuses that directly affect consumer benefits, excessive pricing of intensive technology-embodied products, refusal to license, anti-competitive tying in technology transfer agreements, and contractual restrictions on downstream purchasers for instance. In order to help implement their law in practice, developing countries should adopt relevant guidelines in compliance at least with the transparency and certainty requirements of the TRIPS Agreement. Moreover, developed countries should cooperate and assist developing countries in this area, both in matters concerning IP protection itself and in the encouragement of the dissemination and transfer of technology. These issues will be analysed in detail in Chapter 5.
Other Path’, in Qaqaya Hassan and G. Lipimile (eds), The Effects of Anti-competitive Business Practices on Developing Countries and Their Development Prospects, Geneva: UNCTAD, p. 205.
4. Prospects of technology transferrelated competition law in a global context 4.1
ALTERNATIVES AND CHALLENGES
It is generally accepted that competition law and IP law should be developed in tandem in order to promote competition and innovation and to curb IPR abuses. The TRIPS Agreement sets global minimum standards of IP protection. But the need for controlling and correcting unilateral abusive conduct of right holders and anti-competitive restraints in technology transfer agreements is taken into account only by general agreement that the reasonable application of domestic competition law to technology transfer, at the discretion of each country Member, should be compatible with the TRIPS Agreement. This leads to the fact that, as discussed in Chapters 2 and 3, such an application varies from one country to another; and in each country it varies over time. The complexity and technical challenges of the issues together with both internal and external obstacles hinder applications in developing countries. Some alternatives are proposed for solving the issue in a global context. However, each alternative has its own advantages and challenges. 4.1.1
Enforcement Outsourcing
Since firms holding IPR-intensive technology often come from developed countries while developing countries lack expertise and resources in competition law and enforcement capacity, it is proposed that the competition authorities in developed countries should undertake enforcement actions against firms headquartered or located in their jurisdiction.1 Commitments from
1 See, e.g., Dreyfuss, Rochelle Cooper (2004), ‘TRIPS-Round II: Should Users Strike Back?’, U. Chi. L. Rev., 71, 32; Hoekman, Mernard M. et al. (2005), ‘Transfer of Technology to Developing Countries: Unilateral and Multilateral Policy Options’, World Development, 33(10), 1596; Bhattacharjea, Aditya (2006), ‘The Case for a Multilateral Agreement on Competition Policy: A Developing Country Perspective’, J. Int’l Econo. L., 9(2), 314.
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developed countries to prevent IPR abuses by right holders in developing country markets may, to some extent, be an effective way to implement their obligations under Articles 66.2 and 67 of the TRIPS Agreement, which aim to promote and encourage technology transfer to LDCs and to provide assistance to developing and least developed countries in the preparation of laws and regulations on the prevention of IPR abuses. Frederick Abbott seems to follow this approach when he concludes that the current competition rules in the TRIPS Agreement should be maintained as they are, and suggests: [Developed country Members should] agree to reform their competition laws such that exemptions are not provided for [IPR-related] conduct undertaken abroad. If developed Members are serious about the pursuit of market liberalization, they should accept that it is entirely inconsistent with that objective to tolerate and encourage their enterprises to adopt restrictive business practices in foreign markets.2
This approach will bring the well-established IPR-related competition law of developed countries into play and reduce the need to use the scarce resources of competition authorities in developing countries in this area. However, it is almost infeasible because of both the effect (or extraterritorial) doctrine applied in competition law in developed countries and the differences in the purpose of IPR-related competition rules between developed and developing countries. Regarding the effect doctrine, current competition law in the US or the EU, in principle, can be applied to IPR-related anti-competitive conduct occurring in developing countries in order to protect the US or EU domestic market, provided that such conduct adversely affects US or EU domestic trade. In the US, the effect doctrine was made clear in Alcoa,3 which stated that the Sherman Act might reach an Act implemented in a foreign country if that Act was ‘intended to affect [US] imports and did affect them’. In 1982, the US Congress, by enacting the Foreign Trade and Antitrust Improvements Act (FTAIA), added a separate section to the Sherman Act to clarify and restrict the international reach of US antitrust law. This amendment prescribes that the Sherman Act can be applied to conduct involving trade with foreign nations if: (i) such conduct has ‘a direct, substantial, and reasonably foreseeable effect’ on US domestic trade,
2
Abbott, Frederick M. (2005), ‘Are the Competition Rules in the WTO Agreement on Trade-Related Aspects of Intellectual Property Rights Adequate?’, in Ernst-Ulrich Petersmann (ed.), Reforming the World Trading System: Legitimacy, Efficiency, and Democratic Governance, Oxford: OUP, p. 334. 3 US v. Aluminum Co. of America, 148 F.2d 416, 444 (2nd Cir. 1945).
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US imports or US exports of a person engaged in such trade in the US; and (ii) such an effect must give rise to a Sherman Act claim.4 However, the FTAIA has been interpreted differently by the US courts of appeals. There was both a narrow view, contending that ‘jurisdiction exists only if the foreign harm directly arose from a domestic harm’, and an expansive view that ‘jurisdiction exists over any foreign claim that alleged underlying conduct that could have also caused a domestic harm’.5 All this was, finally, solved by the US Supreme Court in Empagran.6 This is a case brought by plaintiffs from Australia, Ecuador, Panama and Ukraine for injuries they suffered outside the US due to an international vitamins cartel, which also operated in the US. Basing itself on two grounds, namely (i) avoiding unreasonable interference with the sovereign authority of other countries, and (ii) the intent of Congress to limit, not expand, the scope of the Sherman Act to foreign trade under the FTAIA, the Supreme Court ruled that the FTAIA cannot be interpreted to ‘bring independently caused foreign injury within the Sherman Act’s reach’.7 This judgment eliminates the concerns from other developed countries that if the US allowed foreign plaintiffs to bring antitrust lawsuits for foreign injuries, it would ‘provide substantial encouragement for widespread forum shopping, might impede competition law enforcement’ in other countries, and ‘undermine respect for national sovereignty’.8 In the EU, the effect doctrine was accepted in Wood Pulp I.9 In this case, the ECJ upheld the Commission’s decision finding illegal price-fixing conduct by wood pulp producers, whose registered offices were situated outside the Community. The ECJ held: [A]n infringement of Article [81 EC] … consists of conduct made up of two elements, the formation of the agreement, decision or concerted practice and the implementation thereof. If the applicability of prohibitions laid down under competition law were made to depend on the place where the agreement, decision or concerted practice was formed, the result would obviously be to give undertakings
4 5
15 U.S.C. 6a. Schmidt, Jonathan T. (2006), ‘Keeping US Courts Open to Foreign Antitrust Plaintiffs: A Hybrid Approach to the Effective Deterrence of International Cartels’, Yale J. Int’l L., 31, 223. 6 F. Hoffmann-La Roche Ltd. v. Empagran S.A., 542 U.S. 155 (2004). 7 Ibid., at 164–173. 8 Brief of the United Kingdom of Great Britain and Northern Ireland, Ireland, and the Kingdom of the Netherlands, 2004 WL 226597, in Empagran, supra note 6, p. 6. 9 Joined Cases 89, 104, 114, 116, 117, and 125 to 129/85, A. Ahlström Osakeyhtiö and others v. Commission, [1988] ECR 5193. However, the effect doctrine was raised for the first time in Case 48/69, ICI v. Commission, [1972] ECR 619.
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an easy means of evading those prohibitions. The decisive factor is therefore the place where it is implemented.10
Instead of talking about ‘effects’, this judgment highlighted the place of ‘implementation’ of the anti-competitive practices. However, such implementation must be considered under the requirement of ‘affect[ing] trade between Member States’ in Articles 81 and 82 EC. From this perspective, locating an anti-competitive practice by its implementation is similar to the way of locating it by its effects.11 Thus, the implementation doctrine in EU competition law is equivalent to the effect doctrine in US antitrust law. This is reflected in merger cases in the EU. The CFI, in Gencor,12 concluded that the application of EU merger regulations to prohibit a merger in the South African platinum and rhodium industry was justified, because the three criteria of immediate, substantial, and foreseeable effects – which are similar to three criteria under the FTAIA in the US – were satisfied. In brief, IPR-related anti-competitive practices which substantially affect a developing country market but do not affect a developed country market cannot be adjudicated on under the developed country’s jurisdiction. Furthermore, even if such anti-competitive practices affect both a developing country and developed country markets, the application of competition law in the developed country is confined to its territory. This can be illustrated by the Microsoft tying cases in the US, the EU, South Korea, Taiwan and Croatia. Although Microsoft’s tying conduct is widespread in the world market, the US or EU applied its competition law to the conduct in US or EU territory; and remedies enforced were also limited to US or EU territory. Microsoft’s competitors in South Korea or Taiwan could really only bring their case to the KFTC or TFTC; they could not have complained to the US or EU competition authorities. And, as Microsoft Croatia demonstrated, even though Microsoft undertook to comply with remedies imposed in the European Commission’s decision, which were upheld by the CFI, in Croatia this was by the application of Croatian competition law, rather than by the direct applicability of the EU remedies in Croatia. Consequently, although in discussions within the WGTCP before the Cancun Ministerial Conference in 2003 many developing countries required developed countries to apply their competition law to
10 11
Ibid., para. 16. Zanettin, Bruno (2002), Cooperation between Antitrust Agencies at the International Level, Oxford: Hart Publishing, p. 19. 12 Case T–102/96, Gencor Ltd. v. Commission, [1999] ECR II–753, paras 90–100. See also Case T–210/01, General Electric v. Commission, [2005] ECR II–5575;CCCC Case No IV/M.877, Boeing/McDonnell Douglas, OJ 1997 L 336/16.
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export cartels or even excessive pricing conduct in developing country markets,13 it is impossible and even infeasible to do that in practice. Regarding differences in the purpose of IPR-related competition rules between developed and developing countries, as learnt from the analyses in the previous chapters, the US and the EU seem to aim at innovation-oriented competition rules, while developing countries focus (or should focus) on dissemination-oriented rules. As Hanns Ullrich observes, ‘innovation-oriented competition policy extends largely beyond the narrow framework of the competition rules set out in the TRIPS Agreement’.14 Consequently, if a developing country outsources the enforcement of its competition law regarding technology transfer, that country will not be taking opportunities provided by the competition provisions under the TRIPS Agreement. The country will be giving up the competition flexibilities permitted in adopting an innovationoriented competition policy, which may not be suitable for its domestic contexts and objectives. To sum up, developed countries do not want to and cannot police IPRrelated anti-competitive practices affecting only developing countries. On the other hand, developing countries would deprive themselves of competition flexibilities in preventing IPR abuses and anti-competitive contractual restraints in inward technology transfer. Outsourcing enforcement of IPRrelated competition law is neither feasible nor reasonable from the perspectives of both developing and developed countries. 4.1.2
International Cooperation between Competition Authorities
International cooperation between competition authorities plays an important role in addressing anti-competitive practices in trade globalization in general and in international technology transfer in particular. It is difficult for the competition authorities of developing countries to gather necessary information to evaluate correctly the effects of technology-related anti-competitive practices by MNCs and effectively prevent or remedy them. Through international cooperation with competition authorities of technology exporting countries, the competition authorities of a technology importing country can adequately and in a timely way gain access to necessary information. This
13 See, e.g., Communication from Thailand, WT/WGTCP/W/213/Rev.1, para. 2.1; Communication from India, WT/WGTCP/W/216, para. 3. 14 Ullrich, Hanns (2005), ‘Expansionist Intellectual Property Protection and Reductionist Competition Rules: A TRIPS Perspective’, in Keith E. Maskus and J.H. Reichman (eds), International Public Goods and Transfer of Technology under a Globalized Intellectual Property Regime, Cambridge: Cambridge University Press, 2005, p. 754.
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increases efficiency in detecting and investigating IPR abuses and anticompetitive restraints in technology transfer agreements. Additionally, international cooperation allows developing countries with less enforcement experience relating to IPR-related competition issues to understand how other countries have dealt with specific situations.15 And cooperation can reduce differences between countries concerning IPR-related competition issues and prevent trade disputes. In an era of trade globalization, competition remedies, especially where there is demand for a globally uniform product, are often not effective if they are limited to one country. A country that does not enforce its domestic competition law in the case concerned cannot of course benefit from remedies imposed by another country. But different remedies in different jurisdictions may lead to artificial trade barriers and significant tension between jurisdictions.16 These remedy-related problems can be mitigated if international cooperation and comity are established. The TRIPS Agreement, as noted, also establishes a cooperation mechanism for IPR-related competition control covering both case-specific cooperation and technical assistance. Article 40.3 and 40.4 provide for consultation and cooperation on a case-by-case basis regarding the enforcement of control of anti-competitive practices in contractual licences. Meanwhile, Article 67 requires developed country Members to provide technical assistance for developing country and LDC Members in the preparation of laws and regulations on the protection and enforcement of IPRs as well as on the prevention of their abuses, and in capacity building. For the first time in public international law, a duty of cooperation in IPR-related competition law has been established by a multilateral agreement.17 However, these cooperation-related provisions are not clear and contain some shortcomings. Regarding the consultation and cooperation on a case-by-case basis, such cooperation is confined to restrictive practices in technology transfer agreements. Unilateral abuses of right holders under Articles 8.2 and 31 of the TRIPS Agreement are not subject to the cooperation. Moreover, Article 40.3 and 40.4 are only rudimentary. They differ substantially from more advanced bilateral agreements or proposals on the 15 See WTO (2002), ‘Report (2002) of the Working Group of the Interaction between Trade and Competition Policy to the General Council’, WT/WGTCP/6, paras 66–67. 16 McCurdy, Gregory S. (2007), ‘Lessons for International Comity and the Extraterritorial Application of the Antitrust Laws from a Decade of Multi-Jurisdictional Proceedings Involving Microsoft’s Windows Operating System Technology’, available at http://lawprofessors.typepad.com/antitrustprof_blog/files/McCurdy.pdf. 17 Article IX of the GATS Agreement also requires each WTO Member, on request from another WTO Member, to enter into consultations with a view to eliminating monopolistic business practices of service suppliers.
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subject18 and may cause difficulties for developing countries investigating anti-competitive restraints in technology transfer agreements. First, they do not specify practical matters such as formalities, time limits and designation of competent authorities. Second, obligations to supply information requested by a Member are limited to publicly available non-confidential information.19 Third, they do not mention explicitly any duty of coordination relating to enforcement activities of the countries concerned. Article 40.3 and 40.4 of the TRIPS Agreement are, therefore, just a legal framework that needs bilateral or plurilateral, or even other multilateral, agreements to spell it out for the convenience of developing countries.20 Regarding technical cooperation, Article 67 can be broadly interpreted to impose obligations on developed countries to assist developing countries and LDCs not only in preparing laws and regulations on the prevention of IPR abuses but also in building capacity relating to the control of such abuses. On the other hand, due to its built-in limits, Article 67 by itself hinders technical cooperation relating to the prevention of IPR abuses. By requiring a developing country (or LDC) Member to request assistance from a developed country Member and by requiring agreement between these two Members on the terms and conditions of the assistance, Article 67 may perpetuate a ‘dependency culture’21 in the relationship between a developing and a developed country. Additionally, technical assistance relating to prevention of IPR abuses provided by developed country Members may be inappropriate for the specific conditions of developing country Members. Article 67 mainly highlights the provision of assistance relating to the protection and enforcement of IPRs. It fails to place explicit obligations on developed country Members to assist developing country Members in enforcing their domestic competition laws to prevent IPR abuses. As a result, developed country Members have, in practice, largely focused their technical assistance on the preparation of domestic legislation for IP protection and the strengthening of enforcement measures in developing country Members.22 They rarely offer technical assistance on how
18 UNCTAD-ICTSD (2005), Resource Book on TRIPS and Development, Cambridge: Cambridge University Press, p. 563. 19 Article 103 of the Agreement between Vietnam and Japan for an economic partnership, signed on 25 Dec. 2008, goes further by stating that confidential information may be exchanged in the process of competition cooperation between Vietnam and Japan. 20 UNCTAD-ICTSD, supra note 18, pp. 562–564. 21 Matthews, Duncan and V. Munoz-Tellez (2006), ‘Bilateral Technical Assistance and TRIPS: The United States, Japan and the European Communities in Comparative Perspective’, J. World IP, 9(6), 632. 22 Ibid., p. 633; Sagar, Rajesh (2006), ‘Identifying Models of Best Practices in the Provision of Technical Assistance to Facilitate the Implementation of the TRIPS
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best to put into practice the competition flexibilities set out in Articles 8.2, 31(k), and 40 of the TRIPS Agreement. In the case where developed countries assist developing countries in the preparation of IPR-related competition legislation, the former often attempt to persuade the latter to adopt innovation-oriented rules. For example, in the process of drafting the Anti-Monopoly Law, Chinese legislators tried to incorporate an Article addressing IPR-related competition issues by stating that IPR abuses may fall under this Law. However, representatives of the US DOJ and the American Bar Association recommended Chinese legislators to revise such an Article. According to the recommendations, China should allow right holders to be free to exercise their rights and to charge high royalties. The unilateral exercise of IPRs in any case, according to these recommendations, shall not constitute an abuse.23 Such technical assistance, if followed, may cause a developing country to close its doors to competition flexibilities under the TRIPS Agreement. Consequently, as Adrian Otten observes, there is ‘little evidence of effective use being made of the available mechanisms for cooperation, especially between developed and developing countries, with respect to the interaction’ of IP and competition laws.24 Without further development in the WTO or other forums on this issue, both developed and developing countries ultimately have to negotiate and sign bilateral or plurilateral agreements on cooperation in competition law enforcement. At the moment, there are four types of such agreements. They are: passive cooperation agreements, negative comity agreements, positive comity agreements, and extension jurisdiction agreements.25 First, passive cooperation agreements: these agreements contain only four major elements, namely notification, information exchange, cooperation and consultation. In the EU–US Competition Cooperation Agreement of 1991,26 Agreement’, p. 34, available at www.esocialsciences.com/data/articles/Document 12522007220.5735895.pdf. 23 See Masoudi, Gerald F. (2006), ‘Key Issues Regarding China’s Antimonopoly Legislation’, available at www.usdoj.gov/atr/public/speeches/217612.pdf; American Bar Association (2005), ‘Joint Submission of the American Bar Association’s Sections of Antitrust Law, Intellectual Property Law and International Law on the Proposed Anti-Monopoly Law of the People’s Republic of China’, available at www.abanet.org/intlaw/committees/business_regulation/antitrust/chinacommentsantimonopoly.pdf. 24 Otten, Adrian (2007), ‘The TRIPS Agreement: Has It Served Its Purpose Twelve Years on?’, International Review for Intellectual Property and Competition Law (IIC), 38(6), 648. 25 Taylor, Martyn (2006), International Competition Law: A New Dimension for the WTO, Cambridge: Cambridge University Press, pp. 108–120; Zanettin, supra note 11. 26 Agreement between the European Communities and the Government of the US regarding the application of their competition laws, OJ 1995 L 95/47.
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Article II provides that the parties shall notify each other whenever the competition authorities of one party are aware that their enforcement activities may affect important interests of the other. Regarding the information exchange, Article III states that this activity facilitates the effective application of competition laws in each party or promotes better understanding of economic conditions and theories relevant to enforcement activities as well as intervention or participation in a regulatory or judicial proceeding. Information exchange may be made through meetings of appropriate officials from the competition authorities of the parties or information supply upon either a voluntary basis or request. With respect to cooperation and coordination, Article IV requires competition authorities of each party to assist the counterparts of the other party in enforcement activities to the extent permitted under the assisting party’s laws and interests. Article VII establishes consultation obligations of parties which are similar to the ones stipulated in Article 40.3 and 40.4 of the TRIPS Agreement.27 However, the EU–US Competition Cooperation Agreement of 1991 is not a true passive cooperation agreement because it also contains the principle of negative comity. Second, negative comity agreements: they, in addition to the four elements contained in the passive cooperation agreements, incorporate the principle of negative comity, which places an obligation on an enforcing country to consider the interests of an affected country when enforcing its domestic competition law and to refrain from taking enforcement action that adversely affects interests of the affected country. Negative comity, to some extent, mitigates harm caused by over-regulation and/or over-enforcement of domestic competition law in the enforcing country. Article VI of the EU–US Competition Cooperation Agreement of 1991, aiming at avoidance of conflicts over enforcement activities, requires each party to ‘seek, at all stages in its enforcement activities, to take into account the important interests’ of the other party. Third, positive comity agreements: these agreements add not only the principle of negative comity but also that of positive comity. That places an obligation on an enforcing country to consider explicit requests for enforcement action made by an affected country to the extent that anti-competitive conduct in the territory of the enforcing country is adversely affecting the affected country. It may be defined as the principle that: A country should (1) give full and sympathetic consideration to another country’s request that it open or expand a law enforcement proceeding in order to remedy
27 See also OECD (1995), ‘Recommendation of the Council Concerning Cooperation between Member Countries on Anticompetitive Practices Affecting International Trade’, C(95)130/FINAL.
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conduct in its territory that is substantially and adversely affecting another country’s interests, and (2) take whatever remedial action it deems appropriate on a voluntary basis and in considering its legitimate interests.28
Positive comity may mitigate under-enforcement (or even under-regulation) of domestic competition law in the affected country.29 Although the EU and the US had signed the EU–US Competition Cooperation Agreement in 1991 which contains the principle to some extent, they decided to sign a real positive comity agreement in 1998.30 Fourth, extension of jurisdiction agreements: they are a further step beyond the positive comity agreements. Under an extension of jurisdiction agreement, a country concerned extends its jurisdiction over competition law enforcement into the territory of the other on a limited extra-territorial basis. The cooperation between Australia and New Zealand provides a good example of the extension of jurisdiction agreement.31 At the moment, there are many agreements on competition law enforcement that fall along a continuum from passive cooperation agreements to extension of jurisdiction agreements.32 However, there remain significant difficulties hindering negotiations of advanced agreements on the cooperation of competition law enforcement, particularly between developing and developed countries. First, developed countries often prioritize entering into advanced cooperation agreements with countries having ‘mature antitrust agencies’.33 Furthermore, they opposed some developing countries’ proposals that would require mandatory cooperation and extension of the MFN principle to cooperation agreements they have signed with each other and with some selected developing countries.34 Consequently, most developing countries are excluded from the benefits of such agreements.35
28 29 30
OECD (1999), ‘CLP Report on Positive Comity’, DAFFE/CLP(99)19, p. 17. Taylor, supra note 25, p. 112; Zanettin, supra note 11, pp. 183–227. See Article V of the EU–US Competition Cooperation Agreement, supra note 26, and Article III of the EU–US Agreement on the application of positive comity principles in the enforcement of their competition laws of 1998, OJ 1998 L 173/28. 31 Taylor, supra note 25, pp. 118–120. 32 See UNCTAD (2007), ‘Experiences Gained so far on International Cooperation on Competition Policy Issues and the Mechanism Used’, TD/B/COM.2/CLP/21/Rev.5. 33 See Brittan, Leon and K. Van Miert (1996), ‘Towards an International Framework of Competition Rules: Communication to the Council’, COM(96)284, Part IV(a). 34 WTO (2002), ‘Report of the Meeting of 1–2 July 2002’, WT/WGTCP/M/18, paras 54–55. 35 WTO, supra note 15, para. 69.
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Second, differences in procedural and substantive rules cause difficulties in arriving at comprehensive cooperation agreements. Each country applies its competition law in a manner consistent with its own domestic interests. It is very difficult to find a common voice between innovation-oriented competition rules in developed countries and dissemination-oriented competition rules in developing countries. A country is unlikely to undertake IPR-related competition law enforcement if such enforcement is contrary to its domestic interests and policies even though such enforcement could benefit interests of consumers in foreign countries. Third, exchanges of private sector confidential information between competition authorities are still a major problem.36 Countries have not yet had sufficient confidence in the process, procedures and handling of each other’s institutions to permit cross-border sharing of confidential information. Such sharing is largely subject to their domestic legislation and enforcement practices.37 Finally, in order to enforce its IPR-related competition rules in particular and competition law in general, a developing country must enter into cooperation agreements not only with developed countries but also with other developing countries. Cooperation with competition authorities in other developing countries will help the developing country in question solve similar cases in a similar way. At the moment, there are over one hundred countries having domestic competition laws and competition authorities. Therefore, in theory, each developing country needs to enter into cooperation agreements with over one hundred countries. This would entail a network of over 5000 bilateral agreements,38 which may be very costly in comparison with plurilateral or multilateral cooperation agreement. However, one can argue that, taking into account the boom in FTAs/EPAs, competition cooperation as well as provisions on competition law and policy can be efficiently incorporated into them. This can encourage bilateral or regional cooperation in the area of competition law enforcement, and even, to some degree, harmonization of the competition law of the countries concerned. Nevertheless, after analysing and comparing competition chapters in a range of current bilateral FTAs, Jane Rennie points out that competition provisions in those FTAs are ‘ritualistic rather than responsive’, lack ‘functional definition’, and need further work to opera-
36 See ICN (2007), ‘Cooperation between Competition Agencies in Cartel Investigations’, Report to the ICN Annual Conference, Moscow, pp. 23–24. 37 Taylor, supra note 25, p. 121. 38 The relevant mathematical formula to determine the number of bilateral agreements in the network is N = (n x (n–1))/2, where N is the number of the bilateral agreements required, and n is the number of countries having domestic competition law.
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tionalize them.39 Consequently, incorporating competition provisions into FTAs/EPAs appears not to solve comprehensively all issues of international competition among competition authorities. Briefly, although formal and informal cooperation among competition enforcement authorities is useful and should be encouraged, mere cooperation in enforcing IPR-related competition law is not a sufficient response or an optimal solution for developing countries wishing to apply the flexibilities under the TRIPS Agreement to address IPR-related anti-competitive practices. It appears that most developing countries are marginalized in the cooperation process. Furthermore, as Neelie Kroes has recently observed, bilateralism in the field of cooperation of competition law has clear limitations.40 This cooperation should be multilateral in order to create more convergence and consensus. 4.1.3
Harmonization through International Forums
The differences among jurisdictions in handling IPR-related anti-competitive practices, particularly the differences in the goals and enforcement of domestic IPR-related competition law, are considerable. It may be impossible to succeed in making these goals and their enforcement coincide.41 This hinders harmonization/convergence in IPR-related competition law. However, much effort has been expended and many proposals made in the attempt to further harmonization or convergence regarding this issue in a variety of international forums. 4.1.3.1 WTO The WTO is currently the only international institution that has IPR-related competition rules under the TRIPS Agreement as hard law. However, these rules are just general principles and do not provide guidance for WTO Members.42 Application of domestic competition law to international technology transfer in one country may cause a concern for another. Subsequently, there have been discussions on IPR-related competition issues in the WTO. At the WTO Ministerial Conference in Singapore in 1996, as part of the four
39 Rennie, Jane (2009), ‘Competition Provisions in Free Trade Agreements: Unique Responses to Bilateral Needs or Derivative Developments in International Competition Policy’, Int’l Trade L. Reg., 15(2), 71. 40 Kroes, Neelie (2008), ‘European Competition Policy in the Age of Globalisation – Towards a Global Competition Order’, Speech/08/61. 41 Dabbah, Maher M. (2005), The Internationalisation of Antitrust Policy, Cambridge: Cambridge University Press, p. 55. 42 See supra Section 1.3.3.
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Singapore issues proposed by the EU, including trade facilitation, transparency in government procurement, investment, and competition, the WGTCP was established.43 The relationship between trade-related aspects of IPRs and competition law/policy was one of the focuses of the WGTCP.44 The discussions on this issue have lead to a general consensus.45 First, competition law can be an important factor in balancing the rights of right holders and their abuses. IP law provides for IPRs to be valued and exchanged; competition law ensures that the market assigns a fair and efficient value to IPRs.46 Second, application of competition law to IPR exercise should avoid two extreme approaches, namely too strict or too lax/ineffective application. The first approach could lessen innovation; and the second could result in over-extensions of market power.47 Third, IPRs do not confer market power on the right holder; IPR licensing is generally pro-competitive; and IPR-related anticompetitive conduct should be considered under a rule of reason standard, on a case-by-case basis, under which ‘pro-competitive-benefits would be weighed against anti-competitive effects’.48 Fourth, together with competition law, a proper balance of IP protection should also be found in IP law. Competition law, as a second layer establishing a balance, provides remedial measures without abridging the level of protection afforded under the TRIPS and the domestic regime of IP protection.49 Fifth, the TRIPS itself reflects the view that regimes for IP protection should be balanced by safeguards intended to restrain anti-competitive practices involving the exercise of IPRs. Some Members contend that the TRIPS competition provisions do not provide sufficient guidance on how to determine IPR-related anti-competitive practices, nor which remedies are appropriate to correct such practices; therefore, more guidance in this area would be useful. Finally, the enactment and enforcement of IPRrelated competition laws and regulations, particularly the guidelines of domestic competition authorities in this area, should be predictable and transparent.50
43 44
Para. 20 of the WTO Singapore Ministerial Declaration, WT/MIN(96)/DEC. See WTO (1997), ‘Report (1997) of the Working Group of the Interaction between Trade and Competition Policy to the General Council’, WT/WGTCP/1 (Checklist of Issues Suggested for Study). 45 WTO (1998), ‘Report (1998) of the Working Group on the Interaction between Trade and Competition Policy to the General Council’, WT/WGTCP/2. See also Anderson, Robert D. (2008), ‘Competition Policy and Intellectual Property in the WTO: More Guidance Needed?’, in Josef Drexl (ed.), Research Handbook on Intellectual Property and Competition Law, Cheltenham: Edward Elgar. 46 Ibid., para. 113. 47 Ibid., para. 117. 48 Ibid., paras 115–116. 49 Ibid., para. 118. 50 Ibid., para. 116.
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The discussions on IPR-related competition law/policy in the WGTCP were both wide-ranging and penetrating.51 They covered scholarly thinking in this area, which is analysed in Chapter 1, as well as the practical issues, which are partly discussed in Chapters 2 and 3. Interestingly, the European Commission, on the basis of discussions in the WGTCP, proposed a WTO multilateral framework agreement on competition law containing three key issues: (i) core principles on domestic competition law and policy, (ii) cooperation modalities, and (iii) support for competition institutions in developing countries.52 The core principles would include transparency, non-discrimination, procedural fairness (due process), and special and differential treatment, as well as commitments to treat hardcore cartels as a serious breach of competition law and to have a competition authority endowed with sufficient enforcement power. Regarding cooperation modalities, it would require casespecific cooperation, including principles of negative comity, and general exchanges of information and experience and joint analyses. On support for developing countries, it would stipulate both technical assistance and enforcement assistance.53 Somewhat surprisingly, the proposal was partly turned down by the developing world. The apparent reason was the lack of balance in negotiations in other fields of the Doha agenda and a fear that the competition issue, as well as other Singapore issues, would only be a tool to increase market access for the benefit of MNCs. With the failure of the Cancun Ministerial Conference in 2003 came deep divergence relating to the launching of negotiations on a multilateral framework on competition policy.54 Subsequently, on 1 August 2004, the WTO General Council decided that no further work towards negotiations on competition policy would be undertaken within the WTO during the Doha Round.55 Since then, the WGTCP has been inactive. The future of competition law in the WTO is still uncertain.
51 52
Anderson, supra note 45, p. 471. Communication from the European Community and Its Member States, WT/WGTCP/W/152. 53 Ibid. See also Evenett, Simon J. (2003), ‘Study on Issues Relating to a Possible Multilateral Framework on Competition Policy’, Study commissioned by the WTO, WT/WGTCP/W/228. 54 Regarding the failure of the Cancun Ministerial Conference in 2003 with respect to the competition issue see, e.g., Jenny, Frédéric (2004), ‘Competition, Trade and Development Before and After Cancun’, in Tzong-Leh Hwang and C. Chen (eds), The Future Development of Competition Framework, The Hague: Kluwer Law International, pp. 26–35; Stewart, Taimoon (2004), ‘The Fate of Competition Policy in Cancun: Politics or Substance’, Legal Issues of Economic Integration, 31(1), 7–11. 55 See Doha Work Programme – Decision Adopted by the General Council on 1 Aug. 2004, WT/L/579. Regarding the failure of the negotiations of four Singapore
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However, the IPR-related competition issue is once more coming back to the WTO in the context of the TRIPS Council discussions. In the TRIPS Council meeting on 17 July 2008, Brazil delivered a communication introducing to the Council issues relating to technical assistance and capacity building. These issues are also included in Cluster A of the WIPO Development Agenda.56 One of the points in this communication is to: Promote measures that will help countries deal with intellectual property-related anti-competitive practices, by providing technical cooperation to developing countries, especially LDCs, at their request, in order to better understand the interface between IPRs and competition policies.57
The basis of the communication in general and the proposal for technical assistance in IPR-related competition in particular are a combination of an interpretation of Article 67 together with Articles 7 and 8 of the TRIPS. In this context, technical assistance from developed country Members under Article 67 should not only focus on implementation of the obligations of developing country Members, but also be demand-driven, transparent, neutral and accountable, and take into account the special needs of developing country Members. This means that the assistance obligations of developed country Members should be ‘development-oriented’ and contribute to a balanced implementation of rights and obligations under the TRIPS in the light of the objectives and principles under Articles 7 and 8. Fundamentally, the technical assistance in question should help developing country Members to ‘make legitimate use of the flexibilities of the TRIPS agreement, as well as of its provisions related to transfer of technology and the prevention and mitigation of’ IPR abuse.58 The TRIPS Council has taken note of the communication of Brazil and it is under discussion.59 As a result, discussions on technical assistance on IPRrelated competition in the TRIPS Council together with the preparatory works in the WGTCP in this area in the past may result in some useful guidelines for developing country Members when designing and enforcing their domestic IPR-related competition law. Considering the present difficulties of the Doha Round negotiations, it is fairly obvious that the competition issue cannot be
issues see Evenett, Simon J. (2007), ‘Five Hypotheses Concerning the Fate of the Singapore Issues in the Doha Round’, Oxford Rev. Econo. Pol’y, 23(3), 392–414. 56 WTO (2008), ‘Technical Cooperation and Capacity Building: “Cluster A” of the Development Agenda’, Communication from Brazil, IP/C/W/513. 57 Ibid. 58 Ibid. 59 Minutes of Meeting of the TRIPS Council on 17 June 2008, IP/C/M/57, paras 91–97.
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reintroduced into its agenda. Nevertheless, competition issues in general and technology transfer-related competition ones in particular have recently (re-)gained much attention in the TRIPS Council, developing countries, and other international forums. 4.1.3.2 OECD The OECD has been working on competition law and policies since 1967.60 The OECD Competition Committee61 is a trans-governmental network of competition enforcers from thirty member countries with private sector participation. It aims to facilitate informal convergence by sharing experience across agencies in activities such as peer review, cooperation, exchange of views, identification of best practices, and making voluntary recommendations.62 The Committee has also been considering legal principles and the extent of convergence among jurisdictions relating to the intersection of competition law and IPRs for a long time.63 The OECD currently does not have an ongoing or planned programme of work on IPR-related competition issues. But the Competition Committee has occasionally organized roundtable discussions in this area.64 Although the OECD did not make any recommendations, it has attempted to identify key points and a relative consensus emerged from the roundtables. In particular, three policy principles have been supported, namely: (i) it should not be presumed that IPRs create or increase market power; (ii) competition policy should acknowledge and respect the basic rights granted under IP law; and (iii) a licensing restriction should not be prohibited under competition law if the restriction leads to a situation in which benefits of licensing outweigh anti-competitive harms caused by the restriction. It
60 See Clarke, Julian L. and S.J. Evenett (2003), ‘A Multilateral Framework for Competition Policy’, in Simon J. Evenett (ed.), The Singapore Issues and the World Trading System: The Road to Cancun and Beyond, Berne: World Trade Institute, p. 100. 61 The name of this committee was changed from the Committee of Experts on Restrictive Business Practices under the OECD Council Resolution C(61)47(Final) to the Committee on Competition Law and Policy under OECD Council Resolution C(987)138(Final), then to the Competition Committee at the 1017th session of the OECD Council (C/M(2001)23, item 402 and document C(2001)261). 62 See the terms of reference of the Committee in OECD Council Resolution C(987)138(Final); Sokol, D. Daniel (2007), ‘Monopolists without Borders: The Institutional Challenge of International Antitrust in a Global Gilded Age’, Berkeley Bus. L. J., 4, 97–102. 63 Rill, James F, and M.C. Schechter (2003), ‘International Antitrust and Intellectual Property Harmonization of the Interface’, Law & Pol’y Int’l Bus., 34, 791. 64 WTO (2008), ‘Technical Cooperation Activities: Information from Other Intergovernmental Organizations – OECD’, IP/C/W/516. The OECD organized three roundtable discussions in this area respectively in 1997, 2004 and 2006.
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should not be implicitly assumed that if the restriction is prohibited, the licence would still be granted.65 The OECD also underlined the importance of cooperation between competition and IP agencies as well as the helpfulness of publishing a set of guidelines by competition agencies to describe how they will analyse technology transfer agreements and other IPR-related conduct.66 However, all OECD efforts in this area are mainly limited to its thirty members, most of whom are developed countries. It is difficult for developing countries to be involved in those soft harmonization efforts. 4.1.3.3 UNCTAD UNCTAD, which was established in 1964 with the purpose of promoting the development and integration of developing countries into the world economy, serves as a forum for multilateral discussions relating to competition law and technology transfer. Although the negotiations over the ToT Code under the auspices of UNCTAD failed, these negotiations have still been good experience for countries concerned with the harmonization of technology transferrelated competition law. Besides, UNCTAD succeeded in establishing the Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, which was adopted by the UN General Assembly in 1980.67 This Set does not contain any information about its legal status, but the WTO Panel in Mexico – Telecoms invoked it as a source to interpret the term ‘anti-competitive practices’.68 Both the Set and the ToT Code may contribute to the formation of customary international competition rules69 and can be applied in IPR-related competition cases. Additionally, the UNCTAD Intergovernmental Group of Experts on Competition Law and Policy has discussed issues relating to competition policy and the exercise of IPRs in order to try to find out how to enhance international consensus, cooperation and technical assistance in this area.70 UNCTAD would like to initiate a global competition standard that allows a degree of flexibility for developing countries benefiting from trade and IP
65 OECD (1998), ‘Competition Policy and Intellectual Property Rights’, DAFFE/CLP(98)18, p. 8. 66 OECD (2005), ‘Intellectual Property Rights’, DAF/COMP(2004)24, p. 7. 67 See supra Section 1.3.2. 68 Mexico – Measures Affecting Telecommunication Services, WT/DS204/R, adopted on 1 June 2004, paras 7.236–7.238. 69 Lianos, Ioannis (2007), ‘The Contribution of the United Nations to the Emergence of Global Antitrust Law’, Tul. J. Int’l. & Comp. L., 15(2), 455. 70 See, e.g., UNCTAD (2002), ‘Competition Policy and the Exercise of Intellectual Property Rights’, TD/B/COM.2/CLP/22/Rev.1; UNCTAD (2007), ‘Round Table Discussion on Competition Policy and the Exercise of Intellectual Property Rights’, available at www.unctad.org/Templates/Page.asp?intItemID=4306&lang=1.
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protection globalization. However, some developed countries raised concerns that UNCTAD activities are in favour of developing countries. Furthermore, the US and some other developed countries doubt the capability of UN-associated institutions to act efficiently and fairly, particularly in terms of trade.71 Finally, although UNCTAD is concerned about the anti-competitive practices of corporate actors (MNCs), and requires their responsibility and accountability in this area, it seems not to give these private actors opportunities to participate in its discussions.72 Consequently, UNCTAD provides a broad view of competition law, including issues of development and social justice that may be suitable for developing countries. But it is not an optimal forum for harmonization of IPR-related competition law from a developed country perspective. And without consensus from the developed countries, developing countries cannot achieve their aims regarding the issues in question. 4.1.3.4 ICN The ICN was launched in October 2001 by competition enforcement officials from fourteen countries. It originated from recommendations made by the International Competition Policy Advisory Committee in its final report in 2000 to the US DOJ.73 As a strong and broad network where developed and developing countries could address practical competition enforcement and policy issues, the ICN is ‘project-driven and consensus-based. Its membership is open to national and multi-national competition agencies responsible for the enforcement of antitrust laws.’74 In its first annual conference in 2002, the ICN proposed to initiate a working group focusing on competition and IPRs which would examine core issues such as the legal standards for monopolization and abuse.75 In its
71 See Official Record of 59th Session, 75th plenary meeting of the UN General Assembly, A/59/PV.75, 22 Dec. 2004, p. 6. 72 Cluchey, David P. (2007), ‘Competition in Global Markets: Who Will Police the Giants?’, Temp. Int’l & Comp. L. J., 21, 83; Sokol, supra note 62, p. 104. 73 The International Competition Policy Advisory Committee recommended the US should, in addition to existing international forums, ‘explore the scope for collaborations among interested governments and international organizations to create a new venue where government officials, as well as private firms, [NGOs], and others can consult on matters of competition law and policy’. International Competition Policy Advisory Committee (2000), ‘Final Report’, pp. 282 and 301, available at www.usdoj.gov/atr/icpac/finalreport.htm. 74 ICN (2001), ‘Antitrust Authorities Launch the International Competition Network’, available at www.internationalcompetitionnetwork.org/index.php/en/newsroom/2001/10/25/25. 75 Rill, James F. (2002), ‘International Competition Network: the Perspective of Non-governmental Advisors’, Address before the First ICN Annual Conference, avail-
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report presented at the sixth annual conference in 2007, the Unilateral Conduct Working Group of the ICN confirmed the complementarity of unilateral conduct objectives and IP goals.76 Since the membership of the ICN represents competition authorities from both mature and newly established competition agencies, the ICN may be a suitable forum for an exchange of views on competition law in general and IPR-related issues in particular. However, the ICN is an informal venue for addressing practical competition concerns. When the ICN reaches consensus on recommendations, or ‘best practices’, arising from its projects, it is left to domestic competition authorities to decide whether and how to implement them through unilateral, bilateral or multilateral arrangements. In practice, it is not easy to achieve real harmonization in these issues in this forum. 4.1.3.5 Other international forums: WIPO and WHO In addition to the WTO, the OECD, UNCTAD and the ICN, other international forums, WIPO and the WHO for instance, have also had activities concerning IPR-related competition issues for developing countries, although these forums do not focus on competition issues in general. WIPO has a mission to promote the effective use and protection of IPRs worldwide. Despite the fact that Article 5.A of the Paris Convention, an international convention on industrial property governed by WIPO, addresses anticompetitive practices resulting from the exercise of patent rights, IPR-related competition issues were not officially discussed in WIPO until the WIPO Development Agenda was adopted by the WIPO General Assembly in 2007.77 Knowing the important role of domestic competition law in controlling IPR abuses in the sustainable development process of developing countries and the complexity of the relationship between IPRs and competition law, four out of the forty-five recommendations of the WIPO Development Agenda address IPR-related competition issues. They are: (i) promoting measures helping countries to curb IPR-related anti-competitive practices through providing technical assistance and cooperation to developing countries; (ii) supporting the UN development goals through WIPO’s norm-setting activities relating to links between IPRs and competition and to IPR-related competition flexibilities; (iii) promoting pro-competitive IPR licensing practices; and (iv) creating able at www.internationalcompetitionnetwork.org/media/library/conference_1st_ naples_2002/rill_icn_naples_speech.pdf. 76 ICN (2007), ‘Report on the Objectives of Unilateral Conduct Laws, Assessment of Dominance/Substantial Market Power, and State-Created Monopolies’, pp. 22–24, available at www.internationalcompetitionnetwork.org/media/library/ unilateral_conduct/Objectives%20of%20Unilateral%20Conduct%20May%2007.pdf. 77 WIPO (2008), ‘Draft Report of the Second Session of the CDIP’, CDIP/2/4 Prov., paras 204 and 206.
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within WIPO opportunities for exchanges of information and experience on IPR-related competition issues.78 These IPR-related competition issues have been being discussed in the WIPO Committee on Development and Intellectual Property (CDIP). Hopefully, these discussions will lead to implementation of the WIPO Development Agenda in general and the competition issues concerned in particular. In this case, WIPO can help developing countries better to understand the relationship between IPRs and competition law and encourage them to apply domestic IPR-related competition law. Furthermore, discussions in the CDIP on IPR-related competition norm-setting and exchanges of information and experience may contribute to harmonization. The WHO promotes the use of competition law and policies in order to ensure access to IPR-embodied medicines. As its global strategy and plan of action on public health, innovation and intellectual property indicates, the WHO is considering how to use competition flexibilities in the TRIPS Agreement in the field of health products.79 Due to the lack of competition law-related missions, the WHO will probably not contribute to the harmonization of IPR-related competition issues. But it may pave the way for developing countries intensively to apply domestic competition law to access to medicines, as South Africa did. 4.1.3.6 Remarks Each international forum currently has its own advantages and disadvantages when attempting to harmonize IPR-related competition law issues. Although it is not easy or even possible to agree and harmonize standards to govern all anti-competitive practices relating to IPRs, these forums have provided benefits by way of exchanges of views on issues in this area. From the perspective of competition law harmonization in general in a global context, the OECD has its limitation on membership and the WHO lacks the competition-related commission; but the WTO, UNCTAD, the ICN, or even WIPO can be chosen as a suitable forum to address competition law harmonization.80 As explained
78 Recommendations 7, 22, 23 and 32 of the WIPO Development Agenda adopted by the WIPO General Assembly in 2007, available at www.wipo.int/export/ sites/www/ip-development/en/agenda/recommendations.pdf. 79 WHO (2008), ‘Global Strategy and Plan of Action on Public Health, Innovation and Intellectual Property’, WHA61.21, Element 6.3(f), available at http://apps.who.int/gb/ebwha/pdf_files/A61/A61_R21-en.pdf. See also WHO (2006), Public Health, Innovation and Intellectual Property Rights, Geneva: WHO, pp. 129–130. 80 For arguments supporting the WTO see, e.g., Gerber, David J. (2007), ‘Competition Law and the WTO: Rethinking the Relationship’, J. Int’l Econo. L., 10(3), 707–724; Taylor, supra note 25; Dabbah, supra note 41, p. 292; Drexl, Josef (2004), ‘International Competition Policy after Cancun: Placing a Singapore Issue on
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in detail below, since no best solution currently exists, the WTO forum is the second-best one for addressing technology transfer-related competition issues.
4.2
4.2.1
PROSPECTS FOR THE TECHNOLOGY TRANSFERRELATED COMPETITION PROVISIONS OF THE TRIPS AGREEMENT Over-enforcement and Under-enforcement
There is a trend in international trade whereby each country would like to protect and promote its national interests and consumer welfare without regard for the interests of other countries or of global welfare.81 In the current era of trade liberalization, tariff and non-tariff barriers have been reduced and eliminated; a country cannot re-erect these barriers to pursue its own interests. Each country attempts to use other tools to achieve similar effects; one such is domestic competition law. As Andrew Guzman argues, by enforcing domestic competition law countries may ‘externalize the costs and internalize the benefits of the exercise of market power across borders’ to maximize national interests.82 Since countries are only concerned with effects occurring within their border, depending on trade flows, they have incentives either to under-enforce or over-enforce their competition law. If a country is a net importer, it has incentives to apply stricter competition standards to force foreign firms to reduce prices, or to increase the quantity and/or quality of imported products/services, at the expense of foreign firms. If a country is a net exporter, it would like to employ laxer competition standards to encourage domestic firms to export products/services to foreign markets at the expense of foreign consumers. In all cases, however, when applying such competition policies, each country often also takes into account the reaction of foreign countries and the effects on the domestic business environment, foreign direct investment and domestic innovation. At the moment and for the future developing countries are, and will continue to be, net importers of technology. Developed countries tend to fear the WTO Development Agenda’, World Comp., 27(3), 419–457. For the UNCTAD see Lianos, Ioannis, supra note 69; Cluchey, supra note 72. For the ICN see Sokol, supra note 62. 81 Guzman, Andrew T. (2004), ‘The Case for International Antitrust’, in Richard A. Epstein and M.S. Greve (eds), Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy, Washington DC: AEI Press, p. 101. See also Bradford, Anu (2007), ‘International Antitrust Negotiations and the False Hope of the WTO’, Harv. Int’l. L. J., 48, 384. 82 Guzman, supra note 81, pp. 101 and 103–104.
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that developing countries may over-regulate and over-enforce their domestic competition law in international technology transfer in order to externalize the costs of R&D and internalize the benefits of innovation. In fact, as shown in Chapter 3, most developing countries are under-regulating and/or underenforcing domestic competition law in this area. However, in the process of establishing democratic market economies, developing countries discover the benefits of competition law for their national economic growth. They will improve their domestic competition laws and enforce them better. Furthermore, there is a trend to support developing countries in such use of domestic competition laws and regulations to gain access to knowledge. Consequently, it is inevitable that the number of cases relating to the application of domestic competition laws to international technology transfer in developing countries will increase. Besides, as noted, developing countries, while negotiating and signing the TRIPS Agreement, hoped that global IP protection would increase technology transfer from developed to developing countries. However, statistics indicate that the asymmetry in technological capacities between developed and developing countries did not decrease, but even tended to increase. Developing countries have to pay much more for their access to technology to the benefit of MNCs.83 They are now attempting to apply the flexibilities in the TRIPS Agreement to protect their local needs, national interests, technical capabilities, public health and the environment. The most important success of the developing countries in this area was the adoption of the Doha Declaration on the TRIPS Agreement and public health, which recognizes that ‘each Member has the right to grant compulsory licenses and the freedom to determine the grounds upon which such licenses are granted’ together with waivers of the condition for the supply in the domestic market.84 After the Doha Declaration, several developing countries granted public health-related compulsory licences.85 Recently, the Thai government issued compulsory licences with respect to drugs for treatment of AIDS and cancer without any direct unfavourable reaction from developed countries. These actions may mark a starting point in the willingness of developing countries to invoke the flexibilities under the TRIPS Agreement. Developing countries may invoke not only
83 Barton, John H. et al. (2007), View on the Future of the Intellectual Property System, Geneva: ICTSD, p. 6. 84 Para. 5(b) of the Doha Declaration on the TRIPS Agreement and Public Health, WT/MIN(01)/DEC/2; Decision of the General Council of 30 Aug. 2003 on implementation of para. 6 of the Doha Declaration, WT/L/540. 85 See Love, James Packard (2007), ‘Recent Examples of the Use of Compulsory Licences on Patents’, available at www.keionline.org/misc-docs/ recent_cls_8mar07.pdf.
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public health-related flexibilities but also competition flexibilities to meet their economic development level and to implement the UN millennium development goals as addressed by recommendation 22 of the WIPO Development Agenda. So while developed countries may attempt to prevent the over-regulation and over-enforcement of competition law in technology transfer by developing countries in the future, developing countries will tend to use the competition flexibilities in the TRIPS Agreement and intensively apply their competition laws to this area in order to avoid under-enforcement. Although their purposes may be different, developing and developed countries can reach a fair enforcement level that benefits both. In order to satisfy both sides, the developed and developing countries cannot limit themselves to recommendations or soft law, which will contain no enforcement mechanism. They seem to have no other choice except negotiations within the WTO on the basis of the current competition rules in the TRIPS Agreement if they wish to reach a consensus. 4.2.2
IPR-related Trade and Competition
IPR-related trade policy or trade policy in general in the WTO, which is based on the principles of MFN treatment, national treatment and transparency, tries to reduce and eliminate governmental barriers to international trade. Competition policy, which regulates competitive conditions and the behaviour of private firms within a country (or a region), tries to eliminate private business barriers that could harm the objective of trade liberalization and the minimum standards of IP protection. Trade policy and competition policy are, therefore, complementary; neither policy could fully achieve its objective without the other.86 It is clear that the possible benefits and gains of trade liberalization will not be realized if anti-competitive practices are prevalent on domestic or international markets because trade liberalization, in that case, ‘might largely simply transfer rents that had been accruing to the government to private sector monopolies, and not lead to lower consumer prices’.87 Even after the failure of the Singapore issues in the Doha Round, there remain demands to link trade, particularly IPR-related trade, and competition policies more closely by extending the coverage of the WTO so as to incorporate competition law because the WTO may be ‘described as a “free trade” institu86 Furthermore, as globalization blurs the boundaries of markets, it also blurs the borders between trade and competition policy. See WTO, supra note 45, para. 23; Dabbah, supra note 40, pp. 206–246. 87 Stiglitz, Joseph E. and A. Charlton (2005), Fair Trade for All: How Trade can Promote Development, Oxford: OUP, p. 268.
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tion, but that is not entirely accurate’; more accurately, ‘it is a system of rules dedicated to open, fair and undistorted competition’.88 At the moment, in addition to the competition rules in the TRIPS Agreement, a number of provisions in other WTO agreements are closely related to competition policy. However, they are dispersed in various WTO agreements without being integrated into a coherent body of competition rules. WTO competition provisions regarding private anti-competitive practices can currently be divided into three categories: (i) mandatory provisions preventing anti-competitive practices, (ii) pro-competitive provisions, and (iii) discretionary provisions preventing anti-competitive practices.89 Regarding the mandatory provisions preventing anti-competitive practices, WTO Members have a due diligence obligation to investigate and prevent the existence of the restrictive business practices stipulated by the WTO rules.90 Members violate this obligation when they are aware of the existence of such practices but do not eliminate them. This may lead to complaints to the WTO DSB. Examples of this type of WTO competition rule are Article VIII of the GATS relating to monopoly and exclusive service suppliers and Section 1 of the Reference Paper on Basic Telecommunications (Telecoms Reference Paper)91 concerning the prevention of anti-competitive practices in telecommunications. As to the pro-competitive provisions, WTO Members have responsibilities to ensure that their private undertakings behave pro-competitively. If a Member does not so perform and does nothing to ensure the existence of the requisite pro-competitive behaviour, that Member violates the norm, and a dispute before the DSB may arise. Section 5 of the GATS Annex on Telecommunications,92 which relates to foreign suppliers’ access to and use of public telecommunications transport networks and services on reasonable and non-discriminatory terms and conditions, and Section 2 of the Telecoms Reference Paper, which stipulates that it is a Member’s duty to ensure interconnection with a major supplier at any technically feasible point in the network under non-discriminatory, reasonable and cost-oriented terms and conditions, may exemplify the pro-competitive provisions.93 88 89
WTO (2007), Understanding the WTO, Geneva: WTO, p. 12. See Alvarez-Jimenez, Alberto (2004), ‘Emerging WTO Competition Jurisprudence and its Possibilities for Future Development’, Nw. J. Int’l L. Bus., 24, 488–492. 90 Argentina – Measures Affecting the Export of Bovine Hide and the Import of Finished Leather, WT/DS155/R, adopted on 16 Feb. 2001, WT/DS155/R, para. 11.52. 91 Telecoms Reference Paper, available at www.wto.org/english/tratop_e/ serv_e/telecom_e/tel23_e.htm. 92 GATS Annex on Telecoms, available at www.wto.org/english/tratop_e/ serv_e/12-tel_e.htm. 93 Article 11.3 of the Agreement on Safeguards requires any Member not to
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The discretionary provisions preventing anti-competitive practices do not include a set of precise obligations; but they do confer considerable discretion on WTO Members to decide which practices are anti-competitive, and how to sanction them under their domestic competition law. Articles 8.2, 31(k) and 40 of the TRIPS Agreement are remarkable examples of this.94 A dispute may be brought to the DSB if a Member alleges that another Member abuses such discretionary provisions and violates other WTO rules. One may argue that the inclusion of competition rules in the WTO is praiseworthy. However, as the analysis of the specific competition rules in the TRIPS Agreement demonstrates, the current rules cannot address satisfactorily the fundamental relationship between trade law and competition law in trade liberalization, while cross-border private anti-competitive practices are multiplying.95 Besides, although IPR-related trade, which plays an important role in international trade in the knowledge-based economies, is subject to detailed WTO rules, IPR-related competition rules in the WTO are still domestic issues. It is worth noting that competition law can affect IPRs and international trade either positively or negatively. On the positive side, it can promote competition and remove entry barriers blocking innovators and market access. On the negative side, it may reduce incentives to innovate and transfer technology and hinder foreign firms from entering domestic markets. IPR-related trade may be distorted to support either interests of right holders, especially MNCs, in the case of under-enforcement of domestic competition law or interests of some specific countries in the case of over-enforcement of their domestic competition law. These problems may become increasingly serious unless either IPR-related competition rules in the TRIPS Agreement are amended or a WTO competition agreement is concluded. 4.2.3
Dispute Settlement
In principle, disputes between WTO Members concerning their rights and obligations under WTO agreements can be settled pursuant to the DSU.96 This dispute settlement mechanism, which exemplifies one of the most important elements of a rules-based multilateral trading system, plays a central role in clarifying and enforcing WTO law with a view to liberalizing international
encourage or support the adoption or maintenance by public and private enterprises of non-governmental measures equivalent to voluntary export restraints; orderly marketing arrangement, compulsory import cartels, etc. can be another example for WTO procompetitive provisions. 94 See supra Section 1.3.3. 95 See also Taylor, supra note 25, p. 163. 96 Article 1.1 of the DSU.
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trade.97 Although competition rules exist in WTO agreements, until 14 September 2009, out of the 399 disputes brought to the WTO DSB, Mexico – Telecoms98 was the first and only competition case. It related to the mandatory prevention of anti-competitive practices under Section 1 and the pro-competitive provisions under Section 2 of the Telecoms Reference Paper. Although this case did not involve the competition rules in the TRIPS Agreement, two conclusions can be drawn concerning the application of these rules at the domestic level. First, there is currently no definition of anti-competitive practices or abuse of a dominant position in WTO law. However, the Panel in Mexico – Telecoms based its reasoning on the open-ended language and the object and purpose of the Telecoms Reference Paper99 and upon international and national practices. The Panel observed that the list of anti-competitive practices in Section 1.2 of the Telecoms Reference Paper is not exhaustive; and that it should include horizontal price fixing and market sharing agreements.100 As Marsden observes, the WTO Members in signing the Telecoms Reference Paper did not agree that a cartel ban is a WTO commitment; it appears, then, that the WTO DSB may ‘create new commitments to open markets’.101 In defining technology transfer-related anti-competitive practices it should be noted that those practices vary from one country to another. In particular, there is a major difference in this area between developed countries, which seem to favour innovation-oriented competition laws and policies, and developing countries, which seem to favour development/dissemination-oriented competition laws/policies. If a dispute relating to the application of domestic competition law to technology transfer is brought to the DSB, it is very difficult for WTO panels and even the Appellate Body to reconcile the differing innovation-oriented and 97 See, e.g., Yerxa, Rufus (2005), ‘The Power of the WTO Dispute Settlement System’, in Rufus Yerxa and B. Wilson (eds), Key Issues in WTO Dispute Settlement: The First Ten Years, Cambridge: Cambridge University Press, p. 3; Keck, Alexander and S. Schropp (2007), ‘Indisputably Essential: The Economics of Dispute Settlement Institutions in Trade Agreements’, WTO Staff Working Paper ERSD-2007-02, p. 5, available at www.wto.org/english/res_e/reser_e/ersd200702_e.pdf. 98 Mexico – Telecoms, supra note 68. 99 Section 1.2 of the Telecoms Reference Paper, which aims at preventing anticompetitive practices by a major supplier in telecommunications, reads that anticompetitive practices ‘shall include in particular: (i) engaging in anti-competitive cross-subsidization, (ii) using information obtained from competitors with anticompetitive results, and (iii) not making available to other services suppliers on a timely basis technical information about essential facilities and commercially relevant information which are necessary for them to provide services’. 100 Mexico – Telecoms, supra note 68, para. 7.237. 101 Marsden, Philip (2004), ‘WTO Decides First Competition Case – with Disappointing Results’, Competition Law Insight, May, 3.
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development-oriented competition rules of Members, and evaluate the appropriateness of the remedies concerned in connection with IP protection under the TRIPS. In such a case, if the DSB finds ‘new commitments’, they may affect either developing countries or developed countries, or even both. Therefore, further competition rules in the WTO have to be established, or at least guidance for the TRIPS competition rules is needed. Second, the WTO Panel in Mexico – Telecoms faced the issue of whether practices mandated by a Member’s law could constitute anti-competitive practices. Under the competition laws of many countries, a company complying with a specific legislative requirement of a country may be immunized from the effect of violating the general domestic competition law of that country, because domestic legislators have the legislative power to limit the scope of domestic competition legislation.102 Nevertheless, Article 27 of the Vienna Convention on the Law of Treaties states that ‘a party may not invoke the provisions of its internal law as justification for its failure to perform a treaty’; and the Appellate Body has held that WTO law is not ‘to be read in clinical isolation from public international law’.103 The Mexico – Telecoms Panel concluded that acts required by governments could still constitute anti-competitive practices prohibited by WTO law.104 One may infer from this that no WTO Member could impose its IPR-related competition rules on another. The promulgation and enforcement of IPR-related competition legislation in one Member is contested before the DSB only if the consistency and appropriateness requirements are not met. However, such a requirement is still controversial. In brief, the dispute settlement mechanism at the WTO imposes pressure on both developing and developed countries to rethink the benefits of negotiating and enacting further competition rules in the WTO system, such as a WTO competition agreement or at least a revision of the TRIPS competition rules. In addition, the competition regulations and policies of a WTO Member may be challenged through the so-called trade policy review mechanism.105 Within
102 It is the so-called ‘state action’ doctrine in the US. See Hovenkamp, Herbert (2005), Federal Antitrust Policy: The Law of Competition and Its Practice, St. Paul, MN: Thomson West, pp. 736–760. In the EU, the ECJ has held that Articles 81 and 82 EC do not apply if ‘anti-competitive conduct is required of undertakings by national legislation or if the latter creates a legal framework which itself eliminates any possibility of competitive activity on their part’. Joined Cases C–359/95 P and C–379/95 P, Commission and France v. Ladbroke Racing, [1997] ECR I–6265, para. 33. 103 United States – Standards for Reformulated and Conventional Gasoline, WT/DS2/AB/R, circulated on 29 April 1996. 104 Mexico – Telecoms, supra note 68, para. 7.244. 105 See Article III.4 of the Marrakesh Agreement Establishing the WTO and Annex 3 of this Agreement; Noonan, Chris (2008), The Emerging Principles of International Competition Law, Oxford: OUP, p. 570.
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this review mechanism, in combination with the need for discussions on further competition rules, the WTO Members may develop a consensus on these rules.
4.3
CONCLUDING REMARKS
Due to the lack of guidance for the application of competition rules in the TRIPS Agreement and to differences both in the goals and enforcement of competition law and in economic development between countries, particularly developed and developing ones, conflicts in the application of domestic competition law to international technology transfer are inevitable. Such conflicts will increasingly become more serious as developing countries improve their domestic competition infrastructures and intensively apply their domestic competition laws to international technology transfer to protect national interests and consumer welfare. The competition rules in the TRIPS Agreement as well as a WTO competition agreement should be reconsidered to prevent increasingly IPR-related anti-competitive practices, promote the dissemination and transfer of technology to developing countries, and efficiently protect IPRs in global trade liberalization. One may argue that it is not necessary to change the present situation of the competition rules in the TRIPS Agreement.106 However, the current overenforcement and under-enforcement dilemma will change. Developing countries will, sooner or later, enforce their domestic competition laws relating to technology transfer. They have the incentives to do this after the successful use of public health-related flexibilities with the Doha Declaration and the proposed Article 31bis of the TRIPS Agreement, as well as the positive confirmation coming from the EU through the Microsoft v. Commission ruling. It seems that conflicts relating to enforcement of domestic competition laws in the field of international technology transfer will not be satisfactorily resolved by the current WTO dispute settlement mechanism. The national interests of both developing and developed country Members cannot be reconciled if they do not reach further competition rules. One may argue that efforts to incorporate the competition issue into the WTO negotiating agenda failed at the WTO Ministerial Conference in Cancun, and the issue appeared in neither the July 2004 package nor the July 2008 package of the Doha Development Agenda.107 Therefore, any efforts to negotiate further IPR-related competition rules at the WTO forum will reach a
106 107
Abbott, supra note 2, p. 334. See www.wto.org/english/tratop_e/dda_e/meet08_e.htm.
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similar result. However, the WTO, as a ‘living organism’, should ‘rapidly react to global challenges’ and ‘contribute to devising solutions’ to them.108 Competition law issues in general and IPR-related ones in particular will be one of the global challenges in the near future. The failure in Cancun and its consequence cannot be a negative precedent preventing negotiations on further IPR-related competition rules or a WTO competition agreement. Developing countries opposed the incorporation of the competition issue into the Doha negotiating agenda for both extrinsic and intrinsic reasons.109 The extrinsic reasons were the lack of ‘balance of negotiations’, i.e. the stalemate of negotiations in other fields of international trade. The intrinsic reasons were internal flaws of the EU proposals on WTO competition law. Developing countries feared that the proposals would be a tool to increase market access that would benefit MNCs from the developed countries. On the other hand, the US did not support the proposals because it wanted to find other solutions in another forum, namely the ICN. As David Gerber noted, obstacles that have impeded negotiations of competition law in the WTO are a ‘lack of “community” in norms and operations of the WTO’ and ‘uncertainty about the form and potential consequences’ of WTO competition law.110 However, negotiations about the future of the IPR-related competition rules will not (or almost certainly will not) be faced with these obstacles. They focus on specific issues interesting both developed and developing countries, namely, finding a solution to the over-enforcement and under-enforcement dilemma and avoiding conflict in the future. Moreover, the IPR-related competition issues are drawing much attention from other international forums such as WIPO and the WHO. This may encourage and accelerate the negotiations on these issues in the WTO. It should be noted that the EU and CARIFORUM states have succeeded in their negotiations and reached a reasonable solution. In a provision regulating technology transfer in the EPA between the EU and the CARIFORUM states signed in October 2008, both parties agree: The EC Party and the Signatory CARIFORUM States shall take measures, as appropriate, to prevent or control licensing practices or conditions pertaining to intellectual property rights which may adversely affect the international transfer of technology and that constitute an abuse of intellectual property rights by right holders or an abuse of obvious information asymmetries in the negotiation of licenses.111
108 Lamy, Pascal (2009), ‘Strengthening the WTO as the Global Body’, available at www.wto.org/english/news_e/news09_e/tnc_chair_report_29apr09_e.htm. 109 Drexl, supra note 80, pp. 435–437. 110 Gerber, supra note 80, p. 724. 111 Article 142.2 of the EPA between the EU and the CARIFORUM states, OJ 2008 L 289/I/3 (emphasis added).
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This provision, like the IPT proposal discussed in Section 1.3.3.3, is still general. However, it goes further than the current competition rules in the TRIPS Agreement by using the term ‘shall’ rather than ‘may’, which appears in Articles 8.2 and 40.2 of the TRIPS Agreement. It creates a mandatory regime to control anti-competitive practices in technology transfer, especially in the CARIFORUM states. This provision, together with the chapter on competition rules in the EPA,112 which does not have an equivalent in the IPT proposal nor the current WTO laws, could pave the way for the enforcement of technology transfer-related competition law in the CARIFORUM states with cooperation from EU competition authorities. In order to reach a consensus on IPR-related competition issues on the basis of the current competition flexibilities in the TRIPS Agreement, the following two issues should be incorporated into the agenda of a post-Doha Round in the WTO. First, scope and requirements for adopting and enforcing competition law relating to international technology transfer: in any case, prevention of IPR-related anti-competitive practices to promote technology transfer to developing countries must be permitted. However, such prevention must also take into account the legal monopoly of IPRs. Negotiations should be focused on minimum criteria to determine anti-competitive abuses of IPRs, refusal to license, excessive pricing of IPR-embodied products, and tying, for instance. Second, increasing cooperation between developing and developed countries with respect to the enforcement of domestic competition law regarding technology transfer: a mechanism relating to technical assistance and advanced cooperation should be established in this area. International comity, both negative and positive, should also be recognized. To conclude, despite the fact that the success of negotiations about further IPR-related competition rules in the WTO, or even a WTO competition agreement, is doubtful, both developing and developed country Members should put these negotiations into the WTO negotiating agenda within a new WTO negotiation round after the Doha Round for the sake of both sides and international trade. Although the case for the improvement of the competition rules in the TRIPS Agreement does not appear to be extremely urgent, both developing and developed country Members should be well prepared and move forward.113 Optimistically, a positive result to these negotiations will result in a new WTO competition agreement or a second amendment of the TRIPS Agreement, or at the very least WTO guidance on IPR-related competition issues, such as a WTO Secretariat note for instance.
112 113
Articles 125–130 of the EPA between the EU and the CARIFORUM states. Anderson, supra note 45, pp. 472–473; Dabbah, supra note 41, p. 286.
5. Implications for developing countries 5.1 PURPOSES AND PRINCIPLES IPR-related anti-competitive practices have recently (re-)gained much attention in the WTO, WIPO and developing countries. There is growing awareness in developing countries of the adverse effects of these practices on their technological level and economic development, as well as their population. They are increasingly recognizing the potential benefits deriving from technology transfer-related competition law enforcement. However, the intersection between competition law and IPRs is complex and not easily managed in practice, especially in developing countries. Developing countries should develop and improve their competition law to complement strong IP regimes, which they have adopted under the TRIPS Agreement and even TRIPS-plus standards embodied in bilateral or regional trade agreements. The TRIPS Agreement, as noted, creates the core international commitments providing minimum standards under which WTO Members have to protect the IP of nationals of other WTO Members. It is undoubted that this agreement also sets up balanced mechanisms for IP protection, on the one hand, and the transfer of and access to technology, on the other. One essential factor for a balanced mechanism relates to the interaction of IP and competition laws. From the competition law perspective, the TRIPS Agreement provides competition flexibilities, which developing country Members may apply to control anti-competitive practices in technology transfer and promote access to technology. Developing countries should appropriately take advantage of these flexibilities to maximize the benefits of domestic competition law and minimize the social costs of adopting a strong IP regime under the TRIPS Agreement. However, there remain ‘inflexibilities in these flexibilities’,1 which prevent developing country Members from tailoring their IPR/technology transfer-related competition regulations and enforcing those regulations in practice so as to protect national interests and consumer welfare. Taking advantage of these compe-
1 Stiglitz, Joseph E. (2008), ‘Economic Foundations of Intellectual Property Rights’, Duke L. Rev., 57, 1717.
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tition flexibilities is not easy for developing countries. It requires a sophisticated competition law infrastructure.2 Accepting the TRIPS Agreement as it is, developing country Members should comply with the minimum standards of IP protection under it. However, when using flexibilities permitted in the TRIPS Agreement, developing country Members should consider the fact, observed by Joseph Stiglitz, that: [IPRs] are important, but the importance of [IPRs] has been exaggerated, as they form only one part of our innovation system. [IPRs] should be seen as part of a portfolio of instruments. We need to strengthen the other elements of this portfolio and redesign our intellectual property regime to increase its benefits and reduce its costs. Doing so will increase the efficiency of our economy – and most likely even increase the pace of innovation.3
A domestic IP regime needs to be viewed as part of a broader set of rules which are designed to optimize knowledge development, dissemination and utilization.4 Currently, it is not easy for developing country Members extensively to reconstruct their domestic IP law without infringing the globalized minimum standards which are well established by the TRIPS Agreement. However, they should, at least, strengthen their domestic competition law and appropriately apply it in practice in order to protect domestic sustainable development and their population. Obviously, competition law plays an important role in promoting competition, innovation, technology transfer, and economic growth in a knowledge-based economy. But technology transferrelated competition law should be neither over-regulated and over-enforced nor under-regulated and under-enforced. Competition law is neither a panacea nor a ‘cure all’ for an economy which has no essential infrastructure, especially human resources, to apply and localize technology. Furthermore, technology often contains not only disclosed but also undisclosed information, know-how and trade secrets for instance. In the process of applying domestic competition law to promote access to technology, developing countries also need the cooperation of IPR holders. Therefore, competition law and IP protection should be compatibly developed in tandem, paving the way for the cooperation of IPR holders.
2 Reichman, Jerome H. and R.C. Dreyfuss (2007), ‘Harmonization without Consensus: Critical Reflections on Drafting a Substantive Patent Law Treaty’, Duke L. J., 57, 98. 3 Stiglitz, supra note 1, p. 1724. 4 Gervais, Daniel J. (2008), ‘Trade and Development’, in Daniel J. Gervais (ed.), Intellectual Property, Trade and Development: Strategies to Optimize Economic Development in a TRIPS-plus Era, Oxford: OUP, p. 4.
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It should be noted that a majority of developing countries at the moment have a low technological level. They are net importers of technology, while the technology gap between developed and developing countries remains wide. Therefore, developing countries should favour technology transfer-related competition law enactment and enforcement in order to promote access to technology, especially IPR-intensive technology. However, as the experience of the US and the EU demonstrated, good IPR-related competition law should be flexible and adaptable when either circumstances change or economic thinking evolves.5 There is no one-size-fits-all model of competition law. Copying Western competition regimes in developing countries will hardly yield success.6 A common technology transfer-related competition law approach to all developing countries is neither desirable nor feasible. Developing countries should not use approaches from developed countries, even the EU approach which seems to be more suitable for developing countries, without changes to fit their local contexts. As David Evans argues, countries should adopt competition rules that ‘adhere to general principles’ but ‘take into account the specifics of their countries or regions’.7 In any event, the appropriate application of domestic competition law to technology transfer in a developing country should be supported by developed countries. As Max Baucus observed in the ‘International Enforcement of Intellectual Property Rights and American Competitiveness’ hearing organized by the US Senate Committee on Finance in 2008: IPR-related laws and agreements [on IPRs] must also reflect [developed countries’] compassion and good sense. We must help ensure that the world’s poorest countries have access to lifesaving medicines to treat their sick, agricultural biotechnology to feed their hungry, and green technology to clean their environment.8
Developed countries cannot expect, or require, developing countries to strike the same balance between IP protection and competition law as the developed countries currently do. As long as the obligations in the TRIPS Agreement are respected, developed countries should not impose any pres-
5 White, Lawrence J. (2008), ‘The Role of Competition Policy in the Promotion of Economic Growth’, p. 28, available at http://ssrn.com/abstract=1129833. 6 Kovacic, William E. (1999), ‘Capitalism, Socialism, and Competition Policy in Vietnam’, Antitrust, 13, 57. 7 Evans, David S. (2009), ‘Why Different Jurisdictions Do Not (and Should Not) Adopt the Same Antitrust Rules’, p. 23, available at http://ssrn.com/ abstract=1342797. 8 Statement of Senator Max Baucus in the ‘International Enforcement of Intellectual Property Rights and American Competitiveness’ Hearing, 15 July 2008, available at http://finance.senate.gov/hearings/statements/071508mb.pdf.
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sures on developing countries when the latter adapt and apply their domestic competition law to technology transfer. Moreover, when applying their domestic competition law to technology transfer, at least technology in areas like medicine, agriculture, environment and climate change, developing countries deserve to receive ‘compassion and good sense’ from developed countries. Such ‘compassion and good sense’ derive from the rights of developing countries in Articles 8, 31(k), and 40, as well as the obligations of developed countries in Articles 66.2 and 67, of the TRIPS Agreement. They also derive from the rights of developing countries to attain the UN millennium development goals.9 Last but not least, developed countries, particularly the US and the EU, should have such ‘compassion and good sense’ if they look at their history of the application of competition law to IPRs. As noted, there was a long period in which these countries extensively applied competition law to limit IPRs. Finally, it is worth noting that every competition law approach in itself contains errors and risks. Applying competition law to prevent IPR abuses and open access to technology may result in more errors and risks. However, these should be regarded as the flip side of the benefits gained from the application of technology transfer-related competition law.10 Experience from developed countries and pioneering developing countries will help developing countries to minimize these errors and risks. Developing countries can learn, as developed countries did, by enforcing the law. In this context, it is worth reiterating principles highlighted in the Resolution adopted by the UN General Assembly on international trade and development in 2005, which states: [It is important to strengthen and enable] trade, investment and business environments through the adoption of appropriate domestic measures and conditions to encourage local, regional and international investment and efforts to prevent and dismantle anti-competitive practices and promote responsibility and accountability of corporate actors at both the international and the national levels, thereby enabling developing countries’ producers, enterprises and consumers to take advantage of trade liberalization, and encourages developing countries to consider establishing competition laws and frameworks best suited to their development needs, complemented by technical and financial assistance for capacity-building, taking fully into account national policy objectives and capacity constraints.11 9 Alvarez, Ana Maria et al. (2007), ‘Anti-competitive Practices and the Attainment of the Millennium Development Goals: Implications for Competition Law Enforcement and Inter-Agency Cooperation’, in UNCTAD, Implementing Competition-Related Provisions in Regional Trade Agreement: Is It Possible to Obtain Development Gains?, Geneva: UNCTAD, pp. 60–87. 10 Flynn, Sean M. (2008), ‘Using Competition Law to Promote Access to Knowledge’, p. 32, available at www.wcl.american.edu/pijip_static/documents/ flynn08122008.pdf?rd=1. 11 UN General Assembly Resolution on international trade and development,
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On the basis of these purposes and principles, the next two Sections present general and specific implications for developing countries. These implications should be used flexibly to meet each country’s genius, goals and aspirations, as well as the ability of its public and private institutions. In other words, on the basis of the implications mentioned below, each developing country should tailor its domestic technology transfer-related competition law to address its local conditions.
5.2
GENERAL IMPLICATIONS
In order properly to adopt and enforce domestic competition law in respect of technology transfer-related anti-competitive practices, the prerequisite is that each developing country should develop and improve its own strong competition law in general and build efficient, independent competition authorities in order properly to enforce the law in practice. This requires political will and reasonable and synchronized strategies. In that respect, developing countries should take into consideration the following general competition law implications.12 First, properly drafting, enacting and amending domestic competition law in order to have a strong, flexible and enforceable system: domestic competition law must respect basic legal principles under the rule of law. It should give competition authorities independence with strong enforcement power, particularly power of investigation, including search, seizure and dawn raids, and the ability to impose fines and other penalties to correct anti-competitive practices. Second, establishing independent competition authorities with strong, good leadership: the independence of competition authorities has an important impact on the enforcement of competition law. Moreover, competition authorities need a competent, independent, energetic and determined leader if they are to enforce domestic competition law well. Third, building competent human resources for competition authorities and courts: competition authorities need their own independent and adequate budgets, allowing them to hire experts in competition law, economics and A/RES/59/221, 11 Feb. 2005, para. 30, available at www.undemocracy.com/A-RES59-221.pdf. 12 Most of these implications were recently mentioned in two works at the IDRC. See Joekes, Susan and P. Evans (2008), Competition and Development: The Power of Competitive Markets, Ottawa: IDRC, pp. 61–68; Stewart, Taimoon et al. (2007), Competition Law in Action: Experiences from Developing Countries, Ottawa: IDRC, pp. 47–52. See also Mehta, Pradeep S. et al. (2007), Politics Trumps Economics: Lessons and Experiences on Competition and Regulatory Regimes from Developing Countries, Jaipur: CUTS.
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industrial sectors and in administrative procedures. Their staff should be well paid and well exposed to competition law issues. Moreover, judges involved in competition cases must be well equipped with competition law and economic analyses in order to be familiar with the complexities of competition cases. Without well-trained competition law judges, who will adjudicate on competition cases, all the efforts of competition authorities may be destroyed by bad judgments. Fourth, building alliances between competition authorities with the beneficiaries of competition law and counteracting the opposition to competition law enforcement: enforcing competition law will inevitably lead to opposition from a group of firms and monopolists. On the other hand, it benefits others. Therefore, competition authorities should cooperate with the beneficiaries and struggle against the opponents. The active involvement of consumer groups and civil society organizations is very important in this process. Fifth, competition law advocacy: competition authorities should encourage public interest in competition law questions in the process of building a domestic competition culture and awareness of competition issues. Sixth, cooperation between competition authorities and other government agencies: adopting and enforcing competition law involves many regulatory government agencies, so cooperation between competition authorities and regulatory agencies and fostering inter-agency discussions are needed. Seventh, instituting both leniency programmes and heavy fines/penalties: proper leniency programmes will effectively help competition authorities detect collusive practices. Meanwhile heavy fines/penalties will deter competition law infringers. Eighth, cooperation with foreign competition authorities: since anticompetitive practices can be regional or global while competition jurisdiction is currently confined to domestic borders, cooperation with foreign competition authorities is essential. This also helps to improve the experience and skills of the staff of domestic competition authorities. Ninth, extra-territorial application of domestic competition law: it is not easy to apply domestic competition law to anti-competitive practices conducted outside a developing country’s territory. But extra-territorial application of domestic competition law may work as a threat to any one who has conducted, or intends to conduct, such practices. Tenth, monitoring opened markets closely: once developing countries open their domestic markets on the basis of their WTO commitments and/or commitments in bilateral/regional trade agreements, many MNCs will operate in them. Through their operation in the domestic markets, these MNCs provide much profit for developing countries. However, MNCs, if not appropriately controlled, may abuse their power and implement anti-competitive practices. Competition authorities should pay more attention to these MNCs. However,
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such special attention cannot lead to the infringement of the national treatment principle in the WTO. The application of domestic competition law should not become a barrier against international trade. In addition to these implications for competition law in general, the following implications mainly focus on the proper adoption and enforcement of competition law in the area of technology/IPRs. 5.2.1
Importance of IPR-related Competition Law in Technology Transfer and Economic Growth
Access to technology, especially IPR-intensive technology, is one of the keys to economic growth and the improvement of living standards in developing countries. Since IPRs are protected globally under the TRIPS Agreement and even the TRIPS-plus agreements, access to technology is neither easy nor free for developing countries as net importers of technology. In a market-based process of access to technology, developing countries are inevitably faced with the anti-competitive practices of technology holders. Moreover, these holders may either refuse to transfer their technology or charge excessive prices at the expense of consumers in developing countries. Proper domestic IP law, to some degree, can help developing countries gain access to technology. The compulsory licensing of patented pharmaceuticals on the ground of public health permitted under the Doha Declaration (and the Amendment of the TRIPS Agreement), as well as its application in some developing countries, has proved the effectiveness of domestic IP law. However, domestic IP law alone cannot solve all aspects of access to technology and cannot effectively prevent IPR abuses and anti-competitive contractual restrictions in technology transfer. Designing appropriate domestic competition and IP laws, developing countries can establish reasonably balanced mechanisms between IP protection and access to technology in order to encourage not only innovation and competition but also economic growth. Good IPR-related competition laws and regulations will help developing countries control anti-competitive practices in technology transfer. Furthermore, developing countries can use their IPR-related competition law as a threat and/or bargaining tool to access technology. In the past, developed countries used their weak IP law, and to some extent their strong IPR-related competition law, in this way. Nowadays, developing countries cannot use a weak IP regime as did the developed countries, owing to the globalized IP protection under the TRIPS Agreement. However, a strong and reasonable IPR-related competition law together with appropriate enforcement of the law is still a good alternative for developing countries. If a developing country does not have IPR-related competition law, or does not strongly and appropriately enforce it, it deprives itself of an important tool
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in establishing a balance, since it has strongly to protect IPRs. Using a reasonable and enforceable IPR-related competition law, developing countries can make the self-interests of IPR holders serve wider interests13 in order to benefit their populations and help them achieve sustainable development in a knowledge-based economy. 5.2.2
Tailoring and Enforcing Domestic IPR-related Competition Law to Suit Particular Socio-Economic Contexts
Domestic competition law in the IPRs/technology related area should be neither too strict nor too lax. However, it is difficult to balance IPRs and competition law in practice. Although they have a similar development level, the US and the EU are different in their approaches to IPR-related competition law. Developing countries should, and deserve to, tailor and appropriately enforce their domestic IPR-related competition law to meet their particular socio-economic contexts. In order to do this, developing countries should understand the complexity of IPRs and competition law. They should adapt and customize IPR-related competition law, especially IPR-related competition cases in the US, the EU and other advanced developing countries, to make it fit local needs and sustainable development. While IP protection is being globalized under the TRIPS Agreement, IPR-related competition law in developing countries needs to be ‘glocalized’ to balance that protection and serve national interests and consumer welfare. In the process of tailoring and enforcing domestic IPR-related competition law, competition authorities in developing countries should enact a set of guidelines on how licence agreements and unilateral practices relating to IPRs will be scrutinized. Experience from the US, the EU and countries like Taiwan, South Korea and Singapore shows that such a set of guidelines will help businesses to structure their technology transfer agreements and avoid IPR-related unilateral abusive conduct so as to comply with the law.14 It will also play an important role in promoting awareness of IPR-related anti-competitive practices in consumers and firms. Such a set of guidelines is consistent with the transparency requirement of the TRIPS Agreement. It makes the application of IPR-related competition law in a developing country, a very complicated issue, more convenient.
13
This view is developed from Bill Gates’s view that ‘[t]he genius of capitalism lies in its abilities to make self-interest serve the wider interest’. See Gates, Bill (2008), ‘A New Approach to Capitalism in the 21st Century’, Remarks of 24 Jan. 2008 at the World Economic Forum, Davos. 14 OECD (2005), ‘Intellectual Property Rights’, DAF/COMP(2004)24, p. 7.
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Cooperation between Competition Authorities and IP Authorities
Adopting and enforcing IPR-related competition law will affect IPRs granted under IP law. On the other hand, if the requirements for granting IPRs, especially patents, are low, there will be many trivial IPRs, which will hinder innovation and competition. Therefore, cooperation between competition authorities and IP authorities should be established, as this will foster mutual understanding of each other’s field. IP authorities will take into account competition issues during their IPR-granting procedures or in their recommendations on the revision of IP law.15 They will also efficiently support competition authorities in the latter’s investigation and enforcement of competition cases. In this cooperation, competition authorities need to have a decisive voice on decisions to grant compulsory licensing as a remedy to correct anti-competitive practices conducted by IPR holders. 5.2.4
International Cooperation in Enforcement of IPR-related Competition Law
Since a majority of developing countries are net importers of technology, most IPR-related competition cases involve foreign nationals or domiciliaries from developed countries. When competition authorities in a developing country apply their domestic competition law to IPR-related anti-competitive practices conducted by those foreign nationals or domiciliaries, they have both a right and an obligation to cooperate, or at least to consult, with competition authorities from developed countries under Article 40.3 and 40.4 of the TRIPS Agreement. However, as noted, the TRIPS Agreement provides the minimum principles for such bilateral cooperation. In order to have support from developed countries and advanced developing countries, which have experience in the application of IPR-related competition law, developing countries should have close cooperation with them. This cooperation can be through bilateral agreements. In addition, developing countries should look for such cooperation through international forums, WIPO and the WTO for instance. The IPR-related competition issues in the WIPO Development Agenda should be discussed in detail and implemented in practice. Regarding the WTO, developing countries should be more pro-active and push for more discussions on these issues in the TRIPS Council. In any case, competition issues, or at least IPR-related competition issues, should be
15 Ibid., p. 7; OECD (2008), ‘Competition, Patent and Innovation’, DAF/COMP (2007)40, p. 10.
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back on the post-Doha negotiation agenda of the WTO. An international competition agreement, including basic elements as proposed by the European Commission, as noted in Sections 4.1.3 and 4.3, should be (re)negotiated in the WTO. Further, through international cooperation in the field of IPR-related competition law, a developing country can reasonably apply IPR-related competition decisions/judgments from developed countries to its domestic circumstances. 5.2.5
Other General Implications
Although developing countries have a wide discretion to adopt and enforce their domestic competition law to control IPR-related anti-competitive practices and promote access to technology, they have to respect the TRIPS Agreement, particularly the consistency and appropriateness requirements. In order to meet these requirements, the fundamental principles rooted in US and EU laws, which are clearly indicated in the Antitrust–IP Guidelines 1995 and the TTBER 2004 and TT Guidelines, should be applied. This means that: (i) domestic competition law in developing countries should be applied to IPRs as to other forms of property; (ii) IPRs themselves do not create market power; and (iii) technology transfer agreements are likely to be pro-competitive. In any case, IPR-related anti-competitive practices should be scrutinized by competition authorities in developing countries on the analysis of the likely effects of right holders’ conduct on a case-by-case basis. This analysis needs to be solidly grounded in economics. There have been increasing demands for substantial economic support for arguments advanced in an IPR-related competition law context in developing countries.16 In order to meet these demands, the staff of competition authorities and judges should be trained to understand not only competition law, but also IP law, the complexity of the interface between competition law and IPRs, as well as the economic rationale behind this interface. In addition to improving economic analyses in IPR-related competition cases, developing countries should build an IPR-related competition law culture in their government, business and general public. IPR-related competition advocacy should also be intensively implemented. Once awareness of IPRrelated competition issues is increased, competition authorities will receive support from government agencies, consumers and civil society organizations in the process of controlling and intervening in IPR-related anti-competitive
16 OECD (2008), ‘Presenting Complex Economic Theories to Judges’, DAF/COMP(2008)31, p. 7.
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practices. IPR-related competition law should be constructed and enforced in the framework of IPR-related competition policy, in which IP law should be improved to establish its own internal balance and support competition law. Non-challenge clauses in licensing agreements should be officially declared to be invalid in order to encourage the elimination of trivial IPRs. Finally, competition law in general and IPR-related competition law in particular, needless to say, are there to protect competition and consumers, not competitors. This is the most important principle which needs to be respected even in developing countries. It should be understood that competition law in developing countries ‘should not be used to protect David from Goliath, but it may be used to empower David against Goliath by opening paths of mobility and access’.17 Regarding technology, domestic firms in developing countries are David. IPR-related competition law in developing countries should reasonably help them to improve their technological competitiveness.
5.3
SPECIFIC IMPLICATIONS
Competition issues in general and IPR/technology-related competition ones in particular are new to a majority of developing countries. These countries are faced with many internal and external obstacles which hinder the adoption and application of competition law to IPRs/technology transfer. So each country should identify its own enforcement priorities in controlling IPR-related anticompetitive practices in the process of promoting access to technology.18 A developing country which embarks on competition law in general, and IPRrelated competition law in particular, for the first time does not need to cover all IPR-related anti-competitive practices, as a developed country with rich experience may do. Developing countries need to establish a legal framework for controlling and preventing most of these IPR-related anti-competitive practices. However, enforcing such competition law in practice is more decisive. Even competition law is no better than an unenforceable, poorly administered one. It is desirable that competition law is so calibrated that different IPR-related anti-competitive practices are enforced gradually over a period of
17 Fox, Eleanor M. (2008), ‘Economic Development, Poverty and Antitrust: the Other Path’, in Qaqaya Hassan and G. Lipimile (eds), The Effects of Anti-competitive Business Practices on Developing Countries and Their Development Prospects, Geneva: UNCTAD, pp.179–180. 18 Prioritization is a key to competition agency effectiveness. ICN (2009), ‘Report on the Agency Effectiveness Project: Second Phase – Effectiveness of Decision’, p. 7, available at www.icn-zurich.org/Downloads/Materials/ICN_CPIWG_ Report_on_the_Agency_Effectiveness_Project.pdf.
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time, instead of all at once. Rhetorically speaking, developing countries, with respect to IPR-related competition law, should ‘walk first and walk well before running’.19 In the beginning, developing countries should focus on preventing some widespread IPR-related anti-competitive practices which seriously affect consumer welfare and national interests. An over-ambitious approach to IPRrelated competition law may result in the law not being applied effectively or efficiently. Using competition law to promote access to technology should be an objective as well as a priority in developing countries. Moreover, the main challenges to developing countries with respect to technology transfer are, as UNCTAD has recently pointed out, ‘the imposition of abusive terms and refusal to license or deal’.20 Therefore, the abuse of IPRs through either refusal to license or excessive pricing of IPR-embodied products should be the first enforcement priorities. Further, even though licensing is generally procompetitive, tying clauses in licensing agreements should be a serious concern; and use restrictions on downstream purchasers also need to be scrutinized under competition law to protect consumers. 5.3.1
Refusal to License
According to the minimum standards in the TRIPS Agreement, WTO Members have an obligation to grant right holders a right to exclude third parties from using the protected IP. Therefore, a mere refusal to license cannot be an infringement of competition law because it derives from the right to exclude. However, it is well recognized, even in the US and the EU, that refusal to license in some exceptional circumstances can be in breach of competition law. How such exceptional circumstances are determined is still controversial as between the US and the EU. Developing countries deserve to construct broad enough exceptional circumstances to prevent anti-competitive refusals to license in order to promote access to technology. Generally, they could flexibly follow the EU approach: a refusal to license will violate the competition law of a developing country if the following four-requirement test is satisfied. First, the indispensability of technology: the technology in question is indispensable for activities in the downstream market; it must involve essential non-substitutable technological input used to produce technological output. Second, the hindrance of the emergence of new products for which 19 Chakravarthy, S. (2007), ‘Economic Reforms and Competition Law Implementation in Developing Countries’, available at www.cutsinternational.org/7up2/Capacity%20building/Presentations/DrSchkravarthy-paper.doc. 20 UNCTAD (2008), ‘Competition Policy and the Exercise of Intellectual Property Rights’, TD/B/COM.2/CLP/68, p. 1.
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there is a potential consumer demand: in the EU, the CFI in Commission v. Microsoft appears to be very flexible on this new product requirement; what matters is that a new product cannot be a cloned one of the current products available on the domestic market, and it must benefit consumers. Third, competition elimination: the refusal excludes all competition in downstream markets. Finally, non-justification: the right to exclude under domestic IP law alone cannot justify the refusal. Furthermore, developing countries can link the refusal to license with the essential facilities doctrine. They can also combine refusal to license with nonlocal working of the technology in question. 5.3.2
Excessive Pricing
IP protection permits right holders to market technology or technology-embodied products at very high prices. This is a good incentive for competition in technology and innovation markets. However, it works well only in market economies where people can afford to pay for the technology or products. For those who cannot pay, governments and/or other aid and philanthropy channels should take care of them. In developing countries, a majority of the population cannot access such products owing to high prices. However, the technology and/or products, especially those in the areas of pharmaceuticals, food and environment, are essential for people in developing countries. Without the intervention of the governments of developing countries, their populations cannot gain access to the technology and/or technology-embodied products in question. And if so, the UN millennium development goals cannot be reached. From the perspective of IP law, some developing countries have succeeded in applying domestic compulsory licensing provisions to patented pharmaceuticals on the ground of public health. This has been supported by the WTO and other international organizations. However, the public health-related compulsory licensing provisions under an IP regime alone cannot solve the excessive pricing problem in developing countries. Domestic competition law in developing countries should be used to prevent this abusive conduct relating to IPRs. To condemn IPR-related excessive pricing as an abuse of a dominant position under competition law, a two-pronged test should be met: (i) the right holder has a dominant position in the relevant market; and (ii) the prices are objectively excessive. Regarding the dominant position, using a market share threshold to determine dominant position is likely to be an optimal solution for developing countries. However, such a threshold, as Vietnam’s experience indicated, should not be too low. In addition to the threshold, other factors should be considered. Competition authorities should take into account the positions of the right holder’s competitors and barriers to entry and expansion in the rele-
Implications for developing countries
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vant market. This means that the interchangeability of the technology in question plays an important role. If there is no substitutable technology, the technology or technology-embodied products in question, together with IP protection, can be regarded as a separate relevant market. In this case, the right holder has a dominant position. Regarding excessive pricing as an abuse of a dominant position, price comparisons should be used. Excessive pricing may be proved if the price of the same technology or product in other developing countries which have similar economic conditions is much lower than the domestic price in the developing country which applies its domestic competition law. A combination of cost-based and demand-side approaches could also be used. 5.3.3
Tying
Tying is the most popular anti-competitive clause incorporated into technology transfer agreements; controlling tying in such agreements should also be a priority. Five requirements should be met before condemning a tying under competition law in developing countries: (i) the tying technology (or technology-embodied product) and tied product are separate; (ii) the undertaking concerned is dominant in the tying technology (technology-embodied product) market; (iii) the undertaking concerned does not give buyers a choice to obtain the tying technology (technology-embodied product) without the tied product; (iv) tying forecloses competition; and (v) tying is not objectively justified. Regarding competition foreclosure, although tying may harm competition both in the main technology market and the tied product market, competition authorities should first focus on the competition foreclosure in the tied product market, which most adversely affects competition in domestic markets in developing countries. 5.3.4
Use Restriction on Downstream Purchasers
In order to limit the abuse of IPRs being used to impose use restriction on purchasers of technology-embodied products, developing countries should take the broadest approach to IPR exhaustion, i.e. international exhaustion of rights. This is permitted in Article 6 of the TRIPS Agreement. Moreover, every use restriction on downstream purchasers should be considered under the prism of IP–competition–contract laws. In this respect, a distinction between repair and reconstruction of IPR-embodied products should be clear, with the aim of making the scope of the right to repair as large as possible. If these issues are appropriately solved, purchasers of IPR-related products in developing countries, as consumers, will have more rights to use these products when affordability, in terms of prices, is not too high.
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SUMMARY AND FINAL REMARKS
Access to technology is very important for developing countries. However, absorbing, making use of, and even improving the technology is more important. Developing countries need adroit, synchronized legal and economic strategies to build an ‘ecology of innovation’21 in general and develop the capacity to exploit technology, especially technological absorptive domestic skills and competences, in particular. However, without technological input, developing countries cannot use them to produce technological output to serve domestic economic growth and development. Nowadays, it is accepted that there are no conflicts between competition law and IP law at domestic or regional, or international/WTO levels. Competition law and IP protection are considered as the two sides of a coin. Both are part of a competition policy that aims at promoting innovation. Competition law and IP law should be treated equally and developed in tandem. However, competition law can advance or hinder innovation and technology transfer in many ways. Applying it to technology transfer is a twoedged sword. It requires a very well-established, prudent and flexible approach from each country, taking into account domestic interests, consumer welfare and national economic development, as well as the incentives and legitimate benefits of right holders. The role of competition law in technology transfer should be neither overlooked nor over-estimated. Apparently, the TRIPS Agreement offers some degree of autonomy to WTO Members in the field of competition law. However, it turns out that the competition flexibilities in the TRIPS Agreement are just confined to the recognition of WTO Members’ rights appropriately to adopt and enforce their domestic competition law. Meanwhile, the obligations linked to these rights are vague, covering only requirements relating to TRIPS Agreement consistency and appropriateness. These rules do not define whose benefits and welfare are to be considered when designing and applying technology transfer-related competition law at the domestic level. Having these competition law flexibilities available in the TRIPS Agreement is a good thing; but being able to apply them effectively in practice, particularly in developing country Members, is a different one. This needs good competition law infrastructures, which are not easily established in developing countries.
21 The term ‘ecology of innovation’ may be defined as adroit and synchronized policies that inspire and spur innovation and commercialization of innovation for societal benefits. It includes, but is not limited to, education, training, immigration, intellectual and competition law/policy, and tax and investment law/policy. See Dean, Cornelia (2007), ‘Determined to Reinspire a Culture of Innovation’, The New York Times, 10 July.
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At the domestic level, developed countries tend to adopt innovationoriented competition rules, while developing countries prefer dissemination and development-oriented ones. Such differences should be respected, because they are not incompatible with the TRIPS Agreement. And looking back at the history of the interaction between IPRs and competition law, one can see that developed countries applied an approach similar to the current approach in most developing countries. Recently, some developing countries have succeeded in using public health-related flexibilities in the TRIPS Agreement. Additionally, the CFI, in its ruling in Microsoft v. Commission, has officially recognized that the enforcement of domestic competition law in the exploitation of IPRs is compatible with the TRIPS Agreement. Therefore, developing countries should reasonably use the competition flexibilities in the TRIPS Agreement to promote inflows of technology transfer from developed countries. In order to do this, developing countries should carefully enact or amend their domestic competition and IP laws, or relevant case law. However, the balance between the enforcement of competition law and IPRs should always be taken into account. In any event, two principles must be complied with. First, competition law itself, like other legal systems, always has two faces: a legal order, i.e. a set of norms, and legal practices, i.e. enforcement of the norms.22 Promulgation of competition legislation relating to technology transfer without due enforcement is worse than no regulation. The developing countries should simultaneously improve their competition infrastructure in order effectively to implement their domestic competition law in international technology transfer. Second, it must be remembered that competition law is antitrust. It is neither anti-IPRs nor anti-trade. The enforcement of domestic competition law in the field of international technology transfer should take into account the legitimate rights of right holders regardless of their nationality. It cannot hinder international trade liberalization and adversely affect the minimum standards of IP protection under the TRIPS Agreement. Moreover, issues concerning the application of domestic competition law to international technology transfer in developing countries should be solved not only at the domestic but also at the WTO level. Competition issues should be back on the post-Doha Round negotiation agenda of the WTO. Both developed and developing countries should start negotiations to develop the competition rules in the WTO in general, and those in the TRIPS Agreement in particular, for the sake of all WTO Members. Moreover, IPR-related competition issues in WIPO, under the WIPO Development Agenda, as well as in
22
Tuori, Kaarlo (2002), Critical Legal Positivism, Aldershot: Ashgate, p. 121.
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other international forums, should be seriously discussed and implemented. In this process, one principle to be respected is that WTO Members should be allowed to use the competition flexibilities of the TRIPS Agreement so as to develop at their own pace. In any case, in the world of globalization of IP protection, IPR-related competition law should be ‘glocalized’. On the basis of the experience of developed countries and other advanced developing countries, developing countries should adapt and customize their domestic IPR-related competition law to make it fit the local context and local needs. Appropriately adopting and applying domestic competition law in IPRs/technology transfer is a real necessity for developing countries wishing to protect national interests and consumer welfare in a knowledge-based market economy. However, developing countries should set priorities, taking into account their limited competition law resources, which control IPR-related anti-competitive practices while promoting access to technology. Refusal to license, excessive pricing of IPRembodied products, IPR-related tying, and IPR-related use restrictions on downstream purchasers should be the focus of competition law enforcement in developing countries. Last but not least, the adoption and enforcement of competition law in general, or of technology transfer-related competition law in particular, should be regarded as a legal process in which learning comes from enforcing the law. This learning process can be carried out by examining different circumstances over time, in which legal issues are increasingly elaborated in order to promote clear, transparent and predictable rules of law. By pro-actively enforcing technology transfer-related competition law, developing countries will achieve two objectives: first, the promotion of access to technology and the control of anticompetitive practices in inward technology transfer agreements, and, second, improving their competition law regimes. International forums, especially the WTO and WIPO, and the UN millennium development goals are supporting developing countries to do this. In this way, technology transfer-related competition law will contribute to the promotion of competitive markets as a basis for prosperity in developing countries.
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Index Abbott laboratories, withdrawal of drug registration application 199–204 Competition Act of Thailand, Section 25(3) complaint 200–202 Competition Act of Thailand, Section 28 complaint 202 abuse of a dominant position and deception by a right holder 115–116 and developed countries 71–77 excessive pricing 299 market share 225 in South Africa 182 in Vietnam 223–226, 231 Agreement on Measures to Discourage the Importation of Counterfeit Goods (1982) 1 Agreement on Safeguards, Article 11.3 279–280 Agreement on Trade-Related Aspects of Intellectual Property Rights see TRIPS Agreement allocative efficiency, IPRs and competition law 34 Annel Draft, TRIPS Agreement 52 anti-commons, tragedy of 21 anti-competitive agreements, per se rule and rule of reason 68–71 anti-competitive non-price practices exclusivity in technology transfer agreements 99–104 grantbacks 90–92 non-challenge clauses 97–99 tying and package licensing 92–97 anti-competitive practices compulsory licensing 46–47, 51 developed countries restrictions on product prices 86–90 royalty concerns 78–86 free-riding, elimination 12, 89
interpretation of term 46 non-price see anti-competitive nonprice practices prices 77–90 antitrust and IP law US antitrust law as lex specialis 118 Antitrust–IP Guidelines (1995) 14, 66, 136, 166, 295 Section 1.0 36, 63 Section 2 63 Section 2.3 71 Section 3.4 70, 71 Section 4.1.2 99, 100 Section 5.2 88 Section 5.3 95 Section 5.4 99, 104 as complementary 63 development of IP-antitrust law intersection 59–64 favouring of antitrust law over IPRs 62 favouring of IP law over antitrust law 60, 61 licence containing price-fixing clause compatible with 60 misuse doctrine 61–62 Nine No-Nos, as violation of antitrust law 62–63 overlapping of antitrust law with regulatory statutes 113 APEC (Asia Pacific Economic Cooperation Forum), Vietnamese membership 213 appropriateness requirement, competition law and TRIPS Agreement 50, 51 Argentina Argentina-US mutually agreed solutions 247–250 Law on Patents and Utility Models 249 Article 44 247, 248 327
328
Competition law, technology transfer and the TRIPS Agreement
ASEAN (Association of South East Asian Countries), Vietnamese membership 213 Berne Convention for the Protection of Literary and Artistic Works Article 5 5 and TRIPS Agreement 2 Vietnam a party to 216 bilateral agreements and TRIPS-plus standards 251–253 and Vietnam 213 biotechnological inventions, Directive 98/44/EEC on legal protection 146 BIT (Bilateral Investment Treaty), 2004 251 Article 6.2 253 Article 8.3(b)(ii) 252 ‘black’/’no-no’ clauses, licensing agreements 66 Brussels Draft, TRIPS Agreement 46, 52 CARIFORUM states, negotiations with EU (2008) 284 cases discussed 209–210 AOIP/Byrard 66, 84 Argentina – Measures Affecting the Export of Bovine Hide and the Import of Finished Leather 47, 279 Arizona v. Maricopa County Medical Society 68, 69, 70 Aro Manufacturing Co. v. Convertible Top Replacement Co. 138, 139 Aspen Skiing Company v. Aspen Highlands Skiing Corpn. 107, 108 Automatic Radio Manufacturing Co. v Hazeltine Research 84–85 Botino Boats, Inc. v. Thunder Craft Boats, Inc. 17, 38 Boussois/Interpane 84, 92 British Airways v. Commission 76, 77 Broadcom v. Qualcomm 115, 116 Brulotte v. Thys Co. 79, 82, 83 Canada – Patent Protection of Pharmaceutical Products 23, 29 Centrafarm v. Sterling Drug 17, 145
Coditel v. Ciné-Vog Films 66, 101 Commercial Solvents (Istituto Chemioterapico Italiano and Commercial Solvents v. Commission) 76, 119, 120, 126 Consten & Grundig v. Commission 64, 65–66, 100, 150 Continental Paper Bag Co. v. Eastern Paper Bag Co. 106, 108, 109 Continental T. V., Inc v. GTE Sylvania Inc. 69, 100 Credit Suisse Securities (USA) LLC v. Billing 109, 113 Davidson Rubber Co. 66, 98, 100 Dawson Chemical Co. v Rohm and Hass Co. 63, 109 Deutsche Grammophon v. Metro 65, 79, 145 Deutsche Telekom v. Commission 81, 113 Develey v OHIM 8–9 Eastman Kodak Co. v. Image Technical Services, Inc. 93, 94, 95, 96 eBay Inc. v. MercExchange L.L.C. 109, 110, 111, 118–119 EC – Asbestos 50, 51 EC – Protection of Trademarks and Geographical Indications for Agricultural Products and Foodstuffs 5, 249 Fabbrica italiana accumulatori motocarri Montecchio SpA v Council (FIAMM) 9, 10 France Télécom v. Commission 74, 224 FTC v Indiana Federation of Dentists 69, 70 General Talking Pictures Corp. v. Western Electric Co. 133, 134 Glaxo Wellcome and Others v. National Association of Pharmaceutical Wholesalers and Others 182, 183 Hazel Tau v. GSK & BI 180, 183, 184–188, 189, 192, 195, 197, 198 Illinois Tool Works Inc. v. Independent Ink, Inc. 63, 95, 106, 208
Index IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. KG 120, 122, 124, 125, 126, 127, 192 Independent Service Organizations Antitrust Litigation, In re 109 India – Patents Protection for Pharmaceutical and Agricultural Chemical Products 52 Innogenetics, N.V. v. Abbott Laboratories 110, 111 Jefferson Parish Hospital District No. 2 v Hyde 63, 94, 95 Kanal 5 Ltd, TV 4 AB v. Föreningen Svenska Tonsättares Internationella Musikbyrä 74, 85 Keeler v. Standard Folding Bed 132, 133 Kelo v. City of New London 22, 112 Kewanee Oil Company v. Bicron Corporation 16, 17 Kodak (Image Technical Services, Inc. v. Eastman Kodak Co.) 109, 114, 117, 195, 221, 225 Ladbroke (Tiercé Ladbroke SA v. Commission) 120, 125–126, 151 Laserdisken ApS v. Kulturministeriet 17, 146 Lear, Inc. v. Adkins 84, 97, 98 Leegin Creative Leather Products, Inc. v PSKS, Inc 68, 69, 88, 89 Linkline (Pacific Bell Telephone Co. v. Linkline Communications, Inc.) 72, 79, 81, 106 Mallinckrodt, Inc. v. Medipart, Inc. 137, 138, 139, 141, 150, 153 Medellin v. Texas 8, 11 MedImmune, Inc. v. Genentech, Inc. 98, 118 Mercoid Corp. v. Mid-Continental Investment Co 24, 62, 112 Mexico – Measures Affecting Telecommunications Services 7, 46, 272, 281, 282 Microsoft EU decision 95, 126, 127, 179
329 Microsoft v. Commission 10, 118, 155, 156, 158–159, 283, 301 contractual restrictions on downstream purchasers 153–154 monopolization or abuse of a dominant position (twopronged test) 73, 74, 77 refusal to license 122, 125, 126, 128, 192 tying and package licensing 93, 94, 95, 96, 97 Monsanto v. McFarling 61, 140 Motion Picture Patents Co. v. Universal Film Manufacturing Co. 61, 135 National Collegiate Athletic Association v. Board of Regents of the University of Oklahoma (NCAA) 70, 104 National Society of Professional Engineers v. US 69, 70 Nintendo of America (Atari Games Corp. v Nintendo of America, Inc.) 63, 104–105 Northern Pacific Railway Co. v. US 69, 93 Nungesser KG & Kurt Eisele v. Commission 66, 100 Oscar Bronner v. Mediaprint 120, 122, 126, 173, 183 Paice LLC v. Toyota Motor Corp. 110–111 Pedro IV Servicios v. Total 89–90 Princo Corp. v. ITC 61, 101 Productores de Musica de España (Promusicae) v. Telefonica de España SAU 17 Qualcomm v. Broadcom 115, 116 Quanta Computer, Inc. v. LG Electronics, Inc. 119 and Federal Circuit judgments 136–145 implications 129–136 McFarling II and ‘single crop only’ 140–145 prism of 132–136, 142, 145, 150, 154 ‘single use only’ restriction 136–137, 138, 139
330
Competition law, technology transfer and the TRIPS Agreement
Radio Telefix Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission (Magill) 120, 124, 125, 126 and copyright 17 four-factor test 127 IP-competition law intersection, development 65 refusal to license 121–127 Rambus Inc. v. FTC 44, 45, 73, 115 Raymond & Co. and Nagoya Rubber Co. Ltd 66, 92 Renault (Consorzio italiano della componentistica di ricambio per autoveicoli and Maxicar v. Régie nationale des usines Renault) 80, 120–121, 125, 126 Smith Kline & French Laboratories, Ltd. v. Court of Appeals 171, 193 Sot. Lelos kai Sia EE v. GlaxoSmithKline AEVE 76, 101, 113, 120, 129, 152, 153 Spectrum Sports, Inc. v. McQuillan 72, 73 State Oil Co. v. Khan 68, 69, 88, 89 Syfait v. GSK 101, 152 TAC v. BMS 181, 183, 188, 192, 196 TAC v. MSD & Merck 181, 183–184, 189–192, 194, 195, 197–198 THP v. VBL 234, 238–242 UCB 201–202 United Brands v. Commission 76, 80, 120 US – Havana Club 2, 5, 49 US – Section 110(5) of the US Copyright Act 23, 155 US Philips Corp. v. ITC 71, 93, 96, 97, 106, 207, 208, 211 US v. Aluminium Co. of America 72, 257 US v. Dentsply Int’l, Inc 104, 159 US v. General Electric Co. 60, 86–87, 88, 135 US v. Joint-Traffic Ass’n 68, 69 US v. Line Material Co. 87, 88 US v. Microsoft Corp (Microsoft I) 72, 86, 103
US v. Microsoft Corp (Microsoft III) 38, 103, 115–116, 136, 177 monopolization or abuse of a dominant position (twopronged test) 72–73, 75, 76, 77 tying and package licensing 94, 96 US v. Univis Lens 130, 148 Vallal Peruman & Dileep Singh Bhuria v. Godfrey Phillips (India) Ltd 167–168 Van den Bergh Foods v. Commission 71, 73 Verizon Communications Inc. v. Law Offices of Curtis v. Trinko 72, 75, 79, 81, 106–109, 118 post-Trinko development 109–114 Volvo (AB Volvo v. Erik Veng (UK) Ltd) 80, 120–121, 125, 126 Weyerhaeuser Co. v. Ross-Simmons Hardware Lumber Co., Inc. 73, 115 Windsurfing International Inc. v. Commission 66, 85, 99 Xerox (SCM Corp. v. Xerox Corp.) 114, 115, 117, 118, 143, 144 Yassin Abdullah Kadi v. Council and Commission 10, 11 Zenith Radio Corp. v. Hazeltine Research, Inc. 84, 85, 100 Zuellig Pharma 237, 238 see also Philips’ Taiwan Package licensing case CDIP (Committee on Development and Intellectual Property), WIPO 275 Charter of Fundamental Rights (EU), on IP protection 17 Chicago School, on leverage theory 95 Chinese Anti-Monopoly Law 250–251, 263 Article 55 168, 169, 250 Clayton Act (1914), US, Section 7 59 Coase theorem, economic efficiency 19 Colgate doctrine, refusal to license in US 108 collective consumption good, IP 12 Commission on Intellectual Property Rights 53
Index Community exhaustion placed on market by patent holder or with her consent 147–150 principle of 145–146 territoriality 146–147 Competition Act of Thailand Section 25(1) 203 Section 25(3) complaint 200, 200–202 Section 28 complaint 200, 202 Section 29 203 competition authorities cooperation with IP authorities in developing countries 294 international cooperation between 260–267 negative comity agreements 264 positive comity agreements 264–265 remedies 261 technical 262–263 TRIPS Agreement 261–262 IPRs and competition law 36 lack of cooperation with IP authorities 246–247 Competition Council, Vietnam 219 competition culture, absence of in developing countries 246 competition law alternatives/challenges 256–276 application to developing countries see developing countries application to technology transfer in developed countries see developed countries, application of competition law to technology transfer in developing countries see developing countries global context 256–285 development, innovation and systemic perspectives 56 enforcement outsourcing 256–260 harmonization through international forums 267–276 ICN 273–274 OECD 271–272 UNCTAD 272–273 WIPO and WHO 274–275
331
WTO 267–271 international cooperation between competition authorities 260–267 IPR-related, in developing countries 292–293 obligations 48–52 overview of applications and disposition 52–57 rights 45–48 and TRIPS Agreement 42–57 flexibilities 54, 55, 56 interpretation 45–52 obligations 48–52 prior to 39–42 rights 45–48 ultimate objective 77 in Vietnam 230–233 competition rules, IPRs and competition law 32–39 competition welfare 34 compulsory licensing see licensing concerted actions, Sherman Act on 59 Confederation of Societies of Authors and Composers (CISAC), exclusivity clause 102 consequentialist theory, justifications for IPRs 15 consistency requirement, competition law and TRIPS Agreement 51 consumer welfare 34, 36 Credit Suisse Securities (USA) LLC v. Billing 109, 113 Croatia, Microsoft Croatia tying case 179–180, 254, 259 de jure or de facto discrimination, evaluation 5 developed countries, application of competition law to technology transfer anti-competitive agreements 68–71 anti-competitive non-price practices exclusivity in technology transfer agreements 99–104 grantbacks 90–92 non-challenge clauses 97–99 tying and package licensing 92–97
332
Competition law, technology transfer and the TRIPS Agreement
anti-competitive price practices 77–90 restrictions on product prices 86–90 royalty concerns 78–86 background 59–77 compatibility with TRIPS Agreement 155–159 arguments against TRIPS compatibility 155–157 arguments for TRIPS compatibility 157–159 contractual restrictions on downstream purchasers 128–154 EU perspective 145–154 US perspective 129–145 EU, development of IP-competition law intersection 64–68 monopolization or abuse of a dominant position (twopronged test) 71–77 principles 68–77 refusal to transfer technology 105–128 refusal to license in US 106–119 US, development of IP-antitrust law intersection 59–64 developing countries Abbott laboratories, withdrawal of drug registration application (in Thailand) 199–204 Competition Act of Thailand, Section 25(3) complaint 200–202 Competition Act of Thailand, Section 28 complaint 202 absence of competition culture in 246 anti-competitive practices, concerns about adverse effects 42 application of technology transfer to competition law Abbott laboratories, withdrawal of drug registration application (in Thailand) 199–204 background 161–174 bilateral agreements and TRIPSplus standards 250–251
current models 166–174 Microsoft tying cases 174–180, 254 normative models 169–174 Philips’ Taiwan Package licensing case 204–212 refusal to license pharmaceutical patents 180–199 Vietnam, case study 212–243 Argentina-US mutually agreed solutions 247–250 ‘compassion and good sense’, right to 289 competition law and TRIPS Agreement 53 current models, substantive law hybrid model 174 laissez-faire 169–170 normative 169–174 quasi per se prohibition model 170–171 simple rule of reason model 172–173 ‘development’ test 163 domestic competition law, enacting 254 downstream purchasers, use restrictions on 299 ‘ecology of innovation’ needed to build 300 excessive pricing 298–299 external obstacles Anti-Monopoly Law of China, EC communications 250–251 Argentina-US mutually agreed solutions 247–250 bilateral agreements and TRIPSplus standards 251–253 general implications for 290–296 cooperation between competition authorities and IP authorities 294 importance of IPR-related competition law in technology transfer and economic growth 292–293 international cooperation in enforcement of IPR-related competition law 294–295
Index tailoring and enforcing domestic IPR-related competition law to suit particular socioeconomic contexts 293 implications for 286–302 general 290–296 innovation-oriented rules, persuaded to accept 263 internal obstacles absence of competition culture 246 deficiency of legislation 244–246 lack of capacity 244 lack of cooperation between competition authorities and IP authorities 246–247 lack of capacity obstacle 244 lack of cooperation between competition authorities and IP authorities 246–247 legislation, deficiency 244–246 Microsoft tying cases 174–180 Microsoft Croatia 179–180, 254, 259 Microsoft Korea 175–178, 180, 254 Microsoft Taiwan178–179, 180, 254 obstacles for external 247–253 internal 244–247 pharmaceutical patents cases, refusal to license 180–199 Aluvia 199–200, 201 application of competition law under pressure of publicity 198 background 180–184 dominant position of a right holder 195–196 effects of IPR-related competition law application 192–195 Hazel Tau v. GSK & BI 180, 183, 184–188, 189, 192, 195, 197, 198 HIV/AIDS treatment 184, 186, 187, 200 IPR-related excessive pricing and refusal to license under competition law 196–198
333
Kaletra 199, 200 remedies against anti-competitive pricing and refusal to license 198–199 TAC v. BMS 181, 183, 188, 192, 196 TAC v. MSD v Merck 181, 183–184, 189–192, 194, 195, 197–198 world sales of products 193 Philips’ Taiwan Package licensing case 204–212 background 204–206 other cases involved 206–210 refusal to license 297–298 specific cases (competition law, application of technology transfer to) Abbott laboratories, withdrawal of drug registration application (in Thailand) 199–204 Microsoft tying cases 174–180, 254 Philips’ Taiwan Package licensing case 204–212 refusal to license pharmaceutical patents 180–199 specific implications for 296–299 strengthening of IP regimes 26 and TRIPS Agreement 4, 27, 287 tying 299 Vietnam, case study background 212–226 technology transfer-related competition law issues 226–242 see also LDCs (least-developed countries) disclosure thesis, IP protection 14, 15 dispute settlement 280–283 trade policy review mechanism 282 Doha Declaration on TRIPS Agreement and Public Health (2001) 150, 283 adoption of 277 compulsory licensing of patented pharmaceuticals under 292 Decision on Implementation of Paragraph 6, adoption 31
334
Competition law, technology transfer and the TRIPS Agreement
medicines, access to 186 technology transfer-oriented provisions 29, 30 doi moi process, Vietnam 213 dominant position abuse of see abuse of a dominant position of right holder, in South Africa 195–196 single-enterprise 226 in Thailand 200 downstream purchasers contractual restrictions on EU perspective 145–154 patent exhaustion doctrine 131, 135, 136 US perspective 129–145 use restrictions on 299 DSU (Dispute Settlement Understanding) appropriateness requirement 50 and Argentina 249 Articles Article 19 9 Article 22 9 Article 26 52 and IPRs 2 Dunkel Draft, TRIPS Agreement 52 dynamic efficiency, IPRs and competition law 33, 34, 35 eBay Inc. v. MercExchange L.L.C. 109, 110, 118–119 four-factor test 111 EC Treaty Article 3.1(g) 64, 145 Article 28 145 Article 30 64, 145 Article 81 36, 64, 65, 102, 157, 221, 259 Article 81(1) 65, 66, 70, 71, 84, 90, 92, 99, 101, 219, 221 Article 81(3) 70–71, 77, 89, 90, 92, 101 Article 82 34, 64, 65, 75, 77, 81–82, 85, 92, 93, 97, 102, 104, 120, 121, 124, 125, 127, 128, 153, 155, 156, 157, 224, 259 types of abusive conduct under 74 Article 82(a) 79, 82
Article 85(3) 66 Article 295 64–65 ‘ecology of innovation’, defined 300 economic efficiency Coase theorem 19 IPRs and competition law 33–34 effect doctrine, enforcement outsourcing, 257, 258 enforcement international cooperation 294–295 of IPRs, under property rules 19–20 outsourcing 256–260 over-enforcement/under-enforcement 276–278 rare nature of 244 TRIPS Agreement rules 2 enterprise, terminology 218 essential facility doctrine pharmaceutical patents cases 182, 183 refusal to license in US 108 EU see European Union (EU) European Convention for the Protection of Human Rights and Fundamental Freedoms (1950), on IP protection 13 European Court of Human Rights, on IP protection 13 European Court of Justice (ECJ), on IP protection 16 European Union (EU) Charter of Fundamental Rights see Charter of Fundamental Rights (EU) Community exhaustion placed on market by patent holder or with her consent 147–150 principle of 145–146 territoriality 146–147 downstream purchasers, contractual restrictions on 145–154 EU–US Cooperation Agreement (1991) 263, 264, 265 on exclusive licensing 100–101, 102 hybrid approach of Commission 127 IP-competition law intersection, development 64–68 negotiations with CARIFORUM states (2008) 284
Index on non-challenge clauses 98–99 refusal to license in 119–128 access to IPRs 124 Magill, IMS Health, and Microsoft v Commission 121–127, 192 new product, protection 123 two-market requirement 122 value of IPRs 124–125 Volvo and Renault cases 120–121 Regulation No. 240/96 on technology transfer agreements, critique 66–67 as TRIPS Agreement proponent 3 ex post and ex ante approaches, IP protection 15 exclusivity in technology transfer agreements exclusive dealing 103–104 exclusive licensing 99–102 output restrictions/other non-price restrictions 104–105 exempted clauses, licensing agreements 66 Federal Trade Commission Act (1914), US 59 First Trademark Directive (Directive 89/104/EEC), Article 7 147 FRAND (fair, reasonable and nondiscriminatory) terms, patenting technology on 116 FTAIA (Foreign Trade and Antitrust Improvements Act) 1982, enforcement outsourcing 257, 258 GATS (General Agreement on Trade in Services) 1995 Annex on Telecommunications 279 Article III 6 Article IX 261 Article VIII 279 Reference Paper on Basic Telecommunications (Telecoms Reference Paper) 46 Section 1 279, 281 Section 1.2 281 Section 2279, 281 GATT (General Agreement on Tariffs and Trade) 1947
335
Article VI 196–197 Article X 6 Article XXII 249 Article XXIII.1(b) 52 and origins of WTO 1 Geneva Convention for the Protection of Producers of Phonogram, Vietnam a party to 216 globalization, and technology 161 grantbacks 90–92 ‘grey’ clauses, licensing agreements 66 Group of 77, list of forty licensing practices 163 Guatemala competition statutes 166–167 laissez-faire model 169 Havana Charter for an International Trade Organization (ITO) (1948) 40, 46 Article 46 39 Hegel, Georg Wilhelm Friedrich, theory of IP spirit 13 Hoffmann–La Roche, and compulsory licensing of Tamiflu 234–235, 236 Hong Kong competition statutes 166–167 laissez-faire model 169 hybrid model, developing countries 174 ICN (International Competition Network), harmonization of competition law, 273–274 incentive thesis, IP protection, 14, 15 India Competition Act (2002), Section 3.5(i) 167 Competition Commission 168, 171 Monopoly and Restrictive Trade Practices Commission 168 Patent (Amendment) Act (2002), Section 84 168, 171 Patent (Amendment) Act (2005), Section 90(1)(ix) 168, 171 quasi per se prohibition model, following 171 Indonesia Competition Law (1999), Article 50 167
336
Competition law, technology transfer and the TRIPS Agreement
intellectual property authorities, lack of cooperation with competition authorities 246–247 intellectual property law, in Vietnam 226–230 intellectual property rights see IPRs (intellectual property rights) International Competition Policy Advisory Committee 273 International Covenant on Economic, Social and Cultural Rights (1966), UN, and property rules of IPRs 13 inventions, patentability of 38 IPRs (intellectual property rights) abuse of 52, 250 and competition law 32–39 dispute settlement 2 economic and legal justifications for 11–18 and economics of innovation 16 ex post justification for IP protection 14 granted to innovators 13 justifications for 15–16 limitations and purpose 23 prevention of abuse 48 property rules and protection of IP 11–24 and technology transfer 24–27 as temporary legal monopoly 18, 32–33 trade and competition, IPR-related 278–280 Jamaica Fair Competition Act (1993) Article 3(c) 169–170 Article 20.2(b) 169–170 Article 26.3 169–170 laissez-faire model 169 Japan Anti-Monopoly Act, Section 21 166 Basic Law on Intellectual Property, Article 10 166 Fair Trade Commission, Guidelines for the Use of Intellectual Property under the Antimonopoly Act (2007) 36 as TRIPS Agreement proponent 3 Vietnam, cooperation with 262
Jefferson, Thomas 12, 14 KFTC (Korea Fair Trade Commission) Guidelines of Reviewing Undue Exercise of Intellectual Property 166, 167, 172, 173 Microsoft Korea case 176, 177, 177–178 know-how licensing agreements, EC Treaty 66 KPPU (Competition Authority of Indonesia) 167 labour/reward theory, justifications for IPRs 15 laissez-faire model, developing countries 169–170 Law on Competition of Vietnam (VLC) see VLC (Law on Competition of Vietnam) Law on High Technology 2008 (Vietnam) 215 Law on Intellectual Property (IP Law) 2005 (Vietnam) 215, 230, 231 Article 7.2 229 Article 145.1(c) 231 Article 145.1(d) 229 Article 148 229 Article 195.1(b) 231 Article 195.1(c) 229 Law on Pharmaceuticals of Vietnam (2005), Article 9.7 236 Law on Technology Transfer 2006 (Vietnam) 215, 230, 243 Article 17.2 232 Article 20 229 Article 25 229 LDCs (least-developed countries) competition law and TRIPS Agreement 51 and enforcement outsourcing 257 technology transfer to Members 31 leverage theory, Chicago School 95 lex specialis 118, 219 liability rules, versus property rules 18–24 licensee estoppel doctrine, non-challenge clauses 97 licensing agreements, standard clauses 66–67
Index compulsory 51 non-merger arrangements 108–109 as only remedy to end abuse 125 in Philippines 170 remedy of recognized by TRIPS Agreement 44 in Thailand (and reaction to) 199–204, 277 TRIPS Agreement 31, 46–47 in Vietnam 234–236 exclusive 99–102 Notice on Patent Licensing Agreements (1962) 65 tying and package 92–97 Philips’ Taiwan Package licensing case 204–212 Locke, John 14 lock-in effects, tying and package licensing 95 Madrid Agreement on International Registration of Marks, Vietnam a party to 215–216 Magill (Radio Telefix Eireann (RTE) and Independent Television Publications Ltd (ITP) v. Commission) 120 and copyright 17 four-factor test 127 IP-competition law intersection, development 65 refusal to license 121–127 Malaysia Communication and Multimedia Act (1998) Sections 133–134 174 Sections 133–144 166 Section 136 174 Section 138 174 hybrid model 174 Patent Act (1983) 174 market power, defined 185 MFN (most favoured nation treatment) IPR-related trade and competition 278 TRIPS Agreement 5, 6, 51 Microsoft tying cases 174–180 anti-competitiveness criterion 176 coercion criterion 176
337
Microsoft Croatia 179–180, 254, 259 Microsoft Korea 175–178, 180, 254 Microsoft Taiwan 178–179, 180, 254 remedies 177–178 separateness condition 176 three-criterion test, illegality of tying 175–176, 177 misuse doctrine, as defence to patent infringement 61–62 MNCs (multinational corporations) developing countries, technology transfer in 161–162 and implications for developing countries 291 investigation of for alleged IPRrelated anti-competitive practices 247 and protection of IPRs 27 and Vietnam 217 monopolization antitrust violation, requirements 73 developed countries 71–77 IPRs as temporary legal monopoly 18, 32–33 meaning of ‘monopoly’ 35 moral rights, justifications for IPRs 15 MRFTA (Korean Monopoly Regulation and Fair Trade Act) Article 3–2(1)(1) 197 Article 3–2(1)(3) 177 Article 3–2(1)(5) 177 Article 23(1)(3) 177 Munich Code (International Antitrust Code), principles 41 NAFTA (North American Free Trade Agreement) Article 1501.3 41 Article 1704 41 national treatment principle, TRIPS Agreement 5, 6 natural law thesis, IP protection 13, 17 negative comity agreements 264 negative rights of IPRs 18 network effects 72–73 non-challenge clauses, anti-competitive non-price practices 97–99 normative models, developing countries hybrid model 174 laissez-faire model 169–170
338
Competition law, technology transfer and the TRIPS Agreement
quasi per se prohibition model, in developing countries 170–171 simple rule of reason model 172 North American Free Trade Agreement see NAFTA (North American Free Trade Agreement) Notice on Patent Licensing Agreements (1962) 65 OECD (Organization for Economic Cooperation and Development) on absence of competition culture in developing countries 246 Competition Committee 271 Council Recommendation Concerning Effective Action Against Hardcore Cartels 46 harmonization of competition law 271–272 over-enforcement/under-enforcement, TRIPS Agreement 276–278 Paris Convention for the Protection of Industrial Property 2 Article 2 5 Article 5, Section A(2) 171 Article 5.A 274 Article 5.A(2) 41–42 Article 5.A(4) 123, 125 Vietnam a party to 215 passive cooperation agreements 263–264 Patent Act 1988 (US) exclusive licensing 100 reform considered 111–112, 119 Sections Section 217(d)(4) 106, 108 Section 217(d)(5) 106 Patent Cooperation Treaty (1993), Vietnam a party to 216 patent exhaustion doctrine, contractual restrictions on downstream purchasers 131, 135, 136 patent law economic rationales for patent system 15–17 international system 38 misuse of patents as antitrust violation 61–62 origins of, in US 60 property rules of IPRs 15
patentability, of inventions 38 per se rule, anti-competitive agreements 69–70 quasi per se prohibition model, in developing countries 170–171 refusal to supply essential facility 183 and tying arrangements 94 US and EU, application by 163 in Vietnam 221, 232 pharmaceutical patents cases, refusal to license (South Africa) anti-retroviral (ARV) medicines 184, 185, 186, 188 application of competition law under pressure of publicity 198 background 180–184 dominant position of a right holder 195–196 efavirenz (EFV) 190, 191 effects of IPR-related competition law application 192–195 essential facility doctrine 182, 183 excessive price 182, 186–187 five-condition test 182–183 IPR-related excessive pricing and refusal to license under competition law 196–198 remedies against anti-competitive pricing and refusal to license 198–199 specific cases Hazel Tau v. GSK & BI 180, 183, 184–188, 189, 192, 195, 197, 198 TAC v. BMS 181, 183, 188, 192, 196 TAC v. MSD v Merck 181, 183–184, 189–192, 194, 195, 197–198 pharmaceuticals and high pharmaceutical prices, exclusive distribution (Vietnam) patents cases, refusal to license 236–238 Philippines Constitution (1987), Section 19, Article XII 170 Philippines Intellectual Property Code (1997) 171 Section 85 166 Section 87 166, 170 Section 88 166, 170
Index Section 91 170 Section 93 166, 170 Philips’ Taiwan Package licensing case 204–212 background 204–206 other cases involved 206–210 positive comity agreements 264–265 possessions, IP enjoying protection of 13 Preparatory Committee for the World Economic Conference, study submitted to (1926) 39 pricing, excessive 298–299 productive efficiency, IPRs and competition law 34 property rules IPRs 11–24 enforcement of IPRs under 19–20 land, protection of 22 versus liability rules 18–24 ‘side effects’ 21 proportionality test, competition law and TRIPS Agreement 51 public good characteristics of IP 12 Punta del Este Declaration (1986), launch of Uruguay Round 1 Quanta Computer, Inc. v LG Electronics, Inc. and Federal Circuit judgments 136–145 implications 129–136 prism of 132–136, 142, 145, 150, 154 ‘single use only’ restriction 136–137, 138, 139 McFarling II and ‘single crop only’ 140–145 quasi per se prohibition model, in developing countries 170–171 refusal to transfer technology 105–128 refusal to license in EU 119–128 access to IPRs 124 Magill, IMS Health, and Microsoft v Commission 121–127, 192 new product, protection 123 two-market requirement 122 value of IPRs 124–125 Volvo and Renault cases 120–121 refusal to license in US 118
339
EBay four-factor test 111 eBay Inc and Credit Suisse cases 109–112 Kodak and Xerox cases 114–117 post-Trinko development 109–114 three exceptions to legality of 115 Trinko/traditional views 106–109 US courts of appeals, splits among 114–117 Regulation (EC) No 240/96 on technology transfer agreements, critique 66–67 see also TTBER (Transfer of Technology Block Exemption Regulation) 2004 restrictive practices, concept 164 Revision Conference of The Hague (1925) 42 reward thesis, IP protection 14, 15 Rome Convention (1961) Article 2 5 and TRIPS Agreement 2 royalty concerns (developed countries) 78–86 excessive royalties 78–82 Lemley-Shapiro economic model 81 post-expiration royalties 82–84 total sale royalties 84–86 US and EC, distinguished 81–82 rule of reason, anti-competitive agreements 69, 70–71, 76 abbreviated (truncated or quick look) 70 grantbacks 92 package licensing, application to (Taiwan) 212 pharmaceutical patents cases, refusal to license 183 resale price maintenance in technology transfer 89 simple rule of reason model, developing countries 172–173 and ToT Code 163 Schumpeter, Josef, on dynamic efficiency 34 Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business
340
Competition law, technology transfer and the TRIPS Agreement
Practices, adoption by UN 40, 46, 165 Sherman Act (1890) US downstream purchasers, contractual restrictions on 136 enforcement outsourcing 257, 258 per se violations, licensing practices as 163 Section 1 59, 62, 64, 68, 69, 70, 88, 92, 94, 102 Section 2 59, 62, 64, 71–73, 75, 81–82, 92, 97, 104, 107, 108, 115, 116, 117, 118 Singapore competition authorities 166 Competition Commission Guidelines (2007) 37, 172–173 failure of WTO Ministerial Conference in Cancun (2003) 55 Ministerial Conference (1996) 267–268 simple rule of reason model 172, 173 Smith, Adam 217 Solow, Robert, economic growth theory of 35 South Africa Competition Commission 187, 192, 198 evaluation of anti-competitive effects (two-step test) 190 pharmaceutical patents cases, refusal to license 180–199 Hazel Tau v. GSK & BI 180, 183, 184–188, 189, 192, 195, 197, 198 TAC v. BMS 181, 183, 188, 192, 196 TAC v. MSD v Merck 181, 183–184, 189–192, 194, 195, 197–198 simple rule of reason model 173 South African Competition Act 1998 pharmaceutical patents cases, refusal to license 181–182 Sections Section 1.1(ix) 182 Section 1.1(viii) 182 Section 1.1(x) 182, 189 Section 4 173
Section 5 173 Section 7 185, 189 Section 8 173 Section 8(a) 182, 183, 185, 187 Section 8(b) 182–183, 186 Section 8(c) 182, 184, 186, 187, 189 Section 8(d)(ii) 183 Section 10 173 Section 49B(2)(b) 184 South African Patent Act (1978) Section 56 173 Section 56.2 182 Section 56.2(d) 183 Section 90 173 South African Patent Amendment Act (2005) 173 South Korea competition authorities 166 Guidelines of the Fair Trade Commission 167, 172, 173 Microsoft Korea tying case 175–178, 180, 254 Monopoly Regulation and Fair Trade Act, Article 59 167 simple rule of reason model 172, 173 see also MRFTA (Korean Monopoly Regulation and Fair Trade Act) static efficiency, IPRs and competition law 33–34 Supreme Court (US) on anti-competitive agreements 69 on IP protection 16–17 lower courts having no authority to overrule decisions by 83 on patent law 38 on royalties 78–79 Taiwan competition authorities 166 Fair Trade Act (2002) Article 5-1(3) 205 Article 10(2) 205 Article 10(4) 206 Article 14 205, 206 Article 24 212 Article 45 167 Fair Trade Law 179 Guidelines of the Fair Trade Commission 172
Index Intellectual Property Office 207, 209–210 Microsoft Taiwan tying case 178–179, 180, 254 Patent Act Article 76, 207, 209, 231 Philips’ Package licensing case 204–212 background 204–206 other cases involved 206–210 simple rule of reason model 172, 173 Tariff Act, Section 337(a)(1)(B) 207 Tamiflu, compulsory licensing (Vietnam) 234–236 technology, and globalization 161 technology transfer black clauses in agreements 67 exempted clauses 67–68 and IPRs 24–27 resale price maintenance, rule of reason 89 technology transfer-oriented provisions of TRIPS Agreement 28–32 vertical agreements 88 Telecommunications Act 1996 (US) 107 Section 601(b)(1) 112 TFEU (Treaty on the Functioning of the European Union) Article 101 64 Article 102 64 TFTC (Fair Trade Commission of Taiwan) Guidelines 172 Microsoft Taiwan 178–179 Thailand Abbott laboratories, withdrawal of drug registration application 199–204 authorization of compulsory licences for pharmaceutical patents 199 Competition Act Section 25(1) 203 Section 25(3) complaint 200, 200–202 Section 28 complaint 200, 202 Section 29 203 Competition Commission 201, 202, 203 compulsory licensing 277
341
as example of deficiency of competition legislation 245 Patent Act (1999) 245 UCB case 201–202 TIPO (Intellectual Property Office of Taiwan) 207, 209–210 Tokyo Round (1973–1979) 1 ToT Code (International Code of Conduct on the Transfer of Technology) abandoning of (1985) 164 Brussels Draft anti-competitive licensing practices, in 1985 version 46 Chapter 4 163 failure of 58 negotiations on draft of 40 purpose 162 trade association, terminology 218 trade policy review mechanism, dispute settlement 282 tragedy of anti-commons 21 transaction costs, Coase theorem 19 transparency principle, TRIPS Agreement 5, 6 Treaty of Lisbon (2007) 64 Treaty of Rome (Treaty Establishing the European Community) see EC Treaty Treaty on Intellectual Property in Respect of Integrated Circuits (1989) Article 5 5 and TRIPS Agreement 2 Treaty on the Functioning of the European Union (TFEU) see TFEU (Treaty on the Functioning of the European Union) Trinko case (Verizon Communications Inc. v. Law Office of Curtis v. Trinko) 72, 75, 79, 81, 118 post-Trinko development 109–114 refusal to license in US 106–109 TRIPS Agreement Annel Draft 52 Articles Article 1(1) 1 Article 3 5 Article 3.1 48 Article 3.2 6
342
Competition law, technology transfer and the TRIPS Agreement
Article 4, 5 6 Article 4(a) 51 Article 6 43, 45, 149, 196 Article 7 28–29, 29, 47, 49, 110, 270 Article 8 29, 270, 289 Article 8.1 29 Article 8.2 43, 45, 46, 48, 50, 52, 158, 261, 263, 280, 285 Article 8b 54 Article 9.1 17 Articles 9–39 2 Article 13 23, 155, 156 Article 17 23, 156 Article 20 157 Article 22.1 214 Article 26.2 23 Article 27.1 38, 123 Article 27.2 38 Article 27.3 38 Article 27.3(b) 142 Article 28 207, 209 Article 28.1(a) 18 Article 29 38 Article 30 23, 110 Article 31 30, 110, 155, 156, 199, 201, 209, 261 Article 31(c) 43 Article 31(f) 30–31, 150 Article 31(h) 253 Article 31(k) 43, 44, 45, 46, 150, 158, 188, 199, 252, 253, 263, 280, 289 Article 31(l) 123 Article 37.2 43, 45 Article 39 155, 156 Article 40 43, 45, 263, 280, 289 Article 40.1 44, 45, 46, 47–48 Article 40.2 44, 45, 46, 48, 50, 52, 55, 90, 156, 157, 285 Article 40.3 44, 51, 261, 262, 264, 294 Article 40.4 44, 51, 261, 262, 264, 294 Articles 41–61 2 Article 48.1 43 Article 63 5, 6 Article 63.1 48 Article 64 52, 249 Article 64.2 52 Article 66.2 31, 257, 289
Article 67 32, 262, 270, 289 Article 68 250 Articles 7–8 7 balance of interests 2–3 Brussels Draft 52 Article 43.2B 46 compatibility with arguments against 155–157 arguments for 157–159 competition authorities, international cooperation between 261–262 and competition rules 32–57 compulsory licensing rules 31, 46–47 cooperation mechanism established by 261 core international commitments contained in 286, 287 creation 3–4 developing countries 4 dispute settlement 280–283 Doha Declaration on (2001) see Doha Declaration on TRIPS Agreement and Public Health (2001) 150 drafts 52 Dunkel Draft 52 effect at domestic law level 7–11 flexibilities 2–3, 27 geographical indications 214 and international technology transfer 11–32 IPR-related trade and competition 278–280 limitations and exceptions to exclusive rights on right holders 30 narratives 3 objectives 6–7 over-enforcement/under-enforcement 276–278 Preamble 5, 28, 45 Recitals 1, 5 and 6 7 principles 5–7 prospects for provisions, global context 276–283 protection standards 1–2, 11 provisions not directly applicable 9 purpose 171 scope 2
Index technology transfer-oriented provisions 28–32 TRIPS Council Brazil communication on technical assistance and capacity building (2008) 270 EC communications to 250–251 TT (Technology Transfer) Guidelines (EU) exclusive dealing 103, 105 exclusive licensing 101 grantbacks 92 and modernization of EU competition law 67, 68 non-challenge clauses 99 royalty concerns 78 tying and package licensing 95, 96–97 TTBER (Transfer of Technology Block Exemption Regulation) 2004 Articles Article 1.1(b) 67 Article 3 68 Article 4.1 67, 68 Article 4.1(a) 89 Article 4.1(c)151 Article 4.2 67, 68 Article 4.2(2) 89 Article 4.2(b) 151 Article 5 67 Article 5.1 68 Article 5.1(a) 92 Article 5.1(b) 92 Article 5.1(c) 99 Article 5.2 68 convergence between US and EC competition policies 159 developing countries, current models 166 and modernization of EU competition law 67, 68 non-challenge clauses 99 Preamble 71 restriction of competing party’s ability to determine prices 89 restrictions on licensees exempted 151 and Singapore Competition Commission Guidelines 172
343
software copyright licensing, extension to cover 67 tying and package licensing 92–97 contractual tying/technological tying 93 definitions 92–93 lock-in effects 95 Microsoft tying cases Microsoft Croatia 179–180, 254, 259 Microsoft Korea 175–178, 180, 254 Microsoft Taiwan 178–179, 180, 254 offensive and defensive tying 97 pro-competitive benefits of tying 94 tying of IPR-unrelated products to use of IPR-incorporated products 60 UNCTAD (United Nations Conference on Trade and Development) harmonization of competition law 272–273 and ToT Code 40, 162 and Vietnam 217 undertaking/association of undertakings 218, 219 Unilateral Conduct Working Group (ICN) 274 United Nations (UN) Declaration on the Establishment of a New International Order 161 New International Economic Order, principles for (1974) 162 Set of Multilaterally Agreed Equitable Principles and Rules for the Control of Restrictive Business Practices, adopted by 40, 46, 165 UNCTAD see UNCTAD (United Nations Conference on Trade and Development) United States antitrust law see antitrust and IP law, US Argentina-US mutually agreed solutions 247–250 Charming Betsy doctrine 11
344
Competition law, technology transfer and the TRIPS Agreement
Clayton Act see Clayton Act (1914), US Congress, Office of Technological Assessment 4 Constitution, Article 1, Section 8, Clause 8 13, 17, 112 development of IP-antitrust law intersection in 59–64 downstream purchasers, contractual restrictions on 129–145 EU–US Cooperation Agreement (1991) 263, 264, 265 Federal Trade Commission Act see Federal Trade Commission Act (1914) US patent law 60 refusal to license in 106–119 eBay Inc and Credit Suisse cases 109–112 Kodak and Xerox cases 114–117 post-Trinko development 109–114 three exceptions to legality of 115 Trinko/traditional views 106–109 US courts of appeals, splits among 114–117 Sherman Act see Sherman Act (1890), US Supreme Court see Supreme Court (US) trade sanctions threatened by 164–165 as TRIPS Agreement proponent 3 US–Korea FTA Article 11.6(2) 253 Article 11.6(5) 253 US–Vietnam Agreement on Trade Relations, Article 10.1 253 WTO law, direct effect not recognized in domestic legal system 9 Universal Declaration of Human Rights, UN (1948), Article 27 13 Uruguay Round (1986–1994) 1, 4 negotiations 9, 164 Uruguay Round Agreements Act 1994 Section 102(a)(1) 8 Section 102(c)(1) 8 VBL (Vietnam Brewery Ltd), competition case 238–242
VCAD (Competition Administration Department), Vietnam 219, 241 vertical agreements, Vietnam 221 Vienna Convention on the Law of Treaties (1969) Article 26 7 Article 27 7, 282 Vietnam appellations of origin (Civil Code) 214 background to technology transfer/competition law 212–226 Civil Code 1995 217, 226 Article 47 214 Article 188 214 Article 786 214 Article 802 235 Article 809 227 Article 810 227 Article 813 228 Civil Code 2005 215, 217 competition law 216–226 abuse of a dominant position/monopoly position 223–226 anti-competitive agreements/ concerted practices 219–223 market power presumption 231 refusal to deal 231 technology transfer-related 230–233 Constitution 217 Article 2 213 Article 12 213 Article 15 213 Article 21 213 Article 57 213 Article 58 213 Decree 48/1998/ND-CP Article 13 228 Article 15 227 Article 23 228 Article 32 227 prohibited conditions 228 economy 212 as example of deficiency of competition legislation 245 intellectual property law 214–216
Index technology transfer-related competition law issues 226–230 Japan, cooperation with 262 legal system, changes to 213 as monist country 10 National Assembly 10, 11 IP law 215 Ordinance on Transfer of Foreign Technology into 226, 228 pharmaceuticals, exclusive distribution of/high pharmaceutical prices 236–238 relevant cases 233–242 exclusive distribution of pharmaceuticals/high pharmaceutical prices 236–238 Tamiflu, compulsory licensing 234–236 THP v. VBL 234, 238–242 Vinapco 242 Socio-Economic Development Strategy (2001–2010) 217 and TRIPS Agreement 10 WTO accession protocol 10 VLC (Law on Competition of Vietnam) 243 Articles Article 2 218 Article 3.6 220 Article 5 219 Article 6 218 Article 8 219 Article 8.6 221, 222, 232 Article 8.7 221, 222, 232 Articles 8–10 220, 221 Article 9.1 222 Article 9.2 220 Article 10.1 220, 221, 222, 232 Article 11.1 223 Article 11.2 223 Article 12 224 Article 13 223, 226, 231 Article 13.2 231 Article 13.3 231 Article 13.6 231, 241 Article 14 224 Article 39 218 Articles 49–55 219
345 Article 58 239 Article 59 239 Article 98-99 241 Article 117 233 Articles 9–10 219 background 217–218 combined market share, defined 220 on enterprises holding monopoly position 224 lex specialis nature of 219 overall goal 218 scope of application 218–219 terms 218
WGTCP (Working Group on Trade and Competition Policy) 54, 268, 269 ‘white’ clauses, licensing agreements 66 WIPO (World Intellectual Property Organization) Committee on Development and Intellectual Property 275 Development Agenda 42, 274, 278 harmonization of competition law 274–275 and TRIPS Agreement 2 Working Group on the Intersection between Trade and Competition Policy (WTO) 37 WTO (World Trade Organization) Cancun Ministerial Conference (2003), failure 55 and GATT 1947 1 as global rules-based multilateral trading system 2 harmonization of competition law 267–271 Marrakesh Agreement Establishing 10, 28, 282 Members discretion regarding direct application of WTO law 9, 54 disputes settled under DSU 2, 7 moral rights, not obligated to protect 17 national treatment obligation 5 power in relation to domestic legislation 43
346
Competition law, technology transfer and the TRIPS Agreement
Vietnam a member of 213 Working Group on the Intersection between Trade and Competition Policy 37 WTO (World Trade Organization)
Members, moral rights, not obligated to protect 17 Zuellig Pharma (ZPV), Vietnam 237, 238
