This article was first published in Competition Law Insight, July 2016
Conceptually, intellectual property rights (IPRs) and competition law appear to be at odds: the former grants temporary monopolies and the latter protects and encourages market competition. This potentially difficult relationship has been increasingly at the heart of competition policy.
As innovation becomes more important to economic success, there is a sharp focus on which policies best encourage successful innovation. Commissioner Vestager recently made it clear that both competition and IP law have a role: “To encourage innovation, you need both competition and reward for innovators”.
The underlying perception is that both IP law and competition law have the same objectives: to provide consumers with better quality products at appropriate price levels. IP law seeks to achieve this by directly incentivising innovation, offering limited monopolies as a reward, hoping to encourage new and more competitive innovations building on or designing around the original technology (but also protected if appropriate); ultimately leading to better quality and lower prices. Competition law seeks to achieve the same end by applying the spur of market competition. It is hoped that companies subject to price competition will innovate to differentiate their offerings from those of competitors and obtain a greater return, again resulting in a better price/quality combination for consumers. Implicitly, however, both approaches will be effective only as long as competition law is enforced with an eye to the need for those who do invest in successful innovation to recoup appropriate rewards for that investment – including by taking advantage of protections provided by IP law.
Tension between the two legal disciplines arises when competition enforcers believe that IP law is overprotective because it enables behaviour which unduly undermines effective competition and has an adverse impact on consumer welfare. Competition law intervention may be seen as a tool to redress the balance in specific circumstances. The principles which underpin such interventions, and how the balance is to be struck, are the subject of some debate.
Justifiable questions do arise about how far IP law is effective in delivering successful innovation for a modern economy. For example, research by the Massachusetts Institute of Technology into the impact of IPRs on innovation in the human genome project found that they led to reductions in scientific research and product development of approximately 20% to 30%. But the focus of this article is on whether recent EU Commission activities in the competition arena shed light on how the Commission now sees the balance between competition law and IP law.
The policy debate and competition enforcement
There has been substantial competition law scrutiny of the role of IPRs in innovation and tech-rich markets over the last decade including the Commission’s AstraZeneca decision, upheld by the CJEU; the Commission’s Microsoft decision, upheld by the
General Court; the Commission’s 2009 pharmaceutical sector inquiry and the subsequent Lundbeck and Servier cases (now under appeal); the Commission’s 2014 article 9 decision against Motorola’s conduct in enforcing its standard essential patents (SEPs); the Commission’s article 7 decision accepting detailed commitments from Samsung about the way in which it would negotiate licences for its SEPs; and the subsequent CJEU judgment on the licensing of SEPs in the Huawei/ZTE reference from Germany. The Commission’s digital single market (DSM) sector inquiry, and related policy initiatives such as on standardisation activities and geoblocking, also involve a balance between IP law and competition policy.
Taking all of these in the round may enable us to discern how the Commission’s view of the relationship between IP and competition law is evolving. A good start is probably the Commission’s most recent explicit official position in the guidelines accompanying the Technology Transfer Block Exemption Regulation (TTBER), as revised in 2014. These are clear that both IPR and competition “are necessary to promote innovation and ensure a competitive exploitation thereof” (para 7). It is then interesting to see how this principle is applied in the block exemption regulation itself: it quickly becomes clear that the Commission regards provisions in an IP licence which affect follow-on innovation particularly unfavourably. The underlying concerns are most obvious when looking at the three areas where the approach in the new TTBER differs from that in the previous regulation, namely the excluded restrictions in article 5: exclusive grant-back restrictions; no-challenge clauses; and obligations relating to the use of competing technology or further research and development:
Licensors often require licensees to assign or grant back to the licensor improvements made to the licensed technology. Under the new TTBER, exclusive grant-back obligations are not block exempted; regarded as likely to fall within the scope of the prohibition in article 101(1); and will require individual assessment under article 101(3). The competition concern is the impact on the licensee’s incentives to engage in further innovation. Non-exclusive grant-back obligations, by contrast, are block exempted, as they allow the licensee to benefit from the improvements to the licensed technology and therefore maintain incentives for the licensee to innovate.
Such clauses prohibit the licensee from challenging the validity of IPRs. Termination on challenge provisions, acceptable in the previous block exemption, are now exempted only where the licence is exclusive. In non-exclusive licences, terminate on challenge provisions (as well as contractual no-challenge clauses) are excluded from the block exemption; are regarded as likely to fall within the prohibition in article 101(1); and will require individual assessment under article 101(3). The policy concern is the potential adverse effects on innovation (as well as on product competition) that arise from the maintenance of invalid
IPRs which can act as a barrier both to product entry and to innovation. The guidelines explain that licensees are normally best placed to determine whether an IPR is valid and that limitations on their ability to do so must be carefully scrutinised.
Limitations on the licensee’s use of its own technology; engaging in further R&D
Such restrictions are hardcore when the parties are competitors. Even when the parties are not competitors, they are not block exempted (with one limited exception designed to protect confidential knowhow); are regarded as likely to fall within the scope of the prohibition in article 101(1); and will require individual assessment under article 101(3). Again, the rationale is clear – the ability and incentive to engage in further innovation, and to exploit technology rights already developed, is protected under competition law, even if this limits an IPR owner’s freedom to choose the conditions on which it will license technology.
Pharma sector and standard essential patents
Outside the context of the TTBER, similar considerations about future innovation, including follow-on innovation, may underlie, at least in part, the Commission’s approach to competition and IP in the pharmaceutical sector. It is widely accepted, including by the Commission during its sector inquiry, that effective IP protection is particularly important here, given long development cycles; the number of projects that ultimately fail; and the ease with which successful products could easily be replicated at low cost once placed on the market. As a consequence, effective patent protection is crucial to commercial success and to encourage further research and innovation. Despite this, practices related to IP protection and enforcement in the pharmaceutical sector have been criticised during the sector inquiry and subsequently held contrary to competition law in cases such as Lundbeck and Les Laboratoires Servier. Leaving aside the detailed legal analysis in these cases, an interesting question is how (if at all) they fit in with the role of competition law in protecting and encouraging innovation.
One potential response, to be inferred from commentary around enforcement in this sector, is that those who seek to bring generic pharmaceuticals to market also engage in innovation, although of a type different to that involved in fundamental research (eg in manufacturing processes, formulation technology and distribution). Another response (espoused during the sector inquiry) is that originator companies had become distracted from focusing on genuine innovation by too great a concern with protecting revenue from existing products and that some of the ways in which IPRs were utilised to protect products which had successfully been marketed did not really reflect the policy imperative of encouraging further innovation. The underlying justification and basis for these views, and how the Commission could identify the appropriate balance, can be queried, but they do suggest that the Commission’s competition interventions in the IP sphere are not always concerned purely with short-term product and price competition, but also with incentivising innovation.
How standard essential patents are dealt with by DG Comp provides a further insight into its approach to innovation, competition law and IPRs. The horizontal guidelines provide a handy introduction: these make clear that, to reduce risks of competition infringement by those who collaborate to set standards, SEP owners should agree to license their SEPs to third parties on fair, reasonable and non-discriminatory (Frand) terms so that essential technology is accessible to those who need it to develop products complying with the standard.
The Commission’s policy objective is to prevent IPR holders from making the implementation of a standard difficult, enabling a balance to be struck between the interests of those who undertake the research necessary to develop the underlying technology and who own relevant IPRs; and those who subsequently use the technology to innovate further, developing attractive products and services which consumers will wish to buy. Again, a balance between encouraging fundamental innovation, giving due deference to the IPRs that protect it, while ensuring that this does not allow IPR owners to distort follow-on innovation can be seen.
Recent article 102 cases in this sector such as the 2014 Samsung and Motorola decisions and the CJEU Huawei/ZTE (2015) case seek to achieve some appropriate balance by limiting the circumstances in which an SEP owner can seek injunctive relief for its SEPs while encouraging an implementer to accept a licence on Frand terms by maintaining the possibility of injunction if it fails to do so. However, notwithstanding the interventions of the Commission and the European Courts, it seems likely that for so long as the question of how rewards of development and implementation of successful standards should be shared between originators (through Frand royalties) and implementers (through profits) remains unanswered, the tension between IP and competition law will be unresolved. This is a policy nettle that has not been fully grasped.
What does the future hold?
The DSM initiative demonstrates the difficulties in formulating policies that balance the rights of IPR owners with the objectives of competition policy.
The Commission’s joint initiative on standardisation (1 June 2016) refers to incentivising investment in innovation, while promoting access to technology and interoperability, but contains no explanation as to how this will be achieved. Equally, the Commission’s position was initially that online geoblocking is antithetical to competition. However, its draft regulation (25 May 2016) carved out audio-visual services, leaving copyright law to be handled at national level.
Similar issues arise in the Commission’s case against Hollywood Studios and Sky UK following the CJEU’s 2011 decision in the Karen Murphy case. While the commitments offered by Paramount (April 2016) accept that there should be no restriction of pay-TV licensees’ ability to respond to unsolicited requests from other member states (passive sales), the other defendants continue to contest the Commission’s approach. This reflects continued uncertainty around the relationship between competition law and IPRs in the audio-visual services sector.
It is evident that formulating policies that protect IPRs and the incentives they provide, while protecting follow-on innovation and competition as well as cross-border trade, is complex. The Commission’s competition enforcement activities should be seen in this context and it is certainly arguable that, whatever the difficulties of developing policy through specific cases, the Commission’s interventions reflect its engagement with this complex policy environment.