Cyprus: The EU Has/Has Not Achieved A Proper Balance Between Competition Law And Intellectual Property

INTRODUCTION

Intellectual Property (IP) rights are those rights granted by law in order to protect tangible property and in general any product of the human intellect. The rationale behind IP rights is to reward and act as an incentive, for making investments in research and development of new ideas and inventions, as well as to facilitate innovation. The main types of IP rights include patents, trademarks, copyright, designs, know-how and computer software.

IP rights are typically granted by national laws and enforced on a national basis. As a result of their national nature, many differences exist in substantial and procedural provisions regarding the protection of IP rights, within the EU. However, despite the said differences, all IP laws grant monopoly rights to their owners, due to their exclusive nature. This is regarded as the starting point of a debate around the relationship between competition law and IP rights. Many support that IP and competition law are fundamentally in conflict. Are they or is this a misunderstanding?

Hereunder an attempt is made to detect the exact relationship between competition law and IP and to examine whether the EU has in fact accomplished – through the jurisprudence of the European Courts or various Regulations and Directives - to achieve a proper balance between the two.

THE RELATIONSHIP BETWEEN INTELLECTUAL PROPERTY RIGHTS AND COMPETITION LAW

The debate around the relationship between IP and competition law has been long and intense. The main question that someone must answer when confronting the above debate is whether IP rights do create anticompetitive effects or whether IP and competition laws are complementary, sharing the same goals.

The above dispute has as its starting point the fact that IP rights are exclusive in nature. IP laws confer exclusive and exclusionary rights on holders of patents, software, trademarks, copyright and other legally protected rights. They provide the owner of IP, the exclusive right to exploit the innovation or economically employ it, transfer it to third parties by licensing or selling and in addition to exclude others from using it and prevent unauthorized use.

Consequently they grant the owner of the IP a legal monopoly. On the one hand the concept of monopoly is prima facie in conflict with the undistorted competition principle, which is one of the core principles of the EU. On the other hand this legal monopoly may lead to market power, in cases where there is a lack of substitutes in the related market. When viewed from this point IP rights may distort the competition principles.

Nevertheless many support that IP and competition law are in fact different routes to the same aims.

At the highest level of analysis IP and competition law are complementary because they both aim at promoting consumer welfare.1

I share the same opinion. The fact that IP laws grant exclusive and monopoly rights should not imply that a coherent conflict between IP and competition law exist. Those who sustain this, disregard the beneficial effects that IP rights can bear.

First of all IP rights promote innovation. Innovation comprises a necessary component of an open and competitive market. IP laws, granting exclusive rights, provide motivation for IP owners to innovate, produce new inventions and also to invest on those inventions, in order to develop and manufacture new products. By innovating, inventing and investing on the innovations, new products and services are produced and overall economic growth is affected. Thus dynamic competition is promoted since firms are encouraged to invest. Consequently IP promotes technical progress to the ultimate benefit of consumers. Moreover competition law also endorses consumer welfare since through its principles and mechanisms, provides the context of an efficient market where goods and services have the lowest prices and firms under competitive pressure have motivations to innovate.

IP rights, as it has been stated above, are beneficial and extremely important to every economic system. However they should not be exercised in a way to extend the restriction of competition beyond that granted under the IP law.

Furthermore the fundamental principles and provisions of competition policy within the EU could not be bypassed only because of the exclusive nature of IP rights. Thereby, for example, Article 81 of the EU Treaty, which prohibits all agreements, which may have as their object and effect the prevention, restriction or distortion of competition, can come into force regarding IP related agreements. Also the ownership of IP rights can put the holder in a dominant position. Abuse of such a dominant position can bring Article 82 into force. However in these cases it must be remembered that the principle is that 'so far as a dominant position is concerned, it is to be remembered at the outset that mere ownership of an intellectual property right cannot confer such a position'2.

The most common IP related agreements that can be assessed under article 81 are Licensing Agreements.

Technology licensing contributes to economic development by disseminating innovations and encouraging new entry.3

I agree. Licensing agreements have in principle pro-competitive effects. They promote innovation, since they facilitate innovators to earn returns to cover a part of their research and development expenses. Moreover the full value of the IP is realized, since without the licensing agreement the owner could not have the funds to develop the innovation. They also result in a dissemination of inventions; this could eventually lead to the production of new technologies and the combination of the licensor's assets with the innovation and invention of the licensee.

On the other hand licensing agreements are sometimes able to distort competition. Especially when they lead to market power or when they include price fixing or territorial or customer sales restrictions.

In addition the acquisition of an exclusive license by a dominant firm can possibly constitute an abuse according to Article 82.

Apart from the above it should be noted here that the EC Treaty – although it contains very little for IP – recognizes their existence in Article 295 (ex 222), which says that the treaty shall in no way prejudice the rules in Member States governing the system of property ownership; this is also supported by Article 30. Still these provisions can be restricted either by the treaty provisions concerning the free movement or the competition Articles, mentioned earlier.

From the above analysis it becomes evident that IP rights and competition law are not fundamentally in conflict. However, although they are said to be complementary, IP rights are not unaffected by competition law intervention. In addition when IP rights are exercised or exploited they can potentially have anti-competitive effects. Viewed under this parameter the EU ought to introduce an adequate degree of balance between the two.

THE RECONCILING ROLE OF THE ECJ

The first steps to reconcile the protection of intellectual property rights and the system of undistorted competition within the EU, were taken by the European Court of Justice. The ECJ through its case law, developed principles, which aimed to introduce a balance between competition law and intellectual property.

At first he ECJ, in its early cases such as Consten an Grundig4, distinguished between the existence and the exercise of an IP right. In the Parke Davis5 case, the court stated that Community law did not affect the existence of an IP right recognized by the law of a Member State, but it did regulate its exercise. As a corollary of the said principle, the EU is not concerned with the existence of the IP right, that is the processes and requirements under which an IP right is granted by national authorities. It is however interested with the exercise of the right; Consequently IP related agreements, decisions or concerned practices, may fall under Article 81 or 82 in case of an abuse of a dominant position.

Nevertheless many support that, the distinction between the existence and exercise of rights in not convincing.6 I somewhat agree, since an IP right that only exists and cannot be exercised, has no value. The importance of an IP right constitutes to the powers granted to its owner. For example if the right owner is not able to prohibit third parties from using it, then his right is of no significance.

The ECJ also developed the notion that there is a 'specific-subject-matter' of each kind of right, which varies according to the type of intellectual property. The first case in which the Court introduced the criterion of the 'specific-subject-matter' was the Deutche Grammophon v Metro7. The 'specific-subject-matter' of an IP right is the exclusive right of the IP right holder to the first marketing of the product or service. The ECJ utilized the said concept in order to determine what exact constitutes 'the existence' of the right and that its exercise will be permitted so far as it is necessary to protect the 'specific-subject-mater'. Again, I am of the opinion that this principle was not able to introduce a proper amount of balance between IP and competition law, since the concept of the 'specific-subject-matter' seems at first to be too general in scope.

Furthermore the ECJ developed the principle of the 'exhaustion of rights'. In HAG II8 it stated that:

The owner of an industrial property right protected by the legislation of a Member State cannot rely on that legislation to prevent the importation or marketing of a product which has been lawfully marketed in another Member State by the owner of the right himself, with his consent or a person economically or legally depended on him.

That means that once a product or service has been put on the market the IP right owner has exhausted its rights. This principle aims primarily to reconcile the interests of IP rights owners, with the needs of a common market in which exists a regime of undistorted competition.

Read together the principles of specific subject matter and exhaustion of rights ensure some reward for the IPR holder while at the same time reducing the market partitioning effects of he national IPR rules.9

I agree. The Court, by developing the said principles tried to conciliate the absolute character of IP rights and the core EU principle of undistorted competition.

However despite the above action of the ECJ it become evident that legislative intervention was necessary to introduce a proper balance between IP rights and competition law.

THE TTBER: INTRODUCING PROPER BALANCE

As it was stated above, the ECJ's jurisprudence, although important, was not enough to completely reconcile IP rights and competition law. Soon it became obvious that the European Legislators should administer regulative stability. This was achieved either by regulating specific parts of IP law –Trademark law for example - or by introducing block exemptions. However the First and Second block exemption Regulations, as well as Regulation 240/9610, were considered to be to narrow in scope, since only patents and know how, were protected, inconsistent, since various clauses with similar effects were treated differently and too restrictive, due to the fact that some clauses were excluded from the block exemption without convincing economic justification.

The introduction of the new TTBER11 was thought to be an attempt to address technical and economic development, by regulating IP rights that had been neglected by the previous acts. In addition it was believed the new TTBE,

...strikes a delicate balance between granting rights broad enough to create incentives for innovation, but at the same time not so broad as to hamper further improvements for competitors.12

I am of the opinion that the new TTBER has in a way succeeded in taking the balance between IP rights and competition law to the next level. First of all its scope is much more wider than the previous block exemption and applies to more IP rights (but not to all). Extending the scope to include software copyright licensing seems to be very important since software is a major part of today's technologic development.

Moreover the new TTBER is characterized as liberal, whereas it exempts all non-compete and tying clauses, customer and output restriction between non-competitors, grant-back license obligations and it eliminates of times limits for active sales restrictions in know-how licenses between non-competitors. However in some cases it is in fact more restrictive than the old one, for example in introducing market share ceilings.

Nevertheless the most important feature of the new TTBER is its flexibility together with its more economically oriented framework. It blacklists only certain clauses thus it imports a sufficient degree of flexibility to the evaluation of the competitive effects of technology licensing agreements. So the new TTBER replaces the 'straitjacket' of the previous regulation – the exhaustive live of exempted and whitelisted clauses- and by doing so it allows firms to formulate their licensing agreements according to their commercial and business needs. Let us not forget that licensing agreements although that have mainly pro-competitive effects can easily fall into the prohibition of Article 81. The replacement of the said 'straitjacket' has balanced the two.

IP RIGHTS AND COMPETITION: WHAT IS NEXT?

It has become clear herein that although IP rights and competition law are not two conflicting concepts and they both pursue consumer welfare, sometimes the exercise and exploitation of IP rights – especially licensing agreements- can potentially raise competition law concerns. Thus the said issues must be adequately regulated in order of possible anti-competitive effects to be controled.

Some argue that the body of IP law attempts by itself to balance the need to provide incentives for innovation with access to market. I disagree with the aforementioned opinion. In the words of Anderman,

...it seems to be overly optimistic to expect that IPR legislation by itself can regulate the exercise of IPRs so comprehensively that it meets the objectives of public policy generally and competition law in particular in relation to markets.13

IP legislation does not regulate competition law issues. IP rights protects innovation and in particular the exclusive right of the owner to enjoy the fruits of the said innovation. Consequently there is a necessity for the relationship between IP rights and competition law to be regulated.

The EU has attempt the above either through the ECJ's jurisprudence or through its legislative acts. However due to the nature of IP rights the EU must continue its balancing efforts.

It must be noted here that IP rights are closely related both to innovation and to high technology. As technology develops and becomes more complex, new IP rights can possibly be created. No one can really predict how these new rights will be exercised and exploited. This could probably lead to competition law concerns.

Consequently the EU should try to keep in touch with new technologic developments and up date the relevant legislation in order for the exercise of new IP rights to be materialized without any anti-competitive effects.

Furthermore the current TTBER only applies to bilateral agreements. In my opinion this should be soon amended in order to cover multiparty licensing such as patent pools, which may be restrictive of competition. Patent pools may reduce competition between parties – especially when composed by substitute technologies – amount to collective tying and to price fixing. In addition they can exclude alternative technologies.

Moreover the TTBER should be soon amended to include more IP rights and more IP related agreements that could affect competition law. It is said that trademark licensing as well as merchandise agreements-that were left outside the scope of the new TTBER-tend to have less impact impact on competition, since even if they are exclusive, competitors can still market products with identical functionality14. Still they are capable to create anti-competitive effects. If they were properly regulated, there would be greater legal certainty and safety in transactions. Now that they have to be assessed in the abstract greater risks and burdens are entailed.

Consequently EU should keep its legislation and jurisprudence in touch with current and modern technologic developments, as well as new methods of exploitation and exercise of IP rights. This way any possible competition concern will be faced with success. Thus the relationship between IP rights and competition law will remain in balance.

CONCLUSION

As the above analysis has demonstrated the EU has in a way achieved a satisfactory amount of balance between IP rights and competition law. Through its case law and legislation the EU has reconciled the two, thus allowing not only the proper application of the competition principles within the Internal Market but also the full exercise of IP rights. However there is still a lot to be done in order to speak of a perfect reconciliation between the two.

In order for this balanced relationship to continue to exist, EU should keep the relevant legislation up-to-date with new IP rights, innovations and inventions, together with new ways of IP rights exploitation. Therefore probable anti-competitive effects will be duly addressed and the said balance will continue to exist.

Footnotes

1. Pepperkorn, L., 'IP Licenses and Competition Rules: Striking the Right Balance' (2003) 26 World Competition 527.

2. Cases C-241-242/91 P, RTA & ITP v. Commission [1995] ECR I-743.

3. Dolmans, A. and Piilola, A., 'The proposed new Technology Transfer Block Extension: Is Europe really better off than with the Current Regulation?' [2003] 26(4) World Competition 541.

4. Joined cases 56 & 58/64, Etablissements Consten SA & Grundig-Verkaufs-GmbH v Commission [1966] ECR 299.

5. Case 24/67, Parke Davies v. Probel [1968] ECR 55.

6. Jones, A. and Suffrin, B., EC Competition Law, Text, Cases and Materials, [2004] Second Edition, Oxford University Press.

7. Case 78/70, Deutche Grammophon Gesellschaft v. Metro-SB-Groβmδrkte GmbH [1971] ECR 487.

8. Case C-10/89, SA CNL-SUCAL NV v. HAF GF AG (HAG II), [1990] ECR I-3711.

9. Barnard, C., The Substantive Law of the EU, [2004] Oxford.

10. Commission Regulation 240/96 on the Application of Article 81(3) of the Treaty to certain categories of technology transfer agreements [1996] OJ L31/2

11. Regulation 772/2004/EC on the application of Article 81(3) to categories of technology transfer agreements, [2004] OJ L 123/11

12.Willard Tom, Summary in Competition law and innovation, OECD publication, DAFFE/CLP(98)18, p. 455.

13. Anderman, S., EC Competition Law and Intellectual Property Rights, Clanderon Press, 1998.

14. Dolmans, A. and Piilola, A., No. 3 above at p.551.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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