UK: Courts seek the right balance to maintain a free market

Competition and intellectual property laws are closely linked, but a number of recent cases confirm that disparities remain in how European and US courts tackle conflicts between the two. That is why companies need to be aware of the impact competition rules can have on the value of their IP, say Isabel Davies, Bruno Lebrun and Andreas Stargard of Howrey

We are living in dynamic times for the interface between competition laws, intended to promote consumer choice and competitive markets to enhance consumer wealth, and the IP laws encouraging businesses to innovate and invest in new technology leading to improved products and low prices to benefit the consumer. Courts in Europe and the US have been far from idle in addressing the intellectual property/antitrust intersection. It is noticeable that the European cases dealing with these issues have mainly been at Commission level in spite of modernization.

Businesses must consider the crossroads of the two bodies of law and develop their approach accordingly, determining how best to commercialize and enforce IP rights within the company’s framework while addressing the potential implications of competition law and its enforcement, particularly in the EU.

European competition law and IP

EU law recognizes and guarantees national property rights (Article 295, EC Treaty). However, conflicts between IP law and competition law do occur, particularly in the context of compulsory licensing. The territorial protection provided by IP rights has led to tension with the principle of free movement in the EU.

Article 81(1) prohibits agreements between undertakings that prevent, restrict or distort competition and which affect trade between member states. In the IP context, that includes licence agreements, which limit the licensee’s commercial freedom to sell products that incorporate the licensed IP. Article 81(3) establishes an exception to this prohibition when the agreement confers sufficient benefits to outweigh the anti-competitive effects.

IP agreements and licences can often fall foul of Article 81(1). Examples of potentially anti-competitive clauses often found in licence agreements include: tying and bundling of products or licences, export bans, restrictions on prices or customers, no-challenge clauses, or the grant of territorial exclusivity.

The main European regulation dealing with the competition aspects of IP licensing is the 2004 Regulation 772/2004 on technology transfer agreements. In 2004, the Commission also set out guidelines that detail the implementation of the Regulation. They will be of great support to national courts and competition agencies, which have become the natural enforcers of EC antitrust rules since May 1, 2004, which means (1) that the European Commission is unlikely to be involved in disputes relating to technology transfer agreements, and (2) that companies have to assess on their own the compliance of their agreements with EC antitrust rules.

The new Regulation applies to all technology licence agreements concluded between only two parties. Technology transfer agreements are defined as a patent licensing agreement, a know-how licensing agreement, a software-copyright licensing agreement or a mixed-patent, know-how or software copyright licensing agreement, which is a wider definition because it also includes copyright in software and designs, and mixed agreements.

The scope of the new Regulation is defined through a market share threshold. Agreements between competitors with a market share of less than 20% and agreements between non-competitors with a market share of less than 30% benefit from the exception in Article 81(3), as long as the agreement does not contain one of the so-called hard-core restrictions provided in the Regulation. Agreements between parties that have market shares in excess of the thresholds will not be illegal, but will be subject to the individual assessment by the parties. […] "It is recalled that there is no presumption of illegality of agreements that fall outside the scope of the provided that they do not contain hardcore restrictions of competition". An agreement is prohibited when it provides typical hardcore restraints, such as price-fixing, limitation of output, and allocation of markets. Other provisions are blacklisted, such as restrictions on the licensee to use its own technology. Both parties must carry out their own research and development whether or not in the field covered by the licence. Price restrictions and restrictions on passive sales are also prohibited (the licensee must be able to respond to unsolicited orders from customers in another exclusive territory or customer group; this restriction was authorized for five years under the previous regulation).

If, under the new Regulation, some terms breach Article 81, the agreement is not void (unlike for hardcore restrictions), but the restrictions will fall away. They include the non-challenge clauses, and the exclusive grant-back or assignment to the licensor of severable improvement or new applications of the licence technology. Non-exclusive grant-back is not prohibited. The payment of compensation for grant-back is not relevant.

The new Regulation authorizes non-compete obligations whereby the licensee is prevented from using third parties’ technologies, which compete with the licensed technology.

Article 82 prohibits the abuse of a dominant position in the EU or a substantial part of it. IP ownership does not automatically confer a dominant position, but it is possible for an IP right to result in or contribute to a dominant position in a particular market.

The tension between competition and IP laws becomes evident in cases, such as Magill, IMS and Microsoft, where the Commission sought to impose compulsory licences after the holder’s withdrawal of or refusal to grant a licence.

In Magill (Case 241/91, RTE and ITP v Commission, 1995), the ECJ first held that a refusal to grant a licence is not an abuse, even if the licence-holder is in a dominant position. However, it then went on to state that in "exceptional circumstances" the exercise of an exclusive right by the owner could involve abusive conduct. The scope of these exceptional circumstances remains a controversial issue.

In IMS (Case C-418-01, IMS Health GmbH v NDC Health GmbH, 2004), the ECJ attempted to clarify these circumstances. IMS provides data on regional sales of pharmaceutical products in Germany. It had developed a brick structure which became a standard for presenting data sales. In its preliminary ruling, the ECJ decided that the refusal to grant a license on the copyright of this brick structure, which was indispensable for providing sales data on pharmaceutical products, could constitute an abuse of a dominant position when the following conditions are fulfilled:

This judgment clarifies when a refusal to licence can become an abuse and when a licence can be imposed on the IP owner. But this may prove difficult in practice. For example, according to this test, the undertaking that requests the licence must "intend" to offer a "new" product. It may be difficult to define what constitutes the novelty of a product or the extent to which that "new" product competes with the existing product of the IP owners. The mere fact that the undertaking requesting the licence must "intend" to offer a new product may be controversial. The request for a licence may be based on one product, which the undertaking may not be able to produce, and still use the licence for producing another product that could not be "new". This judgment leaves a lot of room for interpretation.

The Court of First Instance may use the appeal of the Microsoft decision to clarify how to apply the ECJ’s test in IMS. On March 24, 2004, the Commission fined Microsoft € 497 million for abusing a dominant position. The main issues are access of the information necessary to compete with Microsoft on the workgroup server market (the interoperability information), and Microsoft’s automatic inclusion of its Windows Media Player software into PC operating system products. Only the first issue questions more specifically the relationship between IP and antitrust as recognized by the Commission, which said, in its 2004 decision: "it cannot be excluded that ordering Microsoft to disclose such specifications and allow such use of them by the third parties restricts the exercise of Microsoft’s intellectual property right."

The Commission emphasized that the refusal by the owner of an exclusive right to grant a licence cannot constitute an abuse of a dominant position; it may only in "exceptional circumstances" involve abusive conduct. The Commission then noted that Microsoft was "the de facto standard operating system product for client PCs", and was dominant for workgroup server operating systems. The PC operating systems and the workgroup server operating system markets are closely linked due to interoperability operating requirements. In refusing to provide full interoperability information, in particular to the complainant Sun Microsystems, Microsoft made it difficult for other systems to operate with Windows, restricting competition on the workgroup server operating systems market.

The Commission found the refusal was part of a general conduct pattern whereby Microsoft exploited a range of privileged connections between its dominant PC operating systems and its workgroup server operating system. Microsoft’s argument was insufficient. The Commission concluded that the refusal to disclose interoperability information limited technical development on the market and was harming consumers; it required Microsoft to disclose interface documentation and to conclude licences on fair and reasonable terms.

Microsoft appealed the decision before the Court of First Instance which will have to consider the position of the Commission in light of the ECJ test in IMS. In particular, the Court will have to decide whether the interoperability is necessary to issue a "new product" as defined in IMS.

Briefly after IMS, the ECJ missed the opportunity to clarify the year-old question regarding the conditions under which the refusal by a dominant company to supply in full wholesalers’ orders to control parallel trade. This case involved Syfait, a wholesaler in Greece, which complained before the Greek competition authority against GlaxoSmithKline’s refusal to supply its orders in full (Case –53/03, Syfait v GlaxoSmithKline, May 31 2005).. Unfortunately, the ECJ declined jurisdiction because the Greek national competition authority is not a "court" and therefore was not entitled to ask for a preliminary ruling.

In his opinion Advocate General Jacobs advised that a pharmaceutical manufacturer does not per se abuse its dominant position by refusing to supply in full wholesalers’ orders in a member state, even if aimed at limiting exports. AG Jacobs noted that all European countries fix or influence the price of pharmaceutical products in their territory, which creates opportunities for parallel trade. By attempting to prevent parallel imports pharmaceutical companies are trying to avoid the consequence of an EU-wide application of the low prices imposed upon them in some member states. In AG Jacobs’ view, unlimited parallel trade in the pharmaceutical industry would eventually harm this industry where research and development are very important.

Wholesalers in the pharmaceutical industry obliged to ensure appropriate and continuous supplies to cover the needs of the patients in the member state. This obligation casts doubt on the reasonableness and proportionality of requiring manufacturers to supply wholesalers in low-price member states when they intend to export the quantities supplied in high-price member states. AG Jacobs observed that not the end-consumers, but only the parallel trader benefit from parallel trade because the product’s price is defined by the member state. He stressed that this Opinion was "highly specific" to the pharmaceutical industry. But the arguments developed in this case could probably be extended to certain other industrial sectors.

On June 15, 2005, the Commission fined AstraZeneca €60 million for breaching Article 82 by misusing the patent system and the procedures for marketing pharmaceuticals to delay the market entry for generic competitors to its drug Losec. It is the first time the Commission has decided that the abusive use of patent and regulatory procedures could constitute a breach of Article 82. The Commission press release indicates that AstraZeneca abused its dominant position because,

The US situation

Federal Circuit law governs all antitrust claims as long as they are related to the patent. The Court deems itself to be in the best position to impose and maintain uniformity of the patent laws. Pleading an antitrust case requires a fairly low standard as a general matter: the facts must "at least outline or adumbrate" an antitrust violation, otherwise the plaintiff "will get nowhere merely by dressing them up in the language of antitrust."

Until recently one had to allege all requisite elements of a substantive antitrust claim (such as antitrust injury or market power). This has potentially changed with the Federal Circuit’s Illinois Tool Works decision. On August 5 2005, the US Federal Trade Commission (FTC) and DOJ decided to file an amicus brief to reverse the Federal Circuit’s decision in Illinois Tools Works Inc v Independent Ink, Inc to the question of whether patent ownership automatically creates market power for purposes of an antitrust timeying claim. It was held that proof of market power in a tying case is no longer required.

The most common antitrust claims in IP-related cases are: tying the sale or licence of goods protected by IP rights to unprotected goods; fraud in the procurement of the IP right (so-called Walker-Process actions); the patent misuse defence (where the patentee has illicitly and anticompetitively enlarged the scope of its patent grant); challenges to mergers under § 7 of the Clayton Act, due to the parties’ unique IP assets; discriminatory licensing or pricing under the Robinson-Patman Act; the foreclosure of a competitor’s use of one’s IP assets in furtherance of a Sherman Act § 1 boycott or cartel, or their use in aid of monopolization in violation of § 2; and sham patent litigation.

IP suits in the US are always appealed to the Federal Circuit. Around eight years ago, Joel Klein, former assistant attorney general at the DOJ Antitrust Division, observed in front of the AIPLA that, "the intersection of antitrust law and intellectual property has become a major agenda item for the Antitrust Division." Today, this intersection has grown from a rural four-way stop to a major highway’s cloverleaf interchange: the courts no longer hear only the notorious Walker-Process or patent-misuse defences in patent infringement actions.

The courts and agencies have taken affirmative steps to improve previously undeveloped areas. Both businesses and IP practitioners benefit from the added guidance: according to the DOJ, "by far most cross-licences and pools are, on balance, procompetitive," and the agencies’ joint collaboration Guidelines delineate a way for competitors to engage in pro-competitive joint-venture R&D efforts, allowing companies to estimate the antitrust risks more precisely.

For instance, the Guidelines prohibit all price or output fixing, bid rigging, or division of markets among joint venture partners; all other conduct falls under either the rules laid out in the Horizontal Merger Guidelines or alternatively is analyzed under the classic antitrust Rule of Reason. The Agencies believe that pro-competitive efficiency gains arise from the type of collaboration that combines different capabilities or resources, and favour sunset provisions that ensure effective competition thereafter. If an IP "cross-license is between firms that are competitors, whether in producing goods or services, licensing intellectual property, or in R&D, our antitrust antennae go out".

Recent US developments are, most notably, the Federal Circuit’s radical approach in Illinois Tool Works Inc v Independent Ink, Inc, to the question whether patent ownership automatically creates market power for purposes of an antitrust tying claim. On appeal, the Supreme Court granted certiorari. On August 5 2005, the FTC and DOJ decided to file an amicus brief urging reversal of the decision. They sought to retain the status quo of the classic rule that every element of an antitrust offence – including market power in the tying product market – must be proven, be it by a careless plaintiff or by the stroke of a Federal Circuit judge’s pen in a landmark decision.

Perhaps less well-known and not as far-reaching is Applera Corp/Roche Molecular v MJ Research, a 2004 Federal District Court decision from Connecticut. It is a fitting example of the modern antitrust-IP interplay at work in a commercial dispute among businesses. The court granted summary judgment for the patentee-plaintiffs. The subject matter was complex, relating to DNA polymerase chain reaction and thermal cycler instrument technology, purportedly violating the plaintiffs’ patents. MJR counterclaimed that the plaintiffs licensed and enforced their patents anti-competitively, alleging horizontal hub-and-spoke conspiracy.

The court divided the trial, hearing patent infringement issues first and antitrust claims second. But a month before the jury’s $19.8 million infringement verdict and the court’s subsequent denial of MJR’s antitrust claims, the defendant filed for bankruptcy protection. The court held that MJR not only lacked cognizable antitrust injury and thus standing, but also that the plaintiffs’ licensing program did not constitute horizontal price fixing and did not extend the lawful scope of the patent grant. The evidence showed that there was no fixed market price in the relevant product, because a wide retail price range for the cylinders existed.

Price-fixing claims based on IP licensing must be based on more than mere 1) evidence of improper motive, 2) imposition of a licensing fee covering only the patented technology, 3) multiple licensing, which is not a per se antitrust violation, or 4) most-favoured-nations (or -licensee) clauses. The latter which are not price fixing, especially when they give licensees lower royalty rates if the licensor engages in subsequent negotiations that lead to lower licence fees, as the decision observes.

This District Court opinion re-emphasizes US patent owners’ broader antitrust immunities compared to non-patentees’ conduct, and shows the mixed results with which infringement defendants try to extend the reach of Sherman § 1 as it relates to agreements by patentees.

Recommended strategies

Companies need to be aware of the antitrust angle when dealing with their IP, when enforcing and licensing their IP rights.

In the EU, on the one hand, a decision like Microsoft indicates that the Commission may take a strong stance against IP rights owners (which could be confirmed by the decision in AstraZeneca). On the other hand, the new Guidelines on technology transfer indicate that the Commission is very much aware of the need to maintain a balance between the reward of innovation and the good functioning of the market through competition: "Intellectual property rights promote dynamic competition by encouraging undertakings to invest in developing new and improved products and processors. 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."

Businesses that are, or will be, involved in technology licensing need to take particular account of the new Regulation on transfer of technologies when negotiating new licences and should review their existing arrangements for compliance. Companies also need to consider the effects of parallel imports, including whether price differentials between member states are justified, and to which extent they motivate parallel imports.

In both the US and the EU, it is recognized that competition and IP laws are complementary (both are centred on the innovation process and the expansion of economic activity). The US imposes fewer limitations on the commercialization of IP rights than the EU, and there is a noticeable tension between the competition and IP regimes in the area of compulsory licensing. Changes to competition and IP laws are occurring on both sides of the Atlantic to enhance and strengthen coherence between the two regimes and there is a growing convergence between EU and US competition policy towards licensing agreements.

PULL QUOTES:

-The Commission emphasized that the refusal by the owner of an exclusive right to grant a licence cannot constitute an abuse of a dominant position

-The courts and agencies have taken affirmative steps to improve previously undeveloped areas. Both businesses and IP practitioners benefit from the added guidance

-Companies need to be aware of the antitrust angle when dealing with their IP, when enforcing and licensing their IP rights

Isabel Davies

Isabel Davies is head of intellectual property at the London office of Howrey and a member of the firm’s global IP management team. She specializes in intellectual property dispute resolution. For over 20 years Isabel’s practice has focused on intellectual property including trade marks, patents, design, copyright, confidential information and trade libel.

Isabel deals in both contentious and non-contentious issues and advises on portfolio management of trade marks and patents, programmes for obtaining multi-national registrations of trade marks, challenging and acquiring the marks and their disposal and assignment of portfolios of IP rights. She also cooperates with the Howrey antitrust team. In addition to her general IP dispute work, Isabel is responsible for Howrey’s European trade mark practice, and is admitted to practise as a legal practitioner before the European Patent Office. Before joining Howrey, Isabel was chairman of Eversheds’ intellectual property group and the head of their London intellectual property group.

Bruno Lebrun

Bruno Lebrun is a partner in Howrey’s Brussels office. He has more than 10 years experience representing clients in a wide range of industries such as automotive, aviation, bio-technology, chemicals, financial services, luxury goods, pharmaceuticals and retail distribution. His practice focuses on EC, French and Belgian competition law and EU law, including both litigation and government experience. Bruno has represented a number of European and US clients in merger cases and regularly advises on issues linked to Article 81 EC, Article 82 EC or Article 86 EC. He advises on general EU matters such as free movement of services, goods and capital and has represented various clients in disputes relating to parallel imports and has defended credit, and financial institutions in free movement of services cases. Bruno graduated from the University of Louvain-la-Neuve in 1992 and obtained a Master in European Law at the Institut d’Etudes Européennes (Université Libre de Bruxelles) in 1993.

Andreas Stargard

Andreas Stargard is an associate in the firm’s antitrust practice group, working in Howrey’s Brussels and Washington DC offices. His focus is on the representation of clients in both traditional litigation, as well as in merger and acquisitions reviewed by other adjudicative bodies (DOJ Antitrust Division and FTC Bureau of Competition). He is familiar with the entertainment and music industry, having worked extensively on FTC compliance. Andreas has worked closely with partners in the global litigation/insurance recovery and intellectual property groups. He is involved in the firm’s pro bono publico practice, representing clients in cases ranging from asylum applications to employment discrimination and tort law. A native of Germany, Andreas is fluent in German and French.