CHAPTER-II

The Interface between Intellectual

Property Rights and Competition Law:
Issues
_____________________________________
“It is a long standing topic of debate in economic and legal circle:
how to marry the innovation bride and the competition groom”
-Mario Monti 1

2.0 Introduction

Intellectual property rights and competition regulation are closely

related. The former provides exclusive rights within a designated market to
produce and sell a product, service or technology that result from some form
of intellectual creation qualifying specific requirements. These inventions
and creations are protected by patents, copyrights, trademarks, trade secrets,
or sui generis forms of protection. Thus, IPRs designate boundaries, within
which competitors may exercise their rights.2

Philip L Williams3 in his paper “Intellectual Property Rights: a Grant

of Monopoly or an Aid to Competition?” stated that intellectual property
rights is an important instrument of public policy, designed with the objective

1
European Commissioner for Competition Policy, January 2004
2
Keith E. Maskus and Mohammad Lahouel, ‘Competition Policy and Intellectual Property
Rights in Developing Countries: Interests in Unilateral Initiatives and a WTO Agreement’
(1999) <http://siteresources.worldbank.org/DEC/Resources/84797-
1251813753820/6415739-1251814020192/maskus.pdf> accessed 30 March, 2012
3
<http://mbs.edu.au/home/jgans/papers/Intellectual%20Property%20Rights%20and%20Mon
opoly.pdf> accessed 2 July, 2015

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The Interface between Intellectual Property Rights and Competition Law:
Issues

of promoting efficient production of creative work so as to serve social rather

than individual welfare goals. In principle, IPRs create market power by
limiting static competition in order to promote investments in dynamic
competition. In competitive product and innovation markets the awarding of
IPRs rarely results in sufficient market power to generate significant
monopoly behaviour. However, in some circumstances a set of patents could
generate considerable market power through patent-pooling agreements
among horizontal competitors. In countries that do not have a strong tradition
of competition and innovation, strengthening IPRs could markedly raise
market power thereby encouraging its exercise. 4 At the outset, licensing
activities and patent protection were carried out under strict surveillance of
competition law and it was considered that patents are monopolies. R. Posner
in his paper, Antitrust Law: An Economic Perspective5 analyses that not all
IPRs are monopolies but acknowledges that some may be in certain
circumstances.

The interplay between the Intellectual Property Laws and

Competition Law can be traced in the following areas:

2.1 Licensing contracts

The role that competition policy plays in monitoring abusive

exploitation of market power in connection with the exercise of IPRs is
particularly important in the review of the anticompetitive effects of licensing
contracts (regulating the transfer or exchange of rights to the use of
intellectual property), containing exclusivity or restrictive clauses. 6 It is
commonly agreed that the licensing of intellectual property generally has
4
Ibid
5
Chicago, 1976
6
Govaere, I., The Use and Abuse of Intellectual Property Rights in E.C. Law, (3rd edn, Sweet
& Maxwell London 1999) 5

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 The Interface between Intellectual Property Rights and Competition Law:
Issues

favourable effects. It facilitates the diffusion of technological innovation and

know-how and their exploitation by firms which may have a greater
comparative advantage. Production can be made more efficient and product
quality can be enhanced when technologies are used in a complementary
manner.

Also, licensing patented technology may increase the return to IPRs

holders, increasing therefore firms’ incentives to pursue investment in
Research & Development. In fact, welfare would be reduced if innovators
and IPRs holders were forced to enter into direct production and
commercialization and hence not allowed to license their know-how to third
parties, facilitated to manufacture and market licensed goods and services.7

2.2 Technology Transfer

Nevertheless, the transfer of patented technology may involve

excessive and unnecessary restrictions to competition, depending on the
specific contractual arrangements and market conditions. An overview of the
pro-competitive and anticompetitive effects of four frequently used types of
contractual restrictions is listed as follows:

 territorial exclusivities,
 exclusive dealing,
 tying requirements, and
 grant-back requirements.

7
Ibid

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The Interface between Intellectual Property Rights and Competition Law:
Issues

They are often used as tools to facilitate the transfer of technology.

However, under some circumstances, they may also lead to an undue
restriction of competition.8

2.3 Patent Pools

Patent pools are the aggregation of intellectual property rights which

are the subject of cross-licensing; whether they are transferred directly by
patentee to licensee or through some medium, such as a joint venture, set up
specifically to administer the patent pool9. Patent pools have pro-competitive
and anti-competitive effects. Pro-competitive benefits generally flow from a
licensor’s making patented technology available to licensees. Patent pools
can have anti-competitive effects when they are used to shield invalid patents
or when they include patents that are not complementary and would compete
against each other. 10 According to a noted author Resnik, 11 pooling helps
companies earn a steady income, recover their investments and reduce risk,
which could spur them to further research and innovation.

On the other hand, Krattiger and Kowalski,12 points at patent pools to

a ‘potential double-edged legal sword’, while while being able to cut through
patent thicket blockages, pose a number of risks, mainly from the perspective

8
Massimiliano Gangi, “Competition policy and exercise of Intellectual Property Rights”,
<http://www.archivioceradi.luiss.it/documenti/archivioceradi/osservatori/intellettuale/Gangi1
.pdf > accessed 15 March, 2013.
9
John Klein, ‘Cross- Licensing and Antitrust Law’, (United States Department of Justice, 2nd
May 1997) <http://www.usdoj.gov/atr/public speeches/1123.htm> accessed 8 December,
2013
10
Kumar Jayant and Abir Roy, Competition Laws in India (1st edn, Eastern Law House
2008), 200
11
Resnik DB, ‘A biotechnology patent pool: An idea whose time has come’ (2003),
<http://www6.miami.edu/ethics/jpsl/archives/papers/biotechPatent.html> accessed 27
January 2013
12
Krattiger A Kowalski S P, ‘Facilitating assembly of and access to intellectual property:
Focus on patent pools and a review of other mechanisms’ in A. Krattiger, RT Mahoney, L
Nelsen (eds), Intellectual Property Management in Health and Agricultural Innovation: A
Handbook of Best Practices (Oxford 2007)

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The Interface between Intellectual Property Rights and Competition Law:
Issues

of competition. Patent pools are subjected to the per se rule in most

jurisdictions, including the United States, Canada, Japan, Germany etc.

2.4 Tying agreements

A ‘tie-in’ is a commercial arrangement in which the seller of one-

product i.e. the tying product conditions its sale on the buyer’s purchasing a
second product i.e the tied product from a seller or a designated third party. A
tying clause should be tested against following factors to determine its
validity with competition laws: First of all, the tied item is a separate product
or service from the tying item, further, the actual tie exists and not an
insubstantial amount of commerce effected.13

Tying arrangements are considered as one of the usual practice

adopted by the licensing companies. Tying is deemed to be per se illegal or
may be analysed under the ‘rule of reason’ approach.

2.5 Grant-backs

Many firms require their licensee to grant back any improvement

made on the subject- matter to them. The result is that effect of grant-back
clauses is that they tend to decrease the licensee’s incentive to invest. The
licensee has to grant back its improvement to the licensor for free. Thus the
licensee chooses not to invest his resources for improvement which
discourages innovation as it decreases the licensee’s own incentive to
improve the technology.

Thus grant back clauses tends to limit the licensee’s role in any type
of improvement in the technology since he shall have to give back any kind
13
Jefferson Parish Hosp. Dist. No. 2 v Hyde (1984) 466 US 2.

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The Interface between Intellectual Property Rights and Competition Law:
Issues

of improvement in the product. This leads to discouragement and thereby

restraining innovation and advancement of technological practices.

2.6 Cross-Licensing

Interchange of intellectual property rights between two or more

persons is cross licensing. It might be a bar to competition if the technology
licensed is substitute rather than complementary in nature. The anti-
competitive effects of cross licensing are reduced innovation, increased
prices and cut backs in production which is likely to happen when cross-
licensing is between competing entities and in that case the competing
entities would not exist and they together may create a market power.

Competition regulation aims at restricting attempts to extend

exploitation of an intellectual asset beyond the boundaries provided by IPRs.
Thus, there is an inherent tension between competition laws and IPRs,
particularly if competition laws give emphasis to static market access and
IPRs emphasize incentives for dynamic competition. Structured properly,
however, the two regulatory systems complement each other in striking an
appropriate balance between needs for innovation, technology transfer, and
information dissemination.14 Today, the relationship between the two systems
is characterized more by its accommodation than by its conflict. Both pose a
divergent path to the same goal.15

14
Ibid.
15
Debra A. Valentine, ‘Intellectual Property and Antitrust: Divergent Paths to the Same
Goal’ (Federal Trade Commission, 5 March 1996),
<http://www.ftc.gov/speeches/other/speech35.htm > accessed 24 November, 2013

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The Interface between Intellectual Property Rights and Competition Law:
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2.7 Abuse of Dominant position

Dominant position is a position of economic strength enjoyed by the

enterprise which enables it to prevent effective competition being maintained
on the relevant market by giving it the power to behave to an appreciable
extent independently of its competitors, customers and ultimately of its
consumers. Some of them are: imposition of discriminatory practices or
trading conditions or predatory prices, limiting supply of goods or services,
denial of market access, using a dominant position in one relevant market to
enter into, or protect, other relevant market. A dominant position in substance
means the capacity of an enterprise to act independently of competitive
forces prevailing in the market or to affect the relevant market in its favour.
A dominant position is acquired by an enterprise over a period of time and
factors such as state of technology, barriers to entry, scale of operations, etc.,
influence the achievement of a dominant position.

2.8 Refusal to supply license

The law of licensing is based on the complementary goals of the

intellectual property system and competition law. The Intellectual property
rights holder has the exclusive right granted under the law for a limited
period of time. Thus the right holder is able to prevent others from exploiting
it but he cannot restrain the development and use of a superior technology.
This is evident from the fact that intellectual property promotes competition
in the market. The issue arises where the refusal of a patented technology
prohibits the entrance of a new product into the market and is considered
anti-competitive.

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The Interface between Intellectual Property Rights and Competition Law:
Issues

The IMS Health case16 has cautiously inserted three conditions to be

satisfied for declaring such a refusal as an abuse of dominant position. They
are:

(1) That the refusal to license ‘is preventing the emergence of a new
product for which there is a potential consumer demand’
(2) That it is ‘unjustified’ and
(3) That such refusal ‘excludes competition in the secondary market’

2.9 Condition in License Agreement Fixing prices

The issue in a license agreement fixing prices is that whether the

owner of the patents could entirely control the manufacture, use and sale of
its patented product, the right to impose the condition that its sales should be
at prices fixed by the licensor and subject to change according to its
discretion. In the view of the judiciary, a term would be valid provided the
conditions of sale are normally and reasonably adapted to secure pecuniary
reward for the patentee’s monopoly. It is to be noted that 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. Finally, when the patentee licensees another to
make and vend on his own account, the price at which his licensee will sell
will necessarily affect the price at which he can sell his own patented goods.

2.10 Block booking

Block booking is the practice of renting one motion picture to an

exhibitor on condition that it is also rent other features from the same
company. The issue arises when each copyrighted film block booked was
itself a unique product and that each feature films varied in theme, in artistic

16
Case C- 418/01, IMS Health [2004] ECR I-5039

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The Interface between Intellectual Property Rights and Competition Law:
Issues

performance, in stars, in audience appeal, etc., and that the other party by
reason of its copyright had a ‘monopolistic’ position as to each tying product
and thereby trying to impose an appreciable restraint on free competition in
the tied product. Further, there were problems when television stations were
forced to accept unwanted films which denied access to the other distributors
who, in turn, were foreclosed from selling to the stations.

2.11 Concluding remark

To conclude, the objective of this chapter is to locate the conflicting

issues of intellectual property protection and competition law in various
jurisdictions like the United States, European Union and India. The various
issues like licensing contracts, abuse of dominant position, block booking,
technology transfer, condition in license agreement fixing prices, tying
agreements, grant back conditions and refusal to supply license are the
conflicting areas where both the laws appear in interface with one another.
Through this chapter, the researcher shall study the areas through judicial
pronouncements of the jurisdictions of United States, European Union and
India. The researcher shall also find out the means of bridging the gap
between the two divergent areas of law and also point out some suggestions
which the developed countries like United States and European Union have
taken up.

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