Intellectual Property, Antitrust and Cumulative Innovation in the EU and the US 9781472561183, 9781849463065

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Acknowledgements Whereas the writing of this book has for the most part been an endeavour pursued in ‘solitude and freedom’ (to quote my home university’s founder), several people and institutions have given their support along the way. Its publication is a happy occasion to express my enduring gratitude to them. Accepted in 2011 by Humboldt University Berlin as a doctoral thesis, this book was conceived during an LLM program at New York University in 2004–5. I was fortunate to spend a year at this vibrant and intellectually stimulating place, and I am grateful to NYU for its Arthur T Vanderbilt scholarship as well as to the Haniel Foundation and the German National Academic Foundation for their financial assistance. The German National Academic Foundation also provided a PhD scholarship. At NYU, Professor Eleanor M Fox, who personifies global and in particular US-EU antitrust dialogue and cooperation, and Professor Harry First were great teachers and academic hosts. Back in Europe, I had the opportunity to discuss some of my ideas with several people at the Brussels office of Cleary Gottlieb Steen & Hamilton. At Humboldt University Berlin, Professor Dr Dr Christian Kirchner did much more than supervise my doctoral thesis. For over a decade he has been an excellent academic guide and mentor to me, with whom I share an interest in the crossroads of law and economics. With his commitment to interdisciplinarity, his intellectual sharpness, his genuinely open mind and his energy and cheerfulness, he is a great source of inspiration. During my time as an assistant at his Chair, Karin Weber and David Dietrich were good colleagues and remain good friends. I am grateful to Professor Dr Hans-Peter Schwintowski and Professor Dr Jan Bernd Nordemann for having served as members of the thesis examination panel. The thesis was awarded the Karlheinz Quack Prize, sponsored by WilmerHale, for the best thesis on economic law at Humboldt University Berlin in 2011. Since our first contact, when I approached him with the manuscript, Richard Hart has been an outstandingly kind publisher, with whom it has been a pleasure to work. I would like to thank the whole team at Hart Publishing, including Ruth Massey, who is an excellent copy editor. Significant parts of this book were written in competition with my professional life. I am thankful to colleagues and friends at the German Economics Ministry for regularly reminding me of an advanced PhD writer’s priority to ‘finish the job’ (Wolfgang!). Some of the Ministry’s intellectual roots in Ordnungspolitik and its quest for—to put together two seemingly antagonistic labels—‘more economic’ rule-based answers to competition questions are issues this book grapples with. I am also grateful to colleagues and friends (Diana, Jean-François and Tobias!) in the Directorate General for Competition of the European Commission for having been great discussion partners on competition (and other) matters. DG COMP is a truly European melting pot with a unique spirit, whose mission of European (economic) integration I am deeply convinced by. At the same time it should be emphasised that positions taken in this book remain strictly personal. I thank Prof Dr Heike Schweitzer and Dr Florian Möslein for keeping me in the academic loop through interesting projects while working in public administration.

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ACKNOWLEDGEMENTS

The book was also written in competition with my private life. I am indebted to Alexandra for having tolerated the inevitable presence of a notebook during many weekends and holidays over the last couple of years. The arrival of little Jakob fortunately provided the final spur to finish the manuscript and to move on to new and less lonely endeavours. Ultimately, this one goes out to those to whom I feel and owe the deepest gratitude: my parents, for their support over the years. This book is dedicated to them.

Abbreviations AAC ABA AG ALR AMC API BER BGH BGHZ BVerfG CFI CJEU DG DIAC DoJ DRM DSL EC ECJ ECPR EEA EPC EUI FRAND FTAIA FTC IAP ICN ICP IHV IPR ISO ISV LRAIC LRIC M-ECPR MCPP NBER NCA

average avoidable cost American Bar Association Advocate General (of the Court of Justice of the EU) American Law Reports Antitrust Modernization Commission application programming interface Block Exemption Regulation Bundesgerichtshof (German Federal Court of Justice) Entscheidungen des Bundesgerichtshofs in Zivilsachen Bundesverfassungsgericht (German Constitutional Court) Court of First Instance Court of Justice of the European Union Directorate General (of the European Commission) Draft International Antitrust Code (US) Department of Justice digital rights management digital subscriber line Treaty establishing the European Communities European Court of Justice efficient component pricing rule European Economic Area Convention on the Grant of European Patents European University Institute fair, reasonable and non-discriminatory Foreign Trade Antitrust Improvements Act of 1982 (US) (US) Federal Trade Commission internet access provider International Competition Network internet content provider independent hardware vendor intellectual property right independent service organisation independent software vendor long-run average incremental cost long-run incremental costs market determined efficient component pricing rule Microsoft Communications Protocol Program National Bureau of Economic Research National Competition Authority (within the European Competition Network)

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ABBREVIATIONS

nyr OECD OEM OJ PatG R&D RAND SIEC SLC SMP SSNDP SSNIP SSO TEU TFEU TRIPS TTBER UNCTAD UrhG US USC UWG WIPO WTO ZWeR

not yet reported (in the European Court Reports) Organisation for Economic Co-operation and Development original equipment manufacturer Official Journal (of the European Communities) Patentgesetz (German Patent Act) research and development reasonable and non-discriminatory significant impediment to effective competition substantial lessening of competition single monopoly profit small but significant non-transitory decrease in price small but significant and non-transitory increase in price standard-setting organisation revised Treaty on European Union Treaty on the Functioning of the European Union Agreement on Trade-Related Aspects of Intellectual Property Rights Technology Transfer Block Exemption Regulation United Nations Conference on Trade and Development Gesetz über Urheberrecht und verwandte Schutzrechte (German Copyright Act) United States, or, within judgments: United States Supreme Court Reports United States Code Gesetz gegen den unlauteren Wettbewerb (German Act against Unfair Competition) World Intellectual Property Organization World Trade Organization Zeitschrift für Wettbewerbsrecht

Table of Cases European Union Ahlström Oy v Commission (Wood Pulp) (89, 104, 116, 117 & 125–29/85) [1988] ECR 5193, [1988] CMLR 901............................................................................................................. 42 AKZO Chemie BV v Commission (C-62/86) [1991] ECR I-3359, [1993] 5 CMLR 215, [1994] FSR 25..................................................................................................... 137, 236 AstraZeneca v Commission (T-321/05) [2010] 5 CMLR 28 ............................. 22, 71, 74, 75, 78, 79, 108 British Airways plc v Commission (T-219/99) [2004] All ER (EC) 1115, [2003] ECR II-5917, [2004] 4 CMLR 19 ........................................................................................... 78 British Airways plc v Commission (C-95/04 P) [2007] ECR I-2331, [2007] 4 CMLR 22, [2007] CEC 607.....................................................................................77, 78, 241 British Horseracing Board Ltd v William Hill Organisation Ltd (C-203/02) [2009] Bus LR 932, [2004] ECR I-10415, [2005] 1 CMLR 15, [2005] CEC 68, [2005] ECDR 1, [2005] Info TLR 157, [2005] RPC 13 .......................................... 18 Centrafarm BV v Sterling Drug Inc (15/74) [1974] ECR 1183, [1974] ECR 1147, [1974] 2 CMLR 480, [1975] FSR 161........................................................................................... 28, 29 Centrafarm BV v Winthrop BV (16/74) [1974] ECR 1183, [1974] ECR 1147, [1974] 2 CMLR 480, [1975] FSR 161................................................................................................. 28 Centre Belge d’Etudes de Marché Télé-Marketing SA (CBEM) v Compagnie Luxembourgeoise de Télédiffusion SA (CLT) (311/84) [1985] ECR 3261, [1986] 2 CMLR 558 .................................................................................................................... 76, 226 CICCRA (Consorzio Italiano della Componentistica di Ricambio per Autoveicoli) and Maxicar v Renault (53/87) [1988] ECR 6039, [1990] 4 CMLR 265, [1990] FSR 544 .............. 32, 218 Clearstream Banking AG v Commission (T-301/04) [2009] ECR II-3155, [2009] 5 CMLR 24 ......... 241 Collins (Phil) v Imtrat Handelgesellschaft mbH (C-92/92 & C-326/92) [1993] ECR I-5145, [1993] 3 CMLR 773, [1994] EMLR 108, [1994] FSR 166............................................ 29 Commercial Solvents. See Instituto Chemioterapico Italiana SpA v Commission Consten and Grundig v Commission (56& 58/64) [1966] ECR 299, [1966] CMLR 418 .................. 28 Courage Ltd v Crehan (C-453/99) [2002] QB 507, [2001] 3 WLR 1646, [2001] All ER (EC) 886, [2001] ECR I-6297, [2002] UKCLR 171, [2001] 5 CMLR 28, [2001] CEC 297, [2002] ICR 457 ..................................................................................................... 243 Deutsche Grammophon Gesellschaft GmbH v MetroSB Grossmarkte GmbH & Co KG (78/70) [1971] ECR 487, [1971] CMLR 631 ................................................... 28, 29 Deutsche Telekom AG v Commission (T-271/03) [2008] ECR II-477, [2008] 5 CMLR 9 ................................................................................................................ 218, 236–38 Deutsche Telekom AG v Commission (C-280/08 P) [2010] 5 CMLR 27 .............................................. 236 F Hoffman-La Roche & Co AG v Commission (85/76) [1979] ECR 461, [1979] 3 CMLR 211, [1980] FSR 13........................................................................................37, 71, 82 Fixtures Marketing Ltd v Organismos Prognostikon Agonon Podosfiarou (OPAP) (C-444/02) [2004] ECR I-10549, [2005] 1 CMLR 16, [2005] CEC 38, [2005] ECDR 3 ................. 18 Fixtures Marketing Ltd v Oy Veikkaus AB (C-46/02) [2004] ECR I-10365, [2005] ECDR 2 ............... 18 Fixtures Marketing Ltd v Svenska Spel AB (C-338/02) [2004] ECR I-10497, [2005] ECDR 4............. 18 France Télécom SA v Commission (Wanadoo) (C-202/07 P) [2009] ECR I-2369, [2009] 4 CMLR 25, [2010] CEC 3.................................................................................................... 236

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Gencor Ltd v Commission (T-102/96) [1999] All ER (EC) 289, [1999] ECR II-753, [1999] BCC 877, [1999] 4 CMLR 971, [1999] CEC 395 ................................................................... 42 GlaxoSmithKline Services Unlimited v Commission (T-168/01) [2006] ECR II-2969, [2006] 5 CMLR 29, [2010] Bus LR D87 ............................................................................................ 37 GlaxoSmithKline Services Unlimited v Commission (C-501/06 P, C-513/06 P, C-515/06 P & C-519/06 P) [2009] ECR I-9291, [2010] 4 CMLR 2, [2010] CEC 885, (2010) 11 BMLR 95 ........................................................................................ 37, 219 IMS Health GmbH & Co OHG v NDC Health GmbH & Co KG (C-418/01) [2004] ECR I-5039, [2004] ECDR 9 .................................................... 6, 124, 132, 133, 153, 159, 205, 213, 214, 218–21, 224–27, 229–35, 251, 263 IMS Health Inc v Commission (T-184/01 R) [2001] ECR II-2349, [2002] 4 CMLR 1, [2002] ECDR 16..........................................................................214, 221, 230, 231 Independent Television Publications Ltd (ITP) v Commission (T-76/89) [1991] ECR II-575, [1991] 4 CMLR 745, [1991] FSR 678 ................................................................ 29 Instituto Chemioterapico Italiana SpA v Commission (6 & 7/73) [1974] ECR 223, [1974] 1 CMLR 309.........................................................................42, 223, 226, 243 Konkurrensverket v TeliaSonera (C-52/09) [2011] 4 CMLR 18 ........................................................... 238 Magill. See Radió Telefís Éireann (RTÉ) v Commission Manfredi v Lloyd Adriatico Assicurazioni SpA (C-295/04–C-298/04) [2007] Bus LR 188, [2007] All ER (EC) 27, [2006] ECR I-6619, [2007] RTR 7, [2006] 5 CMLR 17 ....... 243 Merck & Co Inc v Stephar and Exler BV (187/80) [1981] ECR 2063, [1981] 3 CMLR 463, [1982] FSR 57................................................................................................... 29 Metro SB-Großmärkte GmbH & Co KG v Commission (No 1) (26/76) [1977] ECR 1875, [1978] 2 CMLR 1, [1978] FSR 400 ...................................................................... 39 Michelin v Commission (T-203/01) [2003] ECR II-4071, [2004] 4 CMLR 18 ............................... 71, 78 Micro Leader Business v Commission (T-198/98) [2000] All ER (EC) 361, [1999] ECR II-3989, [2000] 4 CMLR 886, [2000] CEC 540, [2000] ECDR 217 ................... 231, 240 Microsoft Corp v Commission (T-201/04) [2007] ECR II-3601, [2007] 5 CMLR 11 .....................................................................................7, 10, 52, 56, 57, 78, 94, 125, 128, 138, 161, 205, 218, 221, 222, 224–28, 231, 232, 234, 235, 247, 251, 254, 255, 257, 262, 263 Microsoft Corp v Commission (T-167/08) 9 May 2008, OJ 2008 C171/41 .......................................... 245 Nederlandsche Banden Industrie Michelin NV v Commission (Michelin) (322/82) [1983] ECR 3461, [1985] 1 CMLR 282, [1985] FSR 250 .................................................................. 71 Netherlands v Parliament and Council (C-377/98) [2002] All ER (EC) 97, [2001] ECR I-7079, [2001] 3 CMLR 49, [2002] FSR 36, (2002) 68 BMLR 1 .................................. 28 Oscar Bronner GmbH & Co KG v Mediaprint Zeitungs- und ZeitschriftenverlagGmbH & Co KG (C-7/97) [1998] ECR I-7791, [1999] 4 CMLR, [1999] CEC 53 ...................................................................134, 217–21, 224–26, 238 Österreichische Postparkasse AG v Commission (T-213/01 & T-214/01) [2006] ECR II-1601, [2007] 4 CMLR 14 ........................................................................................... 37 Parke, Davis & Co v Probel (24/67) [1968] ECR 55, [1968] CMLR 47, [1968] FSR 393 ..................... 28 Radió Telefís Éireann (RTÉ) v Commission (T-69/89) [1991] ECR II-485, [1991] 4 CMLR 586 .....................................................................................................31, 6, 31, 57, 230 Radió Telefís Éireann (RTÉ) v Commission (Magill) (C-241/91 P & C-242/91 P) [1995] All ER (EC) 416, [1995] ECR I-743, [1995] 4 CMLR 718, [1995] EMLR 337, [1995] FSR 530, [1998] Masons CLR Rep 58 .................... 6, 31, 32, 57, 124, 137, 159, 205, 218–21, 224–27, 229, 231–34, 246, 247, 251, 252, 262

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Sot Lélos kai Sia EE v GlaxoSmithKline AEVE Farmakeftikon Proionton (C-468/06–C-478/06) [2009] All ER (EC) 1, [2008] ECR I-7139, [2008] 5 CMLR 20, [2009] CEC 98, [2009] ETMR 4, (2008) 104 BMLR 129 ....................... 222, 239 Tetra Pak International SA v Commission (Tetra Pak II) (C-333/94 P) [1997] All ER (EC) 4, [1996] ECR I-5951, [1997] 4 CMLR 662 .............................................. 76, 236 Tiercé Ladbroke SA v Commission (T-504/93) [1997] ECR II-923 ..................................................... 221 United Brands Co v Commission (2/76) [1978] ECR 207, [1978] 1 CMLR 429 ....................37, 223, 240 Volvo AB v Erik Veng (UK) Ltd (238/87) [1988] ECR 6211, [1989] 4 CMLR 122 ...............................................................................................29–32, 205, 218, 231 Wouters v Algemene Raad van de Nederlandse Orde van Advocaten (C-309/99) [2002] All ER (EC) 193, [2002] ECR I-1577, [2002] 4 CMLR 27, [2002] CEC 250................................................................................................................................... 38

Commission Decisions AKZO, IV/30.698, Decision of 14 December 1985, OJ 1985 L374/1 .................................................... 71 AstraZeneca, Case COMP/A.37.507/F3.............................................................................22, 24, 108, 109 B&I Line plc v Sealink Harbours Ltd & Sealink Stena Ltd, Case IV/34.174, Decision of 11 June 1992, (1992) 5 CML Rev 255 .......................................................................... 219 CECED, Decision 2000/475/EC, OJ 2000 L187/47 ................................................................................ 38 Deutsche Post AG—Interception of cross-border mail, OJ 2001 L331/40 ............................................. 219 Deutsche Telekom, Case COMP/C-1/37.451, 37.578, 37.579, Decision of 21 May 2003, OJ 2003 L263/9 .........................................................................73, 236, 237 Hofman and DSD, Case COMP/34.493, Decision 2001/837/EC, OJ 2001 L319/1 .............................. 38 IBM (maintenance) services, Case COMP/C-3/39.692 ........................................................................ 246 IMS Health/NDC—Interim Measures, OJ 2002 L59/18 ...................................................................... 224 Magill TV Guide, Decision 89/205/EEC, OJ 1989 L78/43 ........................................6, 243, 246, 247, 248 Microsoft, Case COMP/C-3/37.792, Decision 2007/53/EC, OJ 2007 C32/23 ......................................................................................... 52, 54, 56, 57, 100, 128, 129, 140, 161, 198, 224, 227, 230, 231, 235, 244, 245, 247 NDC Health/IMS Health, Case COMP D3/38.044, Decision 2002/165/EC, OJ 2002 L59/18; Commission Decision 2003/741/EC, OJ 2003 L268/69 .......................................................................................................214, 216, 230, 243, 244, 247, 248 Rambus, Case COMP/38.636, Decision of 9 December 2009............................................................. 200 Sea Containers v Stena Sealink (Sea Containers), Case IV/34.689, Decision of 21 December 1993, OJ 1994 L15/8............................................................................... 219 Siemens/Dräger, Case COMP/M.2861, Decision of 30 April 2003 ........................................23, 138, 139 Tetra Pak II, Case DG IV/31043, Decision of 24 July 1991, OJ 1992 L72/1 ....................................... 138

France Virgin v Apple, Décision No 04-D-54, 9 November 2004, Conseil de la Concurrence ...................... 226

Germany BGH, Judgment of 15 March 1955 (Docket No I ZR 111/53), 1955 GRUR 424 (Möbelpaste) ........... 16 BGH, Judgment of 29 April 1986 (Docket No XZR 28/85), 1986 GRUR (Formstein) ...................... 207 BGH, 1996 GRUR 109, NJW 1996 782 (Klinische Versuche I); BGHZ 135 (Klinische Versuche II) .................................................................................................... 207 BGH, 1996 GRUR 190 (Polyferon II) ................................................................................................... 209

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BGH, Judgment of 12 March 2002 (Docket No X ZR 168/00), 2002 GRUR 515 (Schneidmesser I) ................................................................................................... 207 BGH, Judgment of 12 March 2002 (Docket No X ZR 135/01), 2002 GRUR 519 (Schneidmesser II) ................................................................................................. 207 BGH, Judgment of 13 July 2004 (Docket No KZR 40/02), 2004 GRUR 966 (Standard Spundfass) .................................................................................... 210, 211 BGH, Judgment of 6 May 2009 (Docket No KZR 39/06), 2009 GRUR 694 (Orange-Book-Standard)................................................................211, 212, 217, 256 BGHZ, 148, 221 (SPIEGEL-CD-ROM) ................................................................................................ 212 BpatG, 1994 GRUR 98 (Polyferon I)..................................................................................................... 209 BverfG, 2001 GRUR 43 (Klinische Versuche) ....................................................................................... 208 OLG Dresden, 2003 GRUR 601 ............................................................................................................ 211 OLG Düsseldorf, InstGE 2 .................................................................................................................... 211 OLG Frankfurt, Judgment of 17 September 2002 (Docket No 11 U 67/00), 2003 Multemedia und Recht 45 (IMS-Health II) ..................................................................... 214, 215

United Kingdom Monsanto Co v Stauffer Chemical Co [1985] RPC 515 (CA) ............................................................ 208

United States Aldridge v Microsoft Corp, 995 F Supp 728 (SD Texas 1998)............................................................... 184 Aspen Skiing Co v Aspen Highlands Skiing Corp, 472 US 585 (1985) ..........................................................................................70, 71, 176, 181, 186–89, 192, 193, 202, 203, 223 Associated Press v United States, 326 US 1 (1945) ................................................................................ 195 AT&T Corp v Iowa Utilities Board, 525 US 366 (1999) ....................................................................... 186 Atari Games Corp v Nintendo of America, Inc, 897 F2d 1572 (1990), 975 F2d 832 (Fed Cir 1992), 30 USP Q2d (BNA)1401(ND Cal 1993)..............................33, 126, 174 Baker v Selden, 101 US 99 (1879) ......................................................................................................... 193 Barry Wright Corp v ITT Grinnell Corp, 724 F2d 227 (1st Cir 1983) ................................................... 81 BellSouth Advertising v Donnelley Information, 719 F Supp 1551 (SD Fla 1988), 999 F2d 1436 (11th Cir 1993) .......................................................................................................... 185 Berkey Photo Inc v Eastman Kodak Co, 603 F2d 263 (2d 1979), cert denied 444 US 1093 (1980) ............................................................................................... 189, 190 Brenner v Manson, 383 US 519 (1966) ................................................................................................... 27 Brooke Group Ltd v Brown & Williamson Tobacco Corp, 509 US 209 (1993) ............................... 86, 193 City of Anaheim v Southern California Edison, 995 F2d 1373 (1992) ................................................. 183 Computer Associates International v Altai, Inc, 982 F2d 693 (2d Cir 1992) .................................. 17, 126 Continental Ore Co v Union Carbide & Carbon Corp, 370 US 690 (1962) ........................................... 40 Continental Paper Bag v Eastern Paper Bag, 210 US 405 (1908) ......................................................... 166 Data General Corp v Grumman Systems Support Corp (Data General), 36 F3d 1147 (1st Cir 1994) ........................................................................................178, 179, 188, 190 Dell Computer Corp, Re, FTC Consent Decree, 121 FTC 616 (1996) ..................................106, 107, 199 Diamond v Diehr, 450 US 175 (1981) .................................................................................................... 17 DSC Communications Corp v DGI Technologies, Inc, 81 F3d 597 (5th Cir 1996) .............................. 192 E Bement & Sons v National Harrow Co, 186 US 70 (1902)............................................................ 25, 26 Eastern Railroad Presidents Conference v Noerr Motor Freight, 365 US 127 (1961) ............................. 24 Eastman Kodak Co v Image Technical Services (Kodak I), 504 US 451 (1992) .............179, 185, 188, 218 eBay v MercExchange, 275 F Supp 2d 695 (2003), 401 F 3d 1323 (2005), 547 US 388 (2006) .......... 171 Enterprises Ltd v Accolade, Inc, 977 F2d 1510 (9th Cir 1992) .............................................................. 126

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Ethyl Gasoline v United States, 309 US 436 (1940) ................................................................................ 27 Extractol Process Ltd v Hiram Walker & Sons Inc, 153 F2d 264 (7th Cir 1946) .................................. 194 Fashion Originators’ Guild of America v FTC, 312 US 457 (1941) ...................................................... 195 F Hoffmann-La Roche Ltd v Empagran SA 542 US 155 (2004) ............................................................. 41 Fox Film Corp v Doyal, 286 US 123 (1932) .......................................................................................... 166 Genentech, Inc v Eli Lilly & Co, 998 F2d 931 (Fed Cir 1993)............................................................... 194 Georgia-Pacific Corp v US Plywood Corp, 318 F Supp 1116 (SDNY 1970), 446 F2d 295 (2d Cir 1971)........................................................................................................ 142, 200 Graver Tank & Manufacturing Co v Linde Air Products Co, 339 US 605 (1950)................................. 167 Handgards, Inc v Ethicon, Inc, 601 F2d 986 (9th Cir 1979) ................................................................... 24 Harper & Row Publishers, Inc v Nation Enterprises, 471 SS 539 (1985) .............................................. 174 Hartford-Empire Co v United States, 323 US 386 (1945) ..................................................................... 166 Hartford Fire Insurance Co v California, 509 US 764 (1993) ........................................................... 40, 41 IBM v Platform Solutions, Inc and T3 Technologies, Inc, 2009 WL 3127744 (No 06 Civ 13565(LAK)) ................................................................................... 189 Illinois Tool Works Inc v Independent Ink, Inc, 547 US 29 (2006) .........................................170, 182, 190 Image Technical Services Inc v Eastman Kodak Co (Kodak II), 125 F3d 1195 (9th Cir 1997), cert denied 523 US 1094 (1998) ............... 179, 185, 188, 190, 196, 218 Independent Service Organisations Antitrust Litigation (Xerox), Re, 203 F3d 1322 (Fed Cir 2000), cert denied 121 S Ct 1077 (2002).......................170, 185, 190, 218 Intergraph Corp v Intel Corp, 3 F Supp 2d 1255 (ND Ala 1998), 195 F3d 1346 (Fed Cir 1999) ............................................................................................................ 184 International Salt Co v United States, 332 US 392 (1947).................................................................... 182 Itar-Tass Russian News Agency v Russian Kurier, Inc, 153 F3d 82 (2d Cir 1998) .................................. 44 Jefferson Parish Hospital District No 2 v Hyde, 466 US 2 (1984) ................................................... 34, 182 Kaiser Health Foundation v Abbott Laboratories (Nos 06-55687, 06-55748, 2009 WL 69269 (13 Janaury 2009)) ................................................................................................... 24 Kodak v Image Technical Services, 504 US 451 (1992) ......................................................................... 189 KSR v Teleflex, 550 US 398 (2007) ........................................................................................................ 203 Lasercomb America, Inc v Reynolds, 911 F2d 970 (4th Cir 1990) ................................................ 174, 191 linkLine Communications, Inc v SBC California, Inc, 503 F 3d 876 (2007) .........................193, 237, 238 Lorain Journal Co v United States, 342 US 143 (1951) ........................................................................ 202 Madey v Duke University, 307 F3d 1351 (Fed Cir 2002) ............................................................. 168, 169 Marconi Wireless Telegraph Co v De Forest Radio Telephone & Telegraph Co, 236 F 942 (SDNY 1916), aff ’d 243 F 560 (2d Cir 1917).................................................................. 167 Mazer v Stein, 347 US 201 (1954)........................................................................................................... 45 MCI Communications Corp v AT&T Co, 708 F2d 1081 (7th Cir 1983) ...............................151, 183, 184 Merck KgaA v Integra Life Sciences I, Ltd, 545 US 193, 125 S Ct 2372 (2005) ............................ 169, 203 Miller Insituform v Insituform of North America, 830 F2d 606 (6th Cir 1987) ................................... 178 Milwaukee v Activated Sludge, 69 F2d 577 (7th Cir 1934)................................................................... 171 Motion Picture Patents Co v Universal Film Manufacturing, 243 US 502 (1917) ......................... 26, 169 Napster, Inc Copyright Litigation, Re, 191 F Supp 2d 1087 (ND Cal 2002) ........................................ 175 New York v Microsoft, 224 F Supp 2d 76 (DDC 2002) ................................................. 136, 146, 197–201 New York Mercantile Exchange, Inc (NYMEX) v Intercontinental Exchange, Inc, 323 F Supp 2d 559 (SDNY 2004) ...................................................................................... 192, 193 Norman F Hecht v Pro-Football, Inc, 570 F2d 982 (DC Cir 1977) ...................................................... 182 Northern Pacific Railway Co v United States, 356 US 1 (1958) .............................................................. 34 Northwest Wholesale Stationers, Inc v Pacific Stationery & Printing Co, 472 US 284 (1985).............. 195 Otter Tail Power Co v United States, 410 US 366 (1973) .......................................................183, 186, 194 Pacific Bell Telephone Co v linkLine Communications, Inc, 129 S Ct 1109 (2009) ...............181, 188, 193 Panduit Corp v Stahlin Bros Fibre Works, Inc, 575 F2d 1152 (6th Cir 1978) ...................................... 143

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Precision Instrument Manufacturing Co v Automative Maintenance Machine Co, 324 US 806 (1945) .............................................................................................................................. 25 Prima Tek II, LLC v A-Roo Co, 222 F3d 1372 (Fed Cir 2000).............................................................. 171 Professional Real Estate Investors, Inc v Columbia Pictures, 508 US 49 (1993).............................. 24, 177 Proprietors of Charles River Bridge v Proprietors of Warren Bridge, 36 US (11 Pet) 420 (1837) ................................................................................................................ 165 Q-Tips, Inc v Johnson & Johnson, 109 F Supp 657 (DNJ 1951), 207 F2d 509 (3d Cir 1953) 27............................................................................................................. 27 Quanta v LG Electronics, 553 US 617 (2008) ....................................................................................... 172 Quick Point Pencil Co v Aronson, 567 F2d 757 (8th Cir 1977) ............................................................ 175 Rambus, Inc, Re, Opinion of 5 February 2007, No 9302, 522 F3d 456 (DC Cir 2008), cert denied No 08-694, 2009 WL 425102 (23 February 2009) ............................... 139, 199–201, 245 Reiter v Sonotone Corp, 442 US 330 (1979)............................................................................................ 35 Saturday Evening Post Co v Rumbleseat Press, Inc, 816 F2d 1191 (7th Cir 1987) ............................... 175 Schor v Abbott Laboratories, No 05-3344 (7th Cir 2006) ..................................................................... 101 SCM v Xerox Corp, 645 F2d 1195 (2d Cir 1981), cert denied 455 US 1016 (1982) ........................................................................177, 178, 185, 188, 195 Sega v Accolade, 977 F2d 1510 (9th Cir 1992)...................................................................................... 174 Silicon Graphics, Inc, Re, No C-3626 (FTC 14 November 1995) ........................................................... 23 Simpson v United Oil Co of California, 377 US 13 (1964) ..................................................................... 25 Sony Corp of America v Univesal City Studios, Inc, 464 SS 417 (1984)................................................ 177 Special Equipment Co v Coe, 324 US 370 (1945) ................................................................................. 166 Spectrum Sports v McQuillan, 506 US 447 (1993) ......................................................................... 74, 190 Standard Sanitary Manufacturing Co v United States, 226 US 20 (1912) ............................................. 26 State St Bank & Trust Co v Signature Finance Group, 149F3d 1368 (Fed Cir 1998) ............................ 17 Stewart v Abend, 495 US 207 (1990) .................................................................................................... 172 Texas Instruments, Inc v US International Trade Commission, 805 F2d 1558 (Fed Cir 1986) ................................................................................................................................... 167 Town of Concord v Boston Edison Co, 915 F2d 17 (1st Cir 1990) ........................................................ 181 United Mine Workers v Pennington, 381 US 657 (1965) ........................................................................ 24 United States v Aluminium Co of America (Alcoa), 148 F2d 416 (2d Cir 1945) ........................40, 41, 84 United States v AMR Corp, 335 F3d 1109 (10th Cir 2003) .................................................................... 87 United States v Amsted Industries Inc, 15 July 2008.............................................................................. 139 United States v Colgate, 250 US 300 (1919)...........................................................................176, 181, 217 United States v El du Pont de Nemours & Co, 351 US 377 (1956) ....................................................... 152 United States v General Electric Co, 272 US 476 (1926)......................................................................... 25 United States v Glaxo Group Ltd, 410 US 52 (1973) ............................................................................ 196 United States v Griffith, 334 US 100 (1948).......................................................................................... 189 United States v Grinnell Corp, 384 US 563 (1966) ........................................................................... 70, 71 United States v Gypsum Co, 340 US 76 (1950) ..................................................................................... 136 United States v Line Material Co, 333 US 287 (1948) ...................................................................... 25, 27 United States v Microsoft Corp, 253 F3d 34 (DC Cir 2001), cert denied 534 US 952 (2001) 197 .......................................................... 26, 87, 91, 94, 127, 128, 136, 138, 145, 146, 197, 199–201 United States v Paramount Pictures, Inc, 334 US 131 (1948) ................................................................. 45 United States v Studiengesellschaft Kohle, mbH, 670 F2d 1122 (DC Cir 1981) ........................... 166, 194 United States v Terminal Railroad Association of St Louis, 224 US 383 (1912) ........................... 183, 195 United States v United Shoe Machine Co, 247 US 32 (1918)........................................................ 176, 194 United States v Univis Lens Co, 316 US 241 (1942) ............................................................................... 27 US Philips Corp v International Trade Commission, 424F3d 1179 (Fed Cir 2005) ............................. 191 USM Corp v SPS Technology, Inc, 693 F2d 505 (7th Cir 1982).................................................... 169, 175

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Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, 305 F3d 89 (2d Cir 2002), 540 US 398 (2004), 124 S Ct 872 (2004) .................... 7, 35, 76, 82, 86, 87, 90, 136, 165, 176–82, 186–95, 201, 203, 224, 238, 250, 252, 262 Video Pipeline, Inc v Buena Vista Home Entertainment, Inc, 342 F3d 191 (3rd Cir 2003) ................. 175 Virginia Panel Corp v MAC Panel Co, 133 F3d 860 (Fed Cir 1997) ............................................ 169, 191 Warner-Jenkinson Co v Hilton Davis Chemical Co, 520 US 17 (1997) ................................................ 167 Weyerhaeuse Co v Ross-Simmons Hardwood Lumber Co, 127 S Ct 1069 (2007) ............................ 87, 88 Whittemore v Cutter, 29 F Cas 1120 (CCD Mass 1813) ...................................................................... 168 Windsurfing Inernational v AMF, Inc, 782 F2d 995 (Fed Cir 1986) .................................................... 169 Zenith Radio Corp v Hazeltine Research, 395 US 100 (1969) .............................................................. 195

Table of Legislation INTERNATIONAL TREATIES Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement) 1994 ......................................................................................4, 255, 257, 258, 263 Art 7 ................................................................................................................................................... 255 Art 8(2) ........................................................................................................................................ 255–57 Art 13 ................................................................................................................................................. 256 Art 30 ..................................................................................................................................116, 256, 257 Art 31 ..................................................................................................................................209, 256, 259 (1) .......................................................................................................................................... 209, 256 (k) .................................................................................................................................................. 257 Art 40 ......................................................................................................................................... 256, 257 (1) .......................................................................................................................................... 256, 257 (2) ...................................................................................................................................256, 257, 259 (3) .................................................................................................................................................. 257 (4) .................................................................................................................................................. 257 European Patent Convention 1973 ........................................................................................................ 17 Art 52(2) .............................................................................................................................................. 17 (3) ................................................................................................................................................ 17 Paris Convention for the Protection of Industrial Property 1883 Art 5A(2) ........................................................................................................................................... 206

EUROPEAN UNION Treaties Treaty Establishing the European Community 1957 .................................................................5, 35, 253 Art 3(1)(c) ........................................................................................................................................... 35 (g) .......................................................................................................................................... 35, 78 Treaty of Lisbon 2009 ......................................................................................................................... 5, 35 Treaty on the Functioning of the European Union 2010 ...........................................................5, 42, 253 Art 9 ..................................................................................................................................................... 37 Art 11 ................................................................................................................................................... 37 Art 18 ................................................................................................................................................. 104 Art 34 (ex Art 28 EC) .......................................................................................................................... 28 Art 36 (ex Art 30 EC) .................................................................................................................... 28, 29 Art 51 ................................................................................................................................................... 78 Art 101 (ex Art 81 EC) ..........................................................................................21, 28, 29, 35, 37–39, 42, 79, 92, 94, 99, 102, 133, 239, 242, 243, 251 (1) .......................................................................................................................................... 38, 92 (3) .........................................................................................................38, 39, 92–94, 160–62, 234

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Art 102 (ex Art 82 EC) ...................................................................... 5–7, 21–24, 28–30, 32, 35, 37, 39, 42, 43, 48, 49, 52, 53, 66, 68–82, 85, 87, 88, 90, 92–95, 99, 104, 107, 108, 125, 130, 131, 133, 137–40, 142, 143, 149, 151–153, 156, 159, 160, 162, 163, 194, 197, 200, 205, 206, 210–12, 214, 216–43, 247, 251, 253, 256, 261 (a) ...........................................................................................................................71, 73, 103, 240 (b) ............................................................................................................ 71, 73, 77, 103, 159, 218, 221, 231, 232, 240–42 (c) ...........................................................................................................71, 104, 219, 240–42, 246 (d) .......................................................................................................................................... 71, 80 Art 114 (ex Art 100a EC) .................................................................................................................... 28 Art 115 (ex Art 100 EC) ...................................................................................................................... 28 Art 147(2) ............................................................................................................................................ 37 Art 173 ................................................................................................................................................. 37 Art 345 (ex Art 295 EC) .............................................................................................................. 27, 205 Art 346(1)(b)....................................................................................................................................... 38 Art 352 (ex Art 235 EC) ...................................................................................................................... 28 Treaty on European Union 1993 .............................................................................................................. 5 Protocol ............................................................................................................................................... 78

Regulations 1963 Regulation 17/63 first Regulation implementing Arts 85 and 86 of the Treaty, JO 1962 204 Art 3 ................................................................................................................................................... 243 1994 Regulation 40/94 on the Community trade mark, OJ 1994 L11/1 .............................................. 28 1996 Regulation 240/96 on the application of Art 85(3) of the Treaty to certain categories of technology transfer agreements, OJ 1996 L31/2 ......................................................... 33 2000 Regulation 2659/2000 on the application of Art 81(3) of the Treaty to categories of research and development agreements (Block Exemption Regulation for Research and Development), OJ 2000 L304/7 ........................................................ 205 2001 Regulation 44/2001 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters (Brussels I), OJ 2001 L12/1 .................................... 43 2003 Regulation 1/2003 on the implementation of the rules on competition laid down in Arts 81 and 82 of the Treaty, OJ 2003 L1/1 .......................................................... 38, 247 Recital 5 ............................................................................................................................................... 94 Art 2 ..................................................................................................................................................... 94 Art 7(1) ...............................................................................................................................136, 242, 243 (2) .............................................................................................................................................. 243 Art 8(1) .............................................................................................................................................. 243 Art 9 ........................................................................................................................................... 200, 246 Art 24 ................................................................................................................................................. 244 (1) .................................................................................................................................................. 244 (2) .................................................................................................................................................. 245 2004 Regulation 139/2004 on the control of concentrations between undertakings (Merger Regulation), OJ 2004 L375/35 ....................................................................................... 42, 92 Art 2(3) ................................................................................................................................................ 23 (4) ................................................................................................................................................ 23 2004 Regulation 772/2004 on the application of Art 81(3) of the Treaty to categories of technology transfer agreements (TTBER), OJ 2004 L123/11 ........................................................................................................21, 29, 33, 34, 205 Art 1(1)(e) ............................................................................................................................................. 2

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Directives 1991 Directive 91/250 on the legal protection of computer programs (Software Directive), OJ 1991 L122/42 .................................................................................14, 17, 126 Recitals 10–12.................................................................................................................................... 125 Recital 23 ........................................................................................................................................... 126 Recital 24 ........................................................................................................................................... 126 Recital 26 ........................................................................................................................................... 126 Art 1(2) ................................................................................................................................................ 17 Art 6 ........................................................................................................................................... 126, 213 Art 9(1) .............................................................................................................................................. 126 1993 Directive 93/98 harmonizing the term of protection of copyright and certain related rights, OJ 1993 L290/9 ......................................................................................... 14, 16 1996 Directive 96/9 on the legal protection of databases (Database Directive), OJ 1996 L77/20 ......................................................................................................................14, 18, 215 Recital 47 ..................................................................................................................................... 18, 213 Art 3 ..................................................................................................................................................... 18 Art 7 ........................................................................................................................................... 215, 216 (1) .....................................................................................................................................18, 162, 215 Art 10(1) .............................................................................................................................................. 18 1998 Directive 98/44 on the legal protection of biotechnological inventions, OJ 1998 L213/13 ......................................................................................................................... 14, 209 Art 12 ................................................................................................................................................. 209 1998 Directive 98/71 on the legal protection of designs, OJ 1998 L289/28 Art 7(2) .............................................................................................................................................. 134 Art 14 ................................................................................................................................................. 134 2001 Directive 2001/29 on the harmonization of certain aspects of copyright and related rights in the information society, OJ 2001 L167/10 ...................................................... 14 2002 Directive 2002/19 on access to, and interconnection of, electronic communications networks and associated facilities (Access Directive), OJ 2002 L108/7 Art 5(1)(a) ......................................................................................................................................... 102 2004 Directive 2004/27 on the Community code relating to medicinal products for human use, OJ 2004 L136/34 Art 1(8) .............................................................................................................................................. 203

Recommendations 2003 Recommendation 2003/311 on relevant product and service markets within the electronic communications sector, OJ 2003 L114/45 ................................................... 158

Commission Notices Consolidated Jurisdictional Notice under Council Regulation 139/2004 on the control of concentrations between undertakings, OJ 2008 C95/1 para 24 ................................................................................................................................................. 23 para 26 ................................................................................................................................................. 23 Guidance on the Commission’s enforcement priorities in applying Art 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, OJ 2009 C45/7 ......................................................................................................................69, 219, 225 para 23 ................................................................................................................................................. 88 para 24 ............................................................................................................................................... 228 para 26 ............................................................................................................................................... 236

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para 30 ......................................................................................................................................... 39, 234 paras 63–74 ....................................................................................................................................... 236 para 64 ............................................................................................................................................... 236 para 67 ............................................................................................................................................... 236 para 74 ................................................................................................................................................. 97 para 75 ......................................................................................................................................... 49, 218 para 77 ............................................................................................................................................... 239 para 79 ............................................................................................................................................... 224 para 80 ....................................................................................................................................... 228, 237 para 81 ............................................................................................................................................... 238 para 83 ............................................................................................................................................... 228 para 84 ......................................................................................................................................... 39, 223 para 85 ......................................................................................................................................... 39, 228 para 86 ............................................................................................................................................... 235 para 87 ............................................................................................................................................... 233 para 89 ............................................................................................................................................... 234 para 90 ............................................................................................................................................... 234 Guidelines on the application of Art 81 of the EC Treaty to technology transfer agreements, OJ 2004 C101/2 .................................................................................................33, 66, 152 para 4.2 ................................................................................................................................................ 21 para 4.3 ................................................................................................................................................ 21 para 5 ............................................................................................................................................. 34, 36 para 6 ................................................................................................................................................. 250 para 7 ................................................................................................................................................... 34 para 9 ................................................................................................................................................... 65 para 13 ................................................................................................................................................. 36 para 21 ................................................................................................................................................... 2 para 22 ................................................................................................................................................... 2 para 25 ............................................................................................................................................... 118 Guidelines on the application of Art 81(3) of the Treaty, OJ 2004 C101/97 ....................................... 92 para 42 ................................................................................................................................................ 38 para 43 ................................................................................................................................................. 38 Guidelines on the assessment of horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ 2004 C31/5 .................... 23 para 70 ............................................................................................................................................... 155 para 74 ............................................................................................................................................... 158 Guidelines on the assessment of non-horizontal mergers under the Council Regulation on the control of concentrations between undertakings, OJ 2008 C265/6 paras 31–57 ......................................................................................................................................... 96 Guidelines on vertical restraints, OJ 2000 C291/1 para 7 ................................................................................................................................................... 36 Notice on the definition of the relevant market for the purposes of Community competition law, OJ 1997 C372/5 ............................................................................... 151 para 19 ............................................................................................................................................... 152

NATIONAL LEGISLATION Canada Competition Act 1985 s 32 ....................................................................................................................................................... 23

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China Anti-Monopoly Law 2008 Art 55 ................................................................................................................................................. 254

France Intellectual Property Code 1992 Art L613–5(b) ................................................................................................................................... 208 Art L613–15....................................................................................................................................... 122

Germany Copyright Act (Urheberrechtsgesetz) .......................................................................................16, 212, 213 §§ 1–2 .................................................................................................................................................. 16 § 2(2) ................................................................................................................................................. 212 § 3 ...................................................................................................................................................... 212 § 4(2) ................................................................................................................................................. 214 § 11 ...................................................................................................................................................... 16 § 15 .................................................................................................................................................... 212 § 15–22 ................................................................................................................................................ 16 § 23(1) ............................................................................................................................................... 212 (2) .............................................................................................................................................. 213 § 24(1) ............................................................................................................................................... 213 § 42a................................................................................................................................................... 213 § 44a–63a........................................................................................................................................... 213 § 55a................................................................................................................................................... 213 § 64 ...................................................................................................................................................... 16 § 69a(2) ............................................................................................................................................... 17 § 69e................................................................................................................................................... 213 § 87a et seq ..........................................................................................................................18, 213, 215 § 87b(1) ............................................................................................................................................. 215 § 87c................................................................................................................................................... 213 § 97 .................................................................................................................................................... 212 Patent Act (Patentgesetz) .................................................................................. 15, 122, 123, 206, 210, 211 § 1 ........................................................................................................................................................ 15 (1) .................................................................................................................................................. 210 § 9 ................................................................................................................................................ 15, 206 § 11(2) ............................................................................................................................................... 207 (2b) ................................................................................................................................................ 203 § 14 .................................................................................................................................................... 206 § 15(2) ............................................................................................................................................... 206 § 16(1) ................................................................................................................................................. 15 § 19 .................................................................................................................................................... 210 § 20 .................................................................................................................................................... 210 § 24 .............................................................................................................................206, 208, 210, 213 (1) .......................................................................................................................................... 209, 210 (2) .......................................................................................................................................... 209, 210 § 139 .................................................................................................................................................. 207 Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) § 17 ...................................................................................................................................................... 27

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§ 19 ............................................................................................................................................ 211, 212 § 20 .....................................................................................................................................210, 211, 212 § 33 .................................................................................................................................................... 211 Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb)................................ 16, 215 § 3 ...................................................................................................................................................... 215 § 4(9) ................................................................................................................................................. 215 (10) ................................................................................................................................................ 215 § 17 .............................................................................................................................................. 16, 217 § 19 .............................................................................................................................................. 16, 217

United Kingdom 1623 Statute of Monoploies (c 3) ............................................................................................................. 8 1977 Patent Act (c 37) s 60(5) ................................................................................................................................................ 208 1990 Broadcasting Act (c 42)................................................................................................................ 229

United States Legislation 17 USC § 101 ........................................................................................................................................... 18 § 102(a) ............................................................................................................................................... 16 (b) ................................................................................................................................................ 17 § 106 .................................................................................................................................................... 16 § 117 .................................................................................................................................................... 17 § 302(a) ............................................................................................................................................... 16 § 501 ............................................................................................................................................ 16, 173 35 USC § 100(d) ............................................................................................................................................. 166 § 101 .................................................................................................................................................... 15 §§ 101–03 ............................................................................................................................................ 15 § 154(a)(2) .......................................................................................................................................... 15 § 271(a) ....................................................................................................................................... 15, 167 § 281 .................................................................................................................................................. 171 § 283 .................................................................................................................................................. 171 § 284 .................................................................................................................................................. 171 § 502 .................................................................................................................................................. 173 § 504 .................................................................................................................................................. 173 Atomic Energy Act 1954 ....................................................................................................................... 168 Clayton Act 1914 ..................................................................................................................................... 23 § 7 ........................................................................................................................................................ 23 Clean Air Act ......................................................................................................................................... 168 Constitution Art I § 8 cl 8 ......................................................................................................................................... 45 Copyright Act 1976 ......................................................................................................................... 172–75 § 103(a) ............................................................................................................................................. 173 § 106 .................................................................................................................................................. 172 § 107 .................................................................................................................................................. 173 § 111(d) ............................................................................................................................................. 173 § 115 .................................................................................................................................................. 173 § 116 .................................................................................................................................................. 173 § 1201(f) ............................................................................................................................................ 174

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Digital Millennium Copyright Act 1998 .............................................................................................. 174 Foreign Trade Antitrust Improvements Act 1982 (FTAIA) .................................................................. 41 § 1(A)................................................................................................................................................... 41 Leahy-Smith America Invents Act 2011 ......................................................................................... 15, 250 Patent Act 1952........................................................................................................................ 166–73, 182 § 271(d) ..................................................................................................................................... 190, 191 (4) ...................................................................................................................................... 170, 190 (5) ...................................................................................................................................... 169, 182 (e)(1) ..................................................................................................................................... 169, 203 Patent Misuse Reform Act .................................................................................................................... 170 Robinson-Patman Act 1936.......................................................................................................... 104, 194 § 2(a) ................................................................................................................................................. 103 Sherman Act 1890 ......................................................................................................................35, 42, 178 § 1 ................................................................................................................... 21, 99, 102, 183, 195, 196 § 2 ...................................................................................................... 5–7, 21–24, 32, 41, 42, 66, 68–77, 79–82, 84, 85, 87, 90–92, 95, 99, 103, 107, 125, 131, 133, 136, 137, 139, 142, 149, 152, 153, 155, 159, 160, 162, 163, 166, 176–78, 183–85, 187, 189, 190, 192–97, 200–04, 217, 237, 250, 252, 253, 261, 262 § 6a....................................................................................................................................................... 41 (1)(A) .............................................................................................................................................. 41 (2) .................................................................................................................................................... 41 Uniform Trade Secrets Act 1979 § 1(2) ................................................................................................................................................... 16 (4) .................................................................................................................................................... 15 Uruguay Round Agreements Act 1994 s 102(a)(1) ......................................................................................................................................... 257

Guidelines Antitrust Enforcement Guidelines for International Operations 1995 3.121 .................................................................................................................................................... 41 Antitrust Guidelines for the Licensing of Intellectual Property 1995 ........................................................................................... 21, 33, 46, 117, 156, 177, 194 1.0 ........................................................................................................................................................ 33 2.1 ........................................................................................................................................................ 65 2.2 .......................................................................................................................................157, 177, 182 3.2 .......................................................................................................................................................... 2 3.2.1 ....................................................................................................................................................... 2 3.2.2 ............................................................................................................................................... 2, 157 3.2.3 ........................................................................................................................................2, 117, 118 4.1.2 ................................................................................................................................................... 194 5.1 ........................................................................................................................................................ 21 5.2 ........................................................................................................................................................ 21 5.3 ........................................................................................................................................................ 21 5.4 ........................................................................................................................................................ 21 5.5 ................................................................................................................................................ 21, 196 5.5–5.7 ............................................................................................................................................... 194 5.6 ........................................................................................................................................................ 21

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Final Computer Related Examination Guidelines of the US Patent and Trademark Office 1996 ....................................................................................................................... 17 Horizontal Merger Guidelines 1992 3.2 ...................................................................................................................................................... 158 Horizontal Merger Guidelines 1997 1 ......................................................................................................................................................... 152 1.11 .................................................................................................................................................... 152 Horizontal Merger Guidelines 2010............................................................................................. 152, 158 Non-Horizontal Merger Guidelines 1984 4.211 .................................................................................................................................................... 97

1 Introduction Joseph Schumpeter … may have been right when he wrote that monopoly profits are ‘the baits that lure capital on untried trails’. But when monopolists have the power to block those trails competition law needs to intervene. Harry First1

Innovation processes generate new knowledge which can be used as a resource.2 Competition is one of the drivers for the generation and diffusion of such knowledge.3 It has even been characterised primarily as a procedure for discovering previously unknown knowledge.4 At the same time, post-innovation competition, in particular by imitation, may endanger the recoupment of investments into innovation and thereby reduce ex ante incentives to innovate. In market-based economies, the latter insight serves as a justification for intellectual property (IP) laws barring post-innovation competition by imitation, and antitrust policy takes into account this incentive function of IP. What has been neglected in the relationship between IP and antitrust policies until recently, however, is that new or improved technologies or products may have to build on prior innovation which may be protected by IP.5 Follow-on innovation may thus require access to IP on initial innovation. A holder of such initial IP with market power may have the ability and the incentive to foreclose dynamic competition. Therefore, in addition to the links between pre- and post-innovation competition and initial innovation, IP and antitrust policies in their interplay also need to account for the cumulativeness of innovation.

1.1

THE PREVIOUS FOCUS ON INITIAL INNOVATION

For some time, the relationship between IP and antitrust policies has been framed primarily around the Schumpeterian hypothesis that supra-competitive profits, or, more generally, lucrative post-innovation appropriability conditions, are ‘the baits that lure capital on

1 First (2007), ‘Strong Spine, Weak Underbelly: The CFI Microsoft Decision’, New York University Law and Economics Working Papers 129, p 4, quoting Schumpeter (1947), Capitalism, Socialism and Democracy, pp 89–90. 2 For an early definition of innovation see Schumpeter (1912), Theorie der Wirtschaftlichen Entwicklung; first English translation: (1934), The Theory of Economic Development; (2004), 10th edn, p 66. 3 See Arrow (1962), ‘Economic Welfare and the Allocation of Resources for Invention’ in Nelson (ed), The Rate and Direction of Inventive Activity, pp 609–26; Baumol (2002), The Free-Market-Innovation Machine: Analyzing the Growth Miracle of Capitalism, in particular at pp 286–87, and in more detail below at 2.4.1.3. 4 See the speech ‘Competition as a Discovery Procedure’ given by Hayek in Chicago, 29 March 1968, and, similarly, that given in German under the title ‘Der Wettbewerb als Entdeckungsverfahren’ in Kiel, 5 July 1968. 5 See eg Scotchmer (1991), ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law’, 5 Journal of Economic Perspectives 29; Merges & Nelson (1990), ‘On the Complex Economics of Patent Scope’, 90 Columbia Law Review 839.

2

INTRODUCTION

untried trails’.6 This view may be paraphrased using antitrust terminology for markets in the innovation chain,7 as follows: — innovation markets, which consist of research and development (R&D) directed at particular new or improved products or processes, and the close substitutes for that research and development;8 — technology markets, which consist of the IP and its close substitutes;9 and — product markets, both for intermediate and final products made using the IP, and for products which are used as inputs, together with the IP, in the creation of other products.10 Accordingly, IP may in particular bar post-innovation competition by imitation (ie static competition) on product markets to provide for sufficient ex ante incentives to innovate. These incentives may induce dynamic competition in the form of entry in particular (i) on innovation markets, (subsequently) (ii) on technology markets by introducing IP on new or improved products or processes, and/or (iii) on product markets with new or improved products. In particular, two strands of economic theory offer to some extent competing explanations for the relationship between static and dynamic competition. In terms of neoclassical welfare economics, post-innovation static competition and, accordingly, allocative efficiency should be sacrificed to provide for sufficient ex ante incentives to innovate and thus ‘dynamic efficiency’ if the utility11 added through innovation outweighs allocative losses.12 Utility from innovation stems from the invention and commercial introduction of new or improved products and processes. Such products and processes enhance welfare by generating new market options, by increasing the quality of products and by promoting growth

6 Similarly, Schumpeter ((1942), Capitalism, Socialism and Democracy, p 83) found that ‘[a] system—any system, economic or other—that at every point in time fully utilizes its possibilities to the best advantage may yet in the long run be inferior to a system that does so at no given point in time, because the latter’s failure to do so maybe a condition for the level or speed of long-run performance’. 7 US Antitrust Guidelines for the Licensing of Intellectual Property, issued by the DoJ and the FTC in 1995, at 3.2. This distinction according to relevant antitrust markets differs from the ‘macro’ terminology introduced by von Weizsäcker ((1981), ‘Rechte und Verhältnisse in der modernen Wirtschaftslehre’, 34 Kyklos 345 (English translation: (1984), ‘Rights and Relations in Modern Economic Theory’, Journal of Economic Behavior and Organization 133), who distinguishes between the levels of innovation, production and goods. 8 US Antitrust Guidelines for the Licensing of IP, at 3.2.3. See in more detail below at 4.4. The notion of ‘products’ comprises both goods and services (see also Regulation (EC) No 772/2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements, Art 1(1)(e)). The US Antitrust Guidelines for the Licensing of IP (at 3.2.1) use the notion of ‘goods markets’. 9 See the US Antitrust Guidelines for the Licensing of IP, at 3.2.2, and the similar definition of technology markets in the Commission’s Guidelines on the application of Article 81 EC of the EC Treaty to technology transfer agreements, para 22. 10 See the US Antitrust Guidelines for the Licensing of IP, at 3.2.2. See also the European Commission’s Guidelines on the application of Article 81 EC of the EC Treaty to technology transfer agreements, para 21. 11 More precisely: the discounted net present value of such utility. See Schmidtchen (2007), ‘Die Beziehung zwischen dem Wettbewerbsrecht und dem Recht geistigen Eigentums—Konflikt, Harmonie oder Arbeitsteilung?’ in Oberender (ed), Wettbewerb und geistiges Eigentum, pp 9–46. 12 See eg the analysis of Kaplow (1984), ‘The Patent-Antitrust Intersection: A Reappraisal’, 97 Harvard Law Review 1813 and Hirshleifer (1971), ‘The Private and Social Value of Information and the Reward to Inventive Activity’, 61 American Economic Review 561, at 571. See also OECD (1989), Competition Policy and Intellectual Property Rights, p 101: the ‘short-run misallocation is the price that has to be paid to secure an improved longterm dynamic resource efficiency through an optimal level of innovative activity’.

1.1

THE PREVIOUS FOCUS ON INITIAL INNOVATION

3

through increased productive efficiency.13 In terms of evolutionary economics,14 the process of innovation, by its very nature, defies prediction and thus static equilibrium analysis of the ‘optimal’ amount and velocity of technological progress. On this view, the notion of ‘dynamic efficiency’ therefore cannot be defined with the same precision as ‘allocative efficiency’, but can serve as ‘shorthand’ for the dynamic effects of competition and thus for innovation.15 According to evolutionary economics, dynamic competition is characterised by trial and error as well as by successful innovation and imitation.16 Correspondingly, the multiplicity and diversity of parallel trials of firms and thus of innovation paths may be essential for both the effectiveness of competition as a discovery procedure and innovation.17 At the same time, temporary protection against imitation on product markets may be necessary to induce the necessary entry and competition in particular on innovation markets. Irrespective of the underlying theoretical economic paradigm, there is consensus nowadays that dynamic efficiency generally is more important than static efficiency and that competition policy18 should be guided by this insight.19 As Easterbrook has pointed out poignantly, ‘an antitrust policy that reduced prices by 5 percent today at the expense of reducing by 1 percent the annual rate at which innovation lowers the costs of production would be a calamity. In the long run a continuous rate of change, compounded, swamps static losses.’20 Accordingly, innovation concerns have risen on the agendas of competition authorities.21 Innovation has become a parameter of antitrust policy on its own aside from price, quantity and quality, although it could be integrated under a sufficiently long time horizon into the classic three parameters. In both the US and the EU—today the two biggest jurisdictions and markets with a profound history of competition policy—legislators, competition authorities and courts, albeit at varying degrees and in varying ways, have at

13 See eg Ordover (1985), ‘Economic Foundations and Considerations in Protecting Industrial and Intellectual Property’, 53 Antitrust Law Journal 503, at 505. 14 See eg Nelson & Winter (1982), An Evolutionary Theory of Economic Change; Kerber (1994), Evolutorischer Wettbewerb—Zu den theoretischen und institutionellen Grundlagen der Wettbewerbsordnung. 15 Kerber (2009), ‘Should Competition Law Promote Efficiency?—Some Reflections of an Economist on the Normative Foundations of Competition Law’ in Drexl et al (eds), Economic Theory and Competition Law, pp 93–120. 16 See in particular Clark (1961), Competition as a Dynamic Process. 17 Kerber (2010), ‘Competition, Innovation and Maintaining Diversity through Competition Law’, Research Paper, p 2; Farrell (2006), ‘Complexity, Diversity, and Antitrust’, 51 Antitrust Bulletin 165. 18 The notion of ‘competition policy’ comprises both EU competition and US antitrust policy. The notion of ‘antitrust laws’ comprises both US antitrust and EU competition law. In other respects, the terms ‘antitrust’ and ‘competition’ will be used interchangeably. 19 See eg Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 275. For an overview of theories of dynamic competition and dynamic efficiency see Ellig & Lin (2004), ‘A Taxonomy of Dynamic Competition Theories’ in Ellig (ed), Dynamic Competition and Public Policy: Technology, Innovation, and Antitrust Issues, pp 16–44. 20 Easterbrook (1992), ‘Ignorance and Antitrust’ in Jorde & Teece (eds), Antitrust, Innovation, and Competitiveness, pp 119–36, at pp 122–23. Similarly, see Areeda (1992), ‘Antitrust Law as Industrial Policy: Should Judges and Juries Make It?’ in Jorde & Teece (eds), Antitrust, Innovation, and Competitiveness, pp 29–46, at p 31: ‘At least since Schumpeter wrote nearly fifty years ago, innovation has been thought to contribute far more to our well-being than keeping prices closer to costs through competition.’ But see Brunell (2001), ‘Appropriability in Antitrust: How Much is Enough?’, 69 Antitrust Law Journal 1, at 20: ‘Acknowledging that the long-term welfare effects of dynamic efficiency gains are far more significant that short-term allocative efficiency gains does not mean that any possible diminution in incentives, no matter how remote, ought to trump significant and certain short-term gains.’ 21 See eg Gilbert & Tom (2001), ‘Is Innovation King at the Antitrust Agencies? The Intellectual Property Guidelines Five Years Later’, 69 Antitrust Law Journal 43.

4

INTRODUCTION

least modified the application of antitrust rules to pay deference to IP rights. This applies even in those cases where the exercise of IP rights allows or protects the exploitation of significant market and even monopoly power.

1.2

THE NEED TO ACCOUNT FOR FOLLOW-ON INNOVATION

Fostering innovation has become a central goal within many public policies, not only IP and competition policies. From an economic perspective, there are good reasons to accord innovation such priority: First, much more than labour and capital intensity, technological progress is the most important driver of economic growth.22 Second, knowledge generates increasing returns, which may offset diminishing returns inherent in input accumulation.23 Third, due to large spillovers, the social return on investment in R&D is much higher than its private return.24 Based on the assumption that more IP leads to more innovation in their territory, legislators in many countries have expanded IP rights. In addition, the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS)25 has led to an expansion of IP protection. The number of IP rights, in particular of patents, due to the accumulation of strategic portfolios by firms, as well as IP litigation, has increased significantly.26 This development has even been dubbed the ‘second enclosure movement’.27 However, while IP expansion might increase the incentives for initial innovation, at the same time it may raise the costs of potential follow-on innovation. This may happen in particular if a potential new or improved process or product builds on existing IP-protected technology.28 Indeed, ‘innovations are rarely the dramatic breakthroughs that Schumpeter may have had in mind but rather small improvements in a new process or product in which genuine novelty and imitation-with-a-difference shade imperceptibly into one another’.29 In particular, for such more incremental than radical innovation, the follow-on innovator or improver may need to have a licence for the initial IP-protected innovation to do research or to market his follow-on innovation or improvement.30 This applies specifically to software, where innovation is often cumulative. And this generally

22 See Solow (1956), ‘A Contribution to the Theory of Economic Growth’, 70 Quarterly Journal of Economics 65, who found that between 1909 and 1949 gains from labour and capital intensity accounted for only one-eighth of US GNP growth, while the remaining seven-eighths could be attributed to technological progress. 23 See (the formalisation by) Romer (1990), ‘Endogenous Technological Change’, 98 Journal of Political Economy S71. 24 See eg Griliches (1992), ‘The Search for R&D Spillovers’, 94 Scandinavian Journal of Economics S29. 25 The TRIPS Agreement is Annex 1C of the Marrakesh Agreement Establishing the World Trade Organization, signed in Marrakesh, Morocco, 15 April 1994. 26 See First (2007), ‘Controlling the Intellectual Property Grab: Protect Innovation, Not Innovators’, 38 Rutgers Law Journal 365 (‘Intellectual property law is out of control’). For a description of and reasons for the ‘patent explosion’ and the ‘patent litigation explosion’ in the US see eg Jaffe & Lerner (2004), Innovation and its Discontents, pp 9–16. For an analysis of strategic patenting see the report by Harhoff et al (2007), The Strategic Use of Patents and its Implications for Enterprise and Competition Policies. 27 Boyle (2003), ‘The Second Enclosure Movement and the Construction of the Public Domain’, 66 Law & Contemporary Problems 33. 28 See eg Scotchmer (2004), Innovation and Incentives, pp 127–59. 29 Blaug (1997), Not Only an Economist, p 110. 30 ‘Improvement’ is understood broadly as anything that enhances the options of users. The notion has been introduced by Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989. See also below at 7.1.

1.3

THE REGULATORY PROBLEM AND THE POLICY LEVERS

5

continues to hold as technologies become increasingly complex and products require ever more specialised inputs.31 Thus, setting the relevant IP and antitrust policy levers requires not only accounting for the consequences on dynamic efficiency generated by initial innovation and for static efficiency in particular on product markets; it is also essential to account for the effects on dynamic efficiency that might be generated by follow-on innovation. This insight has already led particular institutions in the US to re-think IP systems32 and the IP/antitrust interface.33 Both IP and antitrust rules attempt to balance the rights of initial and follow-on innovators, improvers and competitors. Particularly by defining the bargaining positions of the different actors, these rules form part of the framework for cumulative innovation which should provide for sufficient ex ante incentives for initial and follow-on innovators and improvers and, at the same time, minimise distortions of competition on the markets in the innovation chain. What role antitrust rules and in particular anti-monopolisation and abuse of dominance law rules—ie section 2 of the Sherman Act34 and Article 102 TFEU (ex Article 82 EC)35—have to play in this framework, is the subject of this book.

1.3

THE REGULATORY PROBLEM AND THE POLICY LEVERS

A paradigmatic situation where the intricacy of the relationship between the incentives for initial and follow-on innovation and improvements as well as post-innovation static efficiency becomes evident is that of a unilateral refusal to deal based on IP rights by a firm with significant market power—in particular a refusal to license IP36 by a firm with such a position on the technology market. Such refusal may have foreclosure effects in particular (i) on follow-on innovation markets, if the firm seeks the licence to do research, and (ii) on product markets, if the firms seeks the licence to market a—potentially new or improved—product. To limit potential competitive concerns and to account for the rights of follow-on innovators, improvers and competitors, IP laws—unlike laws on tangible property—provide various policy levers, such as: the bar for protection, the scope and length of protection, the principle of exhaustion, research exemptions, compulsory licensing regimes to

31 Boldrin & Levine (2005), ‘Intellectual Property and the Efficient Allocation of Social Surplus from Creation’, 2 Review of Economic Research on Copyright Issues 45, at 61–62. See also Heller & Eisenberg (1998), ‘Can Patents Deter Innovation? The Anticommons in Biomedical Research’, 280 Science 698. 32 See the 2005 Report of the National Academy of Sciences Committee on Intellectual Property Rights in the Knowledge-Based Economy, A Patent System for the 21st Century. For an academic contribution to the debate see Shapiro (2004), ‘Patent System Reform: Economic Analysis and Critique’, 19 Berkeley Technology Law Journal 1017. 33 See the two reports based on extensive hearings held by the FTC and the DoJ in 2002: FTC (2003), To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, which focuses on the patent system; and DoJ & FTC (2007), Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, which focuses on the role of antitrust policy. 34 Here in after abbreviated as ‘§ 2 Sherman Act’. 35 Since the entry into force of the Lisbon Treaty, 1 December 2009, which amended the Treaty on European Union and the Treaty Establishing the European Community, the former Art 82 EC is now contained in Art 102 of the Treaty on the Functioning of the European Union (TFEU). Only the notion of ‘common market’ has been replaced by ‘internal market’ (as throughout the whole Lisbon Treaty). The TFEU replaces the EC Treaty, while the revised Treaty on European Union (TEU) partly takes over function of the old Treaty on European Union. 36 Another scenario would be the refusal to supply a product if the refusal is based on an IP right.

6

INTRODUCTION

grant dependency licences, the right to reverse engineer and decompile software, misuse doctrines, as well as the potential substitution of the property for a liability rule under certain conditions. Aside from misuse doctrines under US IP laws, however, none of these ‘internal’ levers is based on a detailed assessment of market power of the entity exercising the IP right and of the effects on competition. In such cases, an obligation to license under anti-monopolisation and abuse of dominance provisions runs into the well-known conflict with the exclusivity right of the IP holder to choose whether and to whom to give a licence as the very essence or ‘subject matter’ of his IP. In a nutshell, the position under § 2 Sherman Act and Article 102 TFEU regarding a refusal to license may be relevant in three basic scenarios. First, if a dominant IP owner refuses to license his IP to a person or entity requesting such a licence, the latter may initiate an antitrust action before a court, claiming that the IP owner has an obligation to license his IP under § 2 Sherman Act or Article 102 TFEU (private enforcement of antitrust as ‘sword’). Second, alternatively, the person or entity seeking the licence may also complain to a competition authority to initiate proceedings, which may result in an order to license the IP (public enforcement of antitrust as ‘sword’). Third, if the person or entity, without a licence, infringes the IP owner’s rights, the latter may initiate an infringement action, against which the infringer may invoke an obligation to license under the antitrust laws as a defence (private enforcement of antitrust as ‘shield’). A potential role for anti-monopolisation and abuse of dominance laws—and in particular of the essential facilities doctrine—could be to complement IP laws by preventing the foreclosure of dynamic competition by dominant firms. The Magill37 and IMS Health38 judgments of the European Court of Justice (ECJ), which involved a weak copyright and a protection of a de facto standard, show, however, that antitrust rules may also be (ab)used as a corrective device where a general cut-back of over-broad IP protection would be preferable. Judging antitrust rules according to their effect on incentives to innovate and on competition thus not only requires assessing their substantive functioning, but also whether they are consistent with an efficient allocation of tasks between IP and competition policy.

1.4

METHODOLOGY AND STRUCTURE

The transatlantic debate on the IP/antitrust interface takes place against the background of the attempt to generate a paradigm shift in EU competition policy towards a ‘more economic’ or ‘effects-based’ approach and, ultimately, the adoption of consumer welfare as its sole goal. While such a tectonic shift would give rise to an expectation of further convergence of EU and US competition policies, the divide over the rules on refusals to deal has essentially widened:39 in the EU, the Court’s jurisprudence in Magill, IMS Health and

37 Decision 89/205/EEC, Magill TV Guide, OJ 1989 L78/43; appealed to the CFI: Cases T-69/89, 70/89 and 76/89, [1991] ECR II-485, 535 and 575; further appealed to the ECJ: Joined Cases C-241/91 P and C-242/91 P, Raidió Teilifís Éireann (RTÉ) and Independent Television Publications (ITP) v Commission [1995] ECR 743 (the ECJ’s judgment will be cited as ‘Magill’). 38 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039 (‘IMS Health’). 39 See in the same vein Fox (2006), ‘Monopolization, Abuse of Dominance, and the Indeterminacy of Economics: The US/EU Divide’, 3 Utah Law Review 725, in particular at 734–35; Kovacic (2009), ‘Competition

1.4

METHODOLOGY AND STRUCTURE

7

Microsoft has established a role for Article 102 TFEU in situations where a refusal to license prevents the marketing of a new product. Conversely, the US Supreme Court in its Trinko judgment,40 in particular by embracing a Hayekian philosophy, has made clear that a unilateral refusal to deal will rarely ever give rise to liability under § 2 Sherman Act. Although the case concerned tangible property, the arguments used by the Court can be applied a fortiori to intellectual property. This book challenges the mainstream assumption that IP and antitrust laws share the same goal of enhancing consumer welfare. Instead, it uses positive economic analysis in a consequentialist tradition based on the assumption of the bounded rationality41 of market actors to compare existing IP and antitrust levers in the two jurisdictions.42 This comparative institutional perspective also enables us to explain the differences between the US and the EU approaches vis-à-vis refusals to supply based on IP in terms of different beliefs with regard to competition, different economic interests, and a different allocation of legislative competencies in the field of IP in the two jurisdictions. In addition, policy recommendations on the division of tasks between IP and antitrust with regard to cumulative innovation and dynamic competition are developed. In order to explore the abovementioned issues, this book follows a top-down research agenda: chapter two analyses the general relationship between IP and antitrust laws in the US and the EU and develops some meta rules and principles vis-à-vis the IP/antitrust interface. Focusing on unilateral conduct, chapter three assesses the standards which are and may be used under § 2 Sherman Act and Article 102 TFEU to determine anti-competitive exclusionary behaviour. Concentrating on refusals to deal, chapter four categorises the different types of refusals based on IP and suggests IP and competition rules that should govern them. For specific types of refusals, the chapter recommends an essential facilities type of test. Providing the building blocks for just such an essential facilities test, chapter five addresses the question of which pricing methodology could be used to determine liability for refusals to deal based on IP, as well as remedies. Chapter six proposes in detail an essential facilities rule aimed at preventing anti-competitive foreclosure arising from a refusal to supply. The suggested essential facilities rule differentiates between refusals based on tangible and refusals based on intellectual property. In the light of the previous analysis, chapters seven and eight analyse the state of US and European IP and antitrust laws with regard to refusals to supply based on IP which may impede follow-on innovation. Chapter nine compares the two different frameworks and attempts to explain the differences as a result of different beliefs, interests and constitutions in the two jurisdictions. Chapter ten concludes by summarising the results of each of the previous chapters in brief statements.

Policy in the European Union and the United States: Convergence or Divergence?’ in Vives (ed), Competition Policy in the EU—Fifty Years from the Treaty of Rome, pp 314–43, at pp 324–25. 40

Verizon Communications Inc v Law Offices of Curtis v Trinko, LLP, 540 US 398, 124 S Ct 872. See eg Selten (2002), ‘What is Bounded Rationality?’ in Gigerenzer & Selten (eds), Bounded Rationality—The Adaptive Toolbox, pp 13–36. See in more detail below at 2.4.1.2. 42 For an analysis of the problem of ‘unintended consequences’ under normative economic theory and an outline of a methodology for a positive economic theory of law see Kirchner (1997), Ökonomische Theorie des Rechts. 41

2 The Relationship between IP and Antitrust Laws … all monopolies and all commissions, grants, licenses, charters, and letters patents… for the sole buying, selling, making, working, or using of anything within this realm… are and shall be utterly void and of none effect, and in no wise to be put in ure or execution. … (a)… any declaration before mentioned shall not extend to any letters patents (b) and grants of privilege for the term of fourteen years or under, hereafter to be made, of the sole working or making of any manner of new manufacturers within this realm (c) to the true and first inventor (d) and inventors of such manufactures, which others at the time of making such letters patents and grants shall not use (e), so as also they be not contrary to the law nor mischievous to the state by raising prices of commodities at home, or hurt of trade, or generally inconvenient… English Statute of Monopolies of 1623

As has been pointed out with regard to the English Statute of Monopolies cited above, intellectual property and competition concerns ‘were born side by side’:1 on the one hand, the Statute generally bans monopolies;2 on the other, it exempts patents for inventions under certain conditions. IP laws provide legal barriers to entry, while antitrust laws aim at keeping the competitive process open. As a consequence, their relationship raises difficult questions of how to balance the rights of innovators, competitors, licensees and follow-on innovators. In the attempt to solve these intricate problems, an enormous amount of scholarly literature and a large body of case law have led to the intersection of the two bodies of law—dubbed as ‘IP and antitrust’—growing into a field of its own.3 Approaches

1 Maurer & Scotchmer (2004), ‘Profit Neutrality in Licensing: The Boundary between Antitrust Law and Patent Law’, NBER Working Paper No 10546, p 1. 2 The Statute, however, was not an antitrust law in the modern sense. Its primary concern was the cutback of public privileges and restrictions of competition to grant freedom of trade (see Heinemann (2002), Immaterialgüterschutz in der Wettbewerbsordnung, p 36). 3 For an overview of the IP/antitrust interface see eg Anderman (2007), ‘The Competition Law/IP “Interface”: An Introductory Note’ in Anderman (ed), The Interface between Intellectual Property Rights and Competition, pp 1–34. For an overview from a US perspective see the standard treatise by Hovenkamp et al (2004), IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law. See also Peritz (2007), ‘Competition Policy and its Implications for Intellectual Property Rights in the United States’ in Anderman (ed), The Interface between Intellectual Property Rights and Competition Policy, pp 125–249; ABA (2007), Intellectual Property and Antitrust Handbook; Myers (2007), The Intersection of Antitrust and Intellectual Property; Carrier (2009), Innovation for the 21st Century: Harnessing the Power of Intellectual Property and Antitrust Law. For a European perspective see Anderman (1998), EC Competition Law and Intellectual Property Rights—The Regulation of Innovation; Anderman & Schmidt (2007), ‘EC Competition Policy and IPRs’ in Anderman (ed), The Interface between Intellectual Property Rights and Competition Policy, pp 37–124; Korah (2006), Intellectual Property Rights and the EC Competition Rules. For a comparative analysis see Czapracka (2009), Intellectual Property and the Limits of Antitrust—A Comparative Study of US and EU Approaches. Major conferences with transatlantic perspectives on the IP/antitrust interface have been held at the Ecole des mines de Paris (in 2004), the European University

2.1 A FIRST LOOK: TWO TYPES OF IP

9

to the relationship between IP and antitrust laws are legion, with complementarity as the emerging—but questionable—consensus on the most abstract level. Exploring the IP/antitrust relationship in general, this chapter first distinguishes between different functional types of IP (at 2.1), before focusing on and taking a closer look at the anti-competitive potential of rights under patent, copyright and trade secret laws (2.2). It then analyses, and rejects, the approaches used so far to solve the relationship question, including the current standard answer of assuming normative complementarity (2.3). Instead, a positive analysis of the costs and benefits of IP rights and of antitrust interference with these rights (2.4) is applied to develop some meta rules and principles for the IP/antitrust interface (2.5 and 2.6).

2.1

A FIRST LOOK: TWO TYPES OF IP

‘Intellectual property’ can be understood broadly as ideas, inventions, discoveries, symbols, images, expressive works (verbal, visual, musical, theatrical), or in short any potentially valuable human product (broadly, ‘information’) that has an existence separable from a unique physical embodiment, whether or not the product has actually been ‘propertized’, that is brought under a legal regime of property rights. (emphasis added)4

With a view to clarifying the differences between IP and tangible property, in particular the limited period of protection, some commentators have argued that it would be more appropriate to view IP rights as a form of licence or leasehold conferred by the state on innovators than as absolute property rights.5 Such a line of argument might be abused in order to ‘immunise’ IP against interferences from other bodies of law for this limited period of time or, conversely and more likely, to weaken the position of IP rights within the hierarchy of rights from the outset. A system of property rights can be defined in the words of Alchian as a ‘method of assigning to particular individuals the “authority” to select, for specific goods, any use from a non-prohibited class of uses’.6 This useful definition allows for two inferences: First, although limited in time, some IP rights should indeed be considered property rights. From a positive economic perspective, the state-licence or leasehold approach should therefore be rejected. Second, such intellectual property encompasses patents, copyrights and trade marks as well as information protected under legal regimes which are more specialised in terms of the subject they protect, for example databases and designs. Protected trade secrets are mostly regarded as not constituting property, for the reason that trade secret laws do not fully confer exclusivity rights on the possessor of the

Institute in Florence (in 2005) and the St Gallen International Competition Law Forum (in 2005). See the books derived from the first two: Lévêque & Shelanski (2005), Antitrust, Patents and Copyright—EU and US Perspectives; Ehlermann & Atanasiu (eds), The Relation between Competition Law and Intellectual Property Law (European Competition Law Annual 2005). 4

Landes & Posner (2003), The Economic Structure of Intellectual Property Law, p 1. Anderman & Schmidt (2007), ‘EC Competition Policy and IPRs’ in Anderman (ed), The Interface between Intellectual Property Rights and Competition Policy, pp 37–124, at p 71. 6 Alchian (1965), ‘Some Economics of Property Rights’, 30 Il Politico 816, at 818. 5

10

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

secret—such rights usually being regarded as the definitive rights of property.7 However, in light of their functional substitutability with patents in providing the possibility of foreclosing markets adjacent to technology markets, as well as for reasons of brevity, IP in the following pages shall, in principle, be understood as encompassing trade secret protection. Specifically, the notion of a ‘refusal to license IP’ will include refusals to supply protected secret information.8 However, those functional differences between different types of protection which matter in the antitrust context will be highlighted. IP laws may have one of two different economic objectives:9 (1) advancing technological innovation (such as patent or trade secret laws) or expressive works (such as copyright laws), or (2) ensuring the integrity of markets (such as, in particular, trade mark laws). Despite their similarities (2.1.1 and 2.1.2), there is a decisive difference (2.1.3) between these two types of IP laws which leads to the exclusion of the second category from further analysis.

2.1.1

A Common Dynamic Benefit: Incentives to Create Markets

Due to its intangible nature, information essentially has three relevant characteristics as an economic good:10 First, information is costly to exclude. Excludability may be viewed as a function of technology and the legal system.11 Incomplete excludability leads to information spillovers. Such positive externalities create a difference between the private and social return in the production of information. Second, information is non-rival in the sense that one agent’s use neither limits his own next use nor another agent’s use. Third, at least in the field of science and technology, information is often cumulative—that is, it constitutes an input towards the creation of new information. The latter two properties increase the magnitude of potential positive externalities and thus the difference between private and social returns from information production. Incomplete excludability and non-rivalry as public-good characteristics provide the familiar rationale for the grant of exclusive IP rights: If there was no protection for information and the costs of copying or imitation were low, competition by free-riders could drive prices of the good produced on the basis of that information down to the marginal

7 See Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 354–55. See similarly the European Commission’s argument as summarised by the CFI in Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 280. The ‘classic’ property rights are the rights to use (usus), to profit (usus fructus), to change (abusus) and to transfer (ius abutendi). For an overview of the rights conferred under trade secret laws see below at 2.2.1.2. 8 In its Microsoft judgment, the CFI also proceeded on the assumption that trade secrets ‘must be treated as equivalent to intellectual property rights’ (see Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 289). 9 Menell & Scotchmer (2007), ‘Intellectual Property’ in Polinsky & Shavell (eds), Handbook of Law & Economics, vol 2, ch 19, p 2. 10 For an analysis see Foray (2004), The Economics of Knowledge, pp 91–129; Lévêque & Ménière (2004), The Economics of Patents and Copyright, pp 4–5. 11 Romer (1990), ‘Endogenous Technological Change’, 98 Journal of Political Economy S71, S74. Whether there is an incentive to exclude others from information depends on whether the private benefits of exclusion exceed the private costs (eg the costs of technology or of litigation).

2.1 A FIRST LOOK: TWO TYPES OF IP

11

cost of production and dissemination (which is often close to zero). Thus the innovator would not be able to recoup the sunk costs of his (potentially risky) investment into the production of information.12 Absent sufficient lead time,13 any sufficient private or public appropriability mechanism14 and sufficient redistributive effects,15 (even) assuming bounded rationality and thus some over-optimism, innovators would anticipate this and not invest or at least not disclose their information. The result would be under-investment into the production of information.16 In particular, patent protection allows the innovator to prevent rivals from free-riding on their investment and thus provides for the necessary ex ante incentive to innovate. This classic line of argument has been referred as ‘reward theory’, ‘incentive theory’, or ‘invention motivation theory’.17 Legal orders usually give an innovator the idea to choose between protection through a trade secret or a patent. Given the mandatory disclosure requirement under common patent laws, trade secrecy18 gives an incentive to create information by complementing patent protection where mandatory disclosure of the information would render the invention worthless. There may be a situation, for example, in which a rival could easily invent around the patent once it is disclosed.19

12 Landes & Posner (2003), The Economic Structure of Intellectual Property Law, p 13. The notion of ‘production of information’ includes both research and development associated with technology and artistic expression. 13 The cost of innovation can sometimes also be recouped without IP protection before the product can be duplicated, if the innovator is able to use his time advantage over copiers. For empirical research on the incentive effects of IP, as opposed to other factors, see Scherer et al (1959), Patents and the Corporation: A Report on Industrial Technology under Changing Public Policy; Levin et al (1987), ‘Appropriating the Returns from Industrial Research and Development’, 18 Brookings Papers on Economic Activity 783. 14 Other public mechanisms would include procurement mechanisms such as government funding of R&D, auctions for the right to be paid when the targeted invention is delivered, fixed-price contracts and prizes. See Scotchmer (2004), Innovation and Incentives, pp 31–59; Shavell & van Ypersele (2001), ‘Rewards versus Intellectual Property Rights’, 44 Journal of Law & Economics 525; Foray (2004), The Economics of Knowledge, pp 165–87; Abramowicz (2007), ‘The Uneasy Case for Patent Races Over Auctions’, 60(3) Stanford Law Review 803; Bar Gill & Parchomovsky (2006), ‘A Marketplace for Ideas?’, 84 Texas Law Review 395. Private appropriability mechanisms include contractual measures, secrecy, technical measures (which may be protected by law, such as by the provisions under the Digital Millenium Copyright Act in the US) and the threat of retaliation. For a survey on the different mechanisms see Cohen et al (2000), ‘Protecting their Intellectual Assets: Appropriability Conditions and Why US Manufacturing Firms Patent (or Not)’, NBER Working Paper 7552. 15 Innovators may be the only ones to have information on future changes in the price of certain inputs that their innovation is likely to cause. This information lead enables them to speculate on these factors and thus to reap other sources of profit. See Hirshleifer (1971), ‘The Private and Social Value of Information and the Reward to Inventive Activity’, 61 American Economic Review 561. 16 See Arrow (1962), ‘Economic Welfare and the Allocation of Resources for Invention’ in Nelson (ed), The Rate and Direction of Inventive Activity, pp 609–26, at p 619. 17 Mazzoleni & Nelson (1998), ‘The Benefits and Costs of Strong Patent Protection: A Contribution to the Current Debate’, 27 Research Policy 273, at 274–75. See also Lemley (2004), ‘Ex ante versus ex post Justifications for Intellectual Property’, 71 University of Chicago Law Review 129. See in more detail below at 2.4.1. 18 For economic analyses of trade secrecy law see Kitch (1980), ‘The Law and Economics of Rights in Valuable Information’, 9 Journal of Legal Studies 683; Posner & Landes (2003), The Economic Structure of Intellectual Property Law, pp 354–71; Menell & Scotchmer (2007), ‘Intellectual Property’ in Polinsky & Shavell (eds), Handbook of Law & Economics, vol 2, ch 19. 19 Given specific patent and trade secrecy systems, there may be other situations where an inventor may prefer trade secrecy over patent protection, eg where the invention can best be exploited over a longer period than a patent would allow or where the cost and delay of seeking a patent would be too high. See Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 356–59. By providing for a substitute for physical and contractual restrictions which firms would have to impose without trade secret protection to prevent a competitor from acquiring their valuable information, trade secrecy reduces the cost of protecting such information (see Lemley (2008), ‘The Surprising Virtues of Treating Trade Secrets as IP Rights’, Stanford Law and Economics Olin Working Paper No 358).

12

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

Copyright, which, unlike patent, does not protect the idea underlying the creation, but only the idea’s expression in the work, has a similar inducement effect:20 If the costs of copying or imitating the work were low, absent protection the market price for a copy of the work would be driven down to the marginal cost of copying. Thus the author would not be able to recoup the fixed cost of expression. Copyright protection therefore allows the original creator to earn back his investment and, in addition, be compensated for his risk of failure. This risk consists in particular of his ex ante uncertainty with regard to demand for his work. Similarly, incomplete excludability and non-rivalry may necessitate IP rights of the second group—which intend to protect the integrity of the marketplace—in order to create and establish markets: On product markets where (i) quality is a relevant parameter, (ii) quality is costly to observe for customers (asymmetric information) and (iii) free-riding on reputation by rivals is possible, sellers have the incentive to make false or misleading product claims or to copy the trade mark of a rival producer who is known for better quality. In this case of potential adverse selection,21 trade mark law (as paradigm for the above second category of IP laws) may not only ex post reduce search costs for customers, it may also give signals of credibility and thus provide for the necessary ex ante incentives to invest in branding.22 In that sense, both types of IP rights, by protecting an investment against free-riding and thus by enhancing appropriability, may be necessary for the existence of the market itself.

2.1.2

Similar Static Costs: Preventing Competition by Imitation

In addition to the above dynamic benefit, both types of IP laws share similar static costs: both grant a set of exclusivity rights, which entitle the holder of the IP to restrict the use of competitive strategies by its rivals. Such restrictions may have a foreclosing effect on competition on innovation, technology and product markets and thus bring both types of IP laws into potential conflict with antitrust laws. Trade mark protection, for example, in particular for descriptive terms, may impede competition by raising branding costs of other companies. In some cases, the increase in marketing costs may be prohibitively high and thus impede market entry if a specific trade mark as a signifier is decisive for customer recognition.23 Trade mark protection may also serve to enforce or shield anti-competitive practices.24 20

Posner & Landes (2003), The Economic Structure of Intellectual Property Law, pp 37–41. See Akerlof (1970), ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, 84(3) Quarterly Journal of Economics 488; Economides (1998), ‘Trademarks’ in Newman (ed), The New Palgrave Dictionary of Economics and the Law, pp 601–03. 22 Lévêque & Ménière (2004), The Economics of Patents and Copyright, p 3. For an economic analysis of trade mark law see Posner & Landes (2003), The Economic Structure of Intellectual Property Law, pp 166–209; Menell & Scotchmer (2007), ‘Intellectual Property’ in Polinsky & Shavell (eds), Handbook of Law & Economics, vol 2, ch 19, pp 58–78. For an overview of other instruments used to provide and regulate market information and thus to establish the market, such as unfair competition laws, see Menell & Scotchmer (2007), ‘Intellectual Property’ in Polinsky & Shavell (eds), Handbook of Law & Economics, vol 2, ch 19, p 59). 23 See Coverdale (1984), ‘Trademarks and Generic Words: An Effect-on-Competition Test’, 51 University of Chicago Law Review 868. For an analysis of the conflict between trade mark and antitrust law see Lunney (1999), ‘Trademark Monopolies’, 48 Emory Law Journal 367. For an analysis of this conflict under European competition law see Joliet (1984), ‘La Licence de marque et le droit européen de la concurrence’, Revue trimestrielle de droit européen 1. 24 For example, trade marks may be used to enforce the restriction of sales to distributors in selective distribution systems or to protect territorial restrictions such as in the case of licensing of trade marks according to national territories. For an overview of such practices under EU competition law see the 2003 Commission Staff Working Paper ‘Possible Abuses of Trade Mark Rights within the EU in the Context of Community’ (SEC(2003) 575). 21

2.1 A FIRST LOOK: TWO TYPES OF IP

13

Depending on the design of the exclusivity rights, these restrictions may be stronger than is necessary to fulfil the dynamic function of those rights and thus lead to an ‘unnecessary’ loss of competition. In such cases, antitrust laws have been considered, in particular on the basis of neoclassical welfare economics, as an instrument to curtail such ‘excessive’ IP rights.25 From such a perspective, methodologically, a similar cost-benefit analysis could be applied with regard to both categories of IP laws to determine under which conditions and in which situations antitrust may be used to re-calibrate the boundaries of the respective IP rights.

2.1.3

A Different Dynamic Cost: Blocking Follow-On Innovation and Improvements

There is, however, a striking difference between IP laws of the first type, which reduce free-riding on the investment in information creation, and IP laws of the second category, which prevent free-riding on reputation: Efficient creation of new works may require access to and use of old works.26 As a consequence, in the patent context it has been recognised for some time that broad patent protection in cumulative innovation settings may impede follow-on innovation and lead to opportunity losses in terms of dynamic efficiency.27 The problem here may not be ‘controlling overfishing, but preventing underfishing after the right has been granted’.28 If innovation is cumulative, IP rights may indeed confer on their holders the power to block improvements and follow-on innovation. This does not mean that the holder of the initial IP right will always make use of this power. On the contrary, in many situations the IP holder will bargain over granting a licence or disclosing the information, thus sharing in the profit generated by the follow-on innovation. There may, however, be situations where the bargaining breaks down and/or where the holder of the IP right has a strategic incentive to prevent follow-on innovation and/or its commercialisation.29 A bargaining breakdown may occur in particular in the case of a ‘patent thicket’, that is, an overlapping set of IP rights to which a subsequent innovator must obtain access when introducing his new innovation. In particular, a patent thicket may expose this subsequent innovator to the risk of being held up by multiple holders of IP rights (the so-called ‘tragedy of the anti-commons’). Similarly, if somebody adds utility to a copyrighted work, the holder of the respective copyright may prevent him from commercialising that improvement. If

25 See eg Suzanne Scotchmer’s Presentation, 26 February 2002 within the DoJ/FTC Hearings on ‘Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy’. 26 Merges & Nelson (1990), ‘On the Complex Economics of Patent Scope’, 90 Columbia Law Review 839, at 908; Scotchmer (1991), ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law’, 5 Journal of Economic Perspectives 29, at 30–31. On the need for access to knowledge in a broad context see Wielsch (2008), Zugangsregeln—Die Rechtsverfassung der Wissensteilung. 27 Scotchmer (1991), ‘Standing on the Shoulders of Giants’, 5 Journal Economics Perspectives 29, at 37; Gallini & Scotchmer (2001), ‘Intellectual Property: When is it the Best Incentive System?’ in Jaffe et al (eds), Innovation Policy and the Economy, pp 51–78. 28 Merges & Nelson (1990), ‘On the Complex Economics of Patent Scope’, 90 Columbia Law Review 839, at 870, 873; see also Merges (1992), ‘Rent Control in the Patent District: Observations on the Grady-Alexander Thesis’, 79 Vanderbilt Law Review 359, at 371. 29 For a more detailed analysis see below, in particular at 4.2–4.8.

14

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

there is a private incentive to block improvements on previous information or works, the public opportunity costs of potential but unrealised follow-on innovation may give rise to mandatory (antitrust) rules. On the contrary, trade mark law in particular usually does not entitle the holder of a trade mark to prevent the emergence of new market options as such (except in particular scenarios involving generic trade marks). To put it in the abstract, trade marks of incumbents may constitute barriers to entry, but they rarely qualify as a necessary input into a new or improved process or product. Thus the subsequent analysis excludes such IP laws which intend to ensure the integrity of the marketplace. This book focuses on those IP laws that promote either technological innovation or expressive works, ie patent, trade secret and copyright laws.

2.2

A CLOSER LOOK: THE ANTI-COMPETITIVE POTENTIAL OF IP RIGHTS

The IP/antitrust relationship problem is illustrated in two steps: First, an overview on the basic (exclusivity) rights of IP holders is provided (2.2.1). Second, anti-competitive potential conduct involving such IP rights is analysed (2.2.2).

2.2.1

IP Laws and the Basic Rights of IP Holders

The exact nature of the relationship problem depends on the scope, breadth and length of IP rights which may interact with US and EU antitrust rules. As will be shown below,30 both sets of antitrust rules might potentially interact with every other national or transnational IP law. Despite harmonisation on an international31 and European32 level, there are still notable differences in the different substantive national protection regimes.33 For the purpose of illustrating the relationship problem as such, however, it is sufficient to confine the overview to exemplary IP jurisdictions and their patent, trade secret and copyright laws. One obvious choice is the US, since approaches under US antitrust laws regarding 30

See below at 2.3.3.3. For an overview of international harmonisation in the area of patents see Baxter & Sinnott (2005), World Patent Law and Practice; in the area of trade secrets: MacLaren (2003), Worldwide Trade Secrets Law; in the area of copyright: Cohen et al (2002), Copyright in a Global Information Economy, pp 48–60; Goldstein (2001), International Copyright: Principles, Law, and Practice, pp 13–60. 32 EU intellectual property law mainly consists of harmonising directives. The most important directives with regard to substantive harmonisation include Directive 2001/29/EC of the European Parliament and of the Council on the harmonization of certain aspects of copyright and related rights in the information society, Directive 98/44/EC of the European Parliament and of the Council on the legal protection of biotechnological inventions, Directive 96/9/EC of the European Parliament and of the Council on the legal protection of databases, Council Directive 93/98/EEC harmonizing the term of protection of copyright and certain related rights, and Council Directive 91/250/EEC on the legal protection of computer programs. Aside from vertical harmonisation, there are Union rights such as the Union trade mark, the Union design and, potentially in the future, the European patent with unitary effect. For an overview of EU intellectual property law see Tritton (2007), Intellectual Property in Europe. For an overview of the acquis communautaire in copyright law see Leistner (2009), ‘Copyright Law in the EC: Status Quo, Recent Case Law and Policy Perspectives’, 46 Common Market Law Review 847. 33 For overviews of the major patent laws see Baxter & Sinnott (2005), World Patent Law and Practice; in the area of trade secrets: MacLaren (2003), Worldwide Trade Secrets Law; in the area of copyright: Geller (ed) (2009), International Copyright Law and Practice. 31

2.2

THE ANTI-COMPETITIVE POTENTIAL OF IP RIGHTS

15

conduct involving IP have been shaped primarily in tandem with US IP laws. The second is Germany as a significant IP jurisdiction in the EU. 2.2.1.1 Patent Laws Under US patent law, four categories of subject matter are eligible for protection: processes, machines, articles of manufacture and compositions of matter.34 According to current practice and jurisprudence, software, business methods and biotechnology inventions are eligible for protection. In order to be patented, the invention or discovery must in particular be novel, not obvious and useful.35 A patent is generally granted for a 20-year term.36 During this term, the patentee has the exclusive right to make, use, offer to sell or sell the patented invention within the US and import it into the US.37 Similarly, the German Patent Act (Patentgesetz) protects product and process inventions including software and biotechnology inventions that are new, involve an inventive step and are susceptible of industrial application.38 During the 20-year term,39 the patentee has the exclusive right to use the patented invention or the process which is the subject matter of the patent. In the case of a product invention, this exclusive right translates into the right to prevent a person who has not sought the patentee’s consent from making, offering, putting on the market or using a product which is the subject matter of the patent or the product obtained directly by the process as well as from importing or stocking the product for such purposes.40 2.2.1.2 Trade Secret Laws As a potential substitute for patent protection, trade secret laws may protect certain information against misappropriation. The US Uniform Trade Secrets Act41 defines a ‘trade secret’ as information, including a formula, pattern, compilation, program device, method, technique, or process, that: (i)

derives independent economic value, actual or potential, from not being generally known to, and not being readily ascertainable by proper means by, other persons who can obtain economic value from its disclosure or use, and (ii) is the subject of efforts that are reasonable under the circumstances to maintain its secrecy.

34

Cf 35 USC § 101. Cf 35 USC §§ 101–03. 36 Cf 35 USC § 154(a)(2). With regard to the beginning of the 20-year term, the 2011 ‘Leahy-Smith America Invents Act’ has abandoned the ‘first-to-file’ principle and introduced the ‘first-to-invent’ principle. The latter is also used in most other jurisdictions. 37 Cf 35 USC § 271(a). US patent law does not positively specify exclusive rights, but instead lists infringing activities. For a detailed analysis of the case law regarding infringing activities see Chisum et al (2004), Principles of Patent Law, pp 859–1058. 38 Cf § 1 of the German Patent Act. For an overview of German IP laws in English see Klett et al (2008), Intellectual Property Law in Germany—Protection, Enforcement and Dispute Resolution. 39 Cf § 16(1) Patent Act. 40 Cf § 9 Patent Act. 41 In § 1(4). 35

16

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

Under US law, trade secret misappropriation can be regarded as a type of unfair competition. Misappropriation, as under most trade secret regimes, includes acquisition by improper means, use or disclosure in breach of confidence and use of a secret knowing that it was disclosed by accident.42 Remedies for infringement of a trade secret include injunctive relief and compensatory damages. The latter may be measured in the form of lost profits or reasonable royalties. The same remedies are available to the holder of a trade secret under the German Act against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb), which protects trade secrets against unauthorised procurement, disclosure and exploitation. Under §§ 17 and 19 of the Act against Unfair Competition, these activities are considered to amount to unfair competition. These provisions and the related case law form a generally accepted definition of trade secret under German law, which is similar to the aforementioned definition under US law.43 2.2.1.3 Copyright Laws US copyright law protects original works fixed in any tangible medium of expression.44 The owner of a copyright has the exclusive right, amongst others, to reproduce the work in copies, to prepare derivative works based upon the work, to distribute copies of the work and to publicly perform or display the work,45 or to authorise the aforementioned activities through a licence. A violation of any of the exclusive rights of the copyright holder is regarded as a copyright infringement.46 In general, the copyright endures for a term consisting of the life of the author and 70 years after the author’s death.47 Similarly, under the German Copyright Act (Gesetz über Urheberrecht und verwandte Schutzrechte) an author of a literary, scientific or artistic work48 has the exclusive right to exploit his work in material form, in particular by reproducing, distributing and exhibiting the work, as well as the exclusive right to communicate his work to the public in nonmaterial form.49 In general, copyright expires 70 years after the author’s death.50

42 The Uniform Trade Secrets Act, in § 1(2), defines misappropriation as: ‘(i) acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means; or (ii) disclosure or use of a trade secret of another without express or implied consent by a person who (A) used improper means to acquire knowledge of the trade secret; or (B) at the time of disclosure or use knew or had reason to know that his knowledge of the trade secret was (I) derived from or through a person who has utilized improper means to acquire it; (II) acquired under circumstances giving rise to a duty to maintain its secrecy or limit its use; or (III) derived from or through a person who owed a duty to the person seeking relief to maintain its secrecy or limit its use; or (C) before a material change of his position, knew or had reason to know that it was a trade secret and that knowledge of it had been acquired by accident or mistake.’ 43 Under German law, a trade secret is a fact which relates to an undertaking and is known to a strictly limited group of persons, or which is not publicly available and which is to be kept secret according to the—expressly stated or presumed—intention of the undertaking. The company must have a justifiable interest in keeping the fact secret. See eg Judgment of the Federal Court of Justice (BGH) of 15 March 1955 (Docket No I ZR 111/53), 1955 Gewerblicher Rechtsschutz und Urheberrecht 424 (Möbelpaste), at 425. 44 Cf 17 USC § 102(a). 45 Cf 17 USC § 106. 46 Cf 17 USC § 501. 47 Cf 17 USC § 302(a). 48 Cf §§ 1–2 of the German Copyright Act. 49 Cf §§ 11, 15–22 Copyright Act. 50 Cf § 64 Copyright Act. The term of protection in the EU was harmonised by Council Directive 93/98/EEC of 29 October 1993 harmonizing the term of protection of copyright and certain related rights, OJ 1993 L290.

2.2

2.2.1.4

THE ANTI-COMPETITIVE POTENTIAL OF IP RIGHTS

17

Protection of Software

Software may be protected under different IP laws. Computer programs can be viewed as textual source code, which is comprehensible to programmers, or as functionally equivalent compiled object code (consisting of the numbers zero and one), which only computers can read. Under US copyright law, the source and object codes as the literal elements of a computer program are the subject of copyright protection.51 The ‘standard’ protection scheme chosen by many software developers is to keep their textual source code (a trade) secret, while protecting their compiled object code through copyright.52 Similarly, in the EU, the Directive on the legal protection of computer programs ensures that Member States grant copyright protection for computer programs.53 Importantly, under both US copyright law and the EU Directive, protection applies to the expression in any form of a computer program, but not to ideas and principles which underlie any element of a computer program.54 The boundary between idea and expression in computer programs, however, is hard to draw in practice.55 This might lead to the protection of functional elements. In addition, software exhibits economies of scale in consumption through compatibility (network effects). Both elements together may enable a copyright owner to enhance or protect his market power on a software market through copyright protection.56 In addition to copyright protection, software (similar to business methods) is patentable under US patent law.57 In Europe, however, the Convention on the granting of European patents (EPC) excludes ‘programs for computers’ from patentability58 to the extent that a patent application relates to a computer program ‘as such’.59 The proposed Directive on the patentability of computer-implemented inventions failed.60 Generally, the requirement of an

51 See eg Computer Associates International v Altai, Inc, 982 F2d 693 (2d Cir 1992), at 702. See also 17 USC § 117 for the limitations on the exclusive rights with regard to computer programs. 52 Abramson (2002), ‘Promoting Innovation in the Software Industry: A First Principles Approach to Intellectual Property Reform’, 8 Boston University Journal of Science and Technology Law 75, at 77 and 124. For an analysis under German law see Köhler (2010) in Köhler & Bornkamm (eds), UWG—Kommentar, § 17, para 12. 53 Directive 91/250/EEC of 14 May 1991. 54 In US copyright law, this idea/expression dichotomy is laid down in 17 USC § 102(b). Under the EU Software Directive, Art 1(2) ensures that only the expression of an idea is protected. The latter has been transposed into German law by s 69a(2) of the Copyright Act, which states: ‘The protection afforded shall apply to the expression in any form of a computer program. Ideas and principles which underlie any element of a computer program, including those which underlie its interfaces, shall not be protected.’ 55 For an analysis see Drexl (1998), What is Protected in a Computer Program? Copyright Protection in the United States and Europe. 56 For an analysis under EU and German copyright law see Bartmann (2005), Grenzen der Monopolisierung durch Urheberrechte am Beispiel von Datenbanken und Computerprogrammen. 57 See Diamond v Diehr, 450 US 175, at 187 (1981); State St Bank & Trust Co v Signature Finance Group, 149 F3d 1368, at 1373–77 (Fed Cir 1998). See also the 1996 Final Computer Related Examination Guidelines of the US Patent and Trademark Office. For a critical analysis of doctrinal development under US patent law see Burk & Lemley (2005), ‘Designing Optimal Software Patents’ in Hahn (ed), Intellectual Property Rights in Frontier Industries, pp 81–108. 58 Art 52(2) of the Convention. 59 Art 52(3) of the Convention. 60 The proposed Directive on the patentability of computer-implemented inventions (2002/0047/COD) was rejected by the European Parliament on 6 July 2005. For an economic analysis of the proposal to introduce a broad patent protection for software in the EU see the Report Mikro- und makroökonomische Implikationen der Patentierbarkeit von Softwareinnovationen: Geistige Eigentumsrechte in der Informationstechnologie im Spannungsfeld von Wettbewerb und Innovation by the Fraunhofer Institute and the Max-Planck Institute for Foreign and International Patent, Copyright and Competition Law for the German Federal Ministry of Economics.

18

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

invention is interpreted to mean that an invention must have a technical character. Thus, in order to be patentable in Europe, contrary to US patent law, a computer program must make a non-obvious ‘technical contribution’ or solve a ‘technical problem’ in a non-obvious way. 2.2.1.5

Protection of Databases

Alongside software, databases are a second category of functional text which may be protected under both US copyright law and the copyright laws of EU Member States. Under the US Feist standard, a factual compilation ‘is copyrightable only to the extent that it features an original selection, coordination, or arrangement’ of its component data.61 In the EU, the Database Directive confirms in its Article 3 that ‘databases which, by reason of the selection or arrangement of their contents, constitute the author’s own intellectual creation shall be protected as such by copyright’. At the same time, it clarifies that ‘[t]he copyright protection of databases provided for by the directive shall not extend to their contents’. In addition to this copyright protection for the original elements, the Database Directive also introduced a 15-year sui generis protection for the content of databases if a substantial investment has been made to obtain, verify or present the database content.62 To account for potential competition concerns, the initial proposal for the Directive provided for a scheme of compulsory licences. If data or information could be acquired from only one source (ie the database concerned), the maker of the database could have been compelled to license under fair and non-discriminatory terms the use of such data under Article 8 of the initial proposal. However, these provisions were deleted from the final Directive. What is left of the original compulsory licensing proposal is recital 47, which states that in the interests of competition between suppliers of information products and services, protection by the sui generis right must not be afforded in such a way as to facilitate abuses of a dominant position, in particular as regards the creation and distribution of new products and services which have an intellectual, documentary, technical, economic or commercial added value.

The recital also clarifies that the provisions of the Directive are without prejudice to the application of Community or national competition law. This European form of sui generis protection has been criticised,63 and legislative efforts to introduce such protection in the US have been abandoned.64

61

Cf 17 USC § 101. Cf, in particular, Arts 7(1), 10(1) 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 L77/20. The latter has been transposed into German law by §§ 87a et seq of the Copyright Act. For an analysis see Leistner (2002), ‘Legal Protection for the Database Maker—Initial Experience from a German Point of View’, 33 International Review of Intellectual Property and Copyright Law 439. 63 The Directive has been under review. See the DG Internal Market and Services Working Paper: First Evaluation of Directive 96/9/EC on the legal protection of databases, Commission of the European Communities, Brussels (12 December 2005), p 3. The ECJ has interpreted the scope of the Directive in, amongst other cases, C-46/02, Fixtures Marketing Ltd v Oy Veikkaus Ab [2004] ECR I-10365; C-203/02, British Horseracing Board Ltd v William Hill Organisation Ltd [2004] ECR I-10415; C-338/02, Fixtures Marketing Ltd v AB Svenska Spel [2004] ECR I-10497; and C-444/02, Fixtures Marketing Ltd v Organismos prognostikon agonon podosfairou AE [2004] ECR I-10549. 64 Legislative proposals included: the 1996 Database Investment and Intellectual Property Antipiracy Act 1996, the 1997 Collections of Information Antipiracy Act I, the 1999 Collections of Information Antipiracy Act II, and the 2003 Database and Collections of Information Misappropriation Act. For critical comment on the proposed Collections of Information Antipiracy Act see Maurer & Scotchmer (1999), ‘Database Protection: Is It Broken and Should We Fix It?’, 284 Science 1129. 62

2.2

2.2.2

THE ANTI-COMPETITIVE POTENTIAL OF IP RIGHTS

19

The Anti-Competitive Potential of Conduct Involving IP

The existence of IP rights necessarily creates transaction costs in the form of litigating infringement and negotiating licences (costs of protection) and costs of rent seeking. From a neoclassical welfare economics perspective, the latter are the costs of ‘wasteful’ races for a monopoly (equal to the excess over the ‘optimal’ investment, minus the social benefit produced by the additional investment).65 The focus here, however, is on the harm to competition that may result from IP rights. Two principle features of both tangible and intellectual property66 may be distinguished which, as a mirror side to their benefits, potentially render them able to allow or facilitate anti-competitive behaviour. First, property rights make legal positions transferable, or at least lower the costs of transfer, thereby rendering bilateral conduct easier. In the case of horizontal coordination, such behaviour allows for the accretion of market power. For example patent law, in combination with the applicable contract law, allows the patentee to horizontally coordinate his actions with other persons. A paradigm example would be the potentially anti-competitive pooling of patents. Second, exclusivity rights as such may cover both unilateral conduct (such as a refusal to license or to disclose information) and bilateral conduct (such as licensing), which may have anti-competitive effects.67 In particular by entitling its holder to prevent the entry of rivals through free-riding on ideas (in the case of patents and trade secrets) or creativity as expressed in works (in the case of copyright), IP constitutes a legal barrier to entry.68 Absent horizontal coordination, anti-competitive effects usually only arise if the IP holder has market power. If there are no substitutes available, the IP may lead to a monopoly on the technology and product markets.69 In terms of welfare economics and focusing on allocative efficiency, a legislator’s task would thus be to set rules that maximise the ratio of the (future) IP holder’s profit to deadweight loss, as Kaplow has pointed out.70 Antitrust restrictions on the exercise of IP rights of an IP holder with market power may form part of such rules to prevent such deadweight loss. Building on Kaplow’s ratio test, Ayres and Klemperer have pointed out that ‘the last bit of monopoly pricing produces large amounts of deadweight loss for a relatively small amount of monopoly profit’.71 Based on Ayres and Klemperer’s insight, it has been argued that in particular antitrust liability for refusals to license should aim at constraining monopolistic pricing.72 To prevent such static harm, however, antitrust restrictions on the core exclusive right to license, in principle, are not

65 See Landes and Posner (2003), The Economic Structure of Intellectual Property Law, pp 16–21; Noll (2004), ‘The Conflict over Vertical Foreclosure in Competition Policy and Intellectual Property Law’, Stanford Institute for Economic Policy Research Discussion Paper No 03-22. 66 For a more detailed analysis of the question whether antitrust needs to distinguish fundamentally between tangible and intellectual property see below at 2.5.1. 67 Ultimately, the transfer of property as such belongs to the set of exclusivity rights. 68 See in more detail below at 6.1.1.2.1. 69 IP, however, is only one factor in the analysis of market power and usually does not confer market power. See in more detail below at 6.1.1. 70 Kaplow (1984), ‘The Patent-Antitrust Intersection: A Reappraisal’, 97 Harvard Law Review 1813. 71 Ayres & Klemperer (1999), ‘Limiting Patentees’ Market Power Without Reducing Innovation’, 97 Michigan Law Review 985. 72 See the presentation of Chris Sprigman, 1 May 2002 within the FTC/DoJ hearings. For arguments against such an approach see Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 302–03.

20

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

the optimal instrument, as will be pointed out later.73 In addition to this static harm, an IP holder’s strategies to deny or restrain access to his technology may cause harm to dynamic competition if they impede technology creation and diffusion. If a technology constitutes a necessary input into innovation, technology or product markets, innovation and new market options may be blocked. Such scenarios with a focus on the strategic foreclosure of follow-on innovation will be analysed in detail in chapter 4. The potential harm to both static and dynamic competition crucially depends on the contestability of the technology market. This, in turn, hinges on (i) the substitutability of the technology and on the (ii) the type and (iii) duration of the IP right concerned.74 The first factor—the substitutability of a technology (and thus the power of its holder on the technology market)—depends on the costs of circumventing the technology concerned. Designing around a specific technology may be not feasible or it may be prohibitively costly, such as in the case of a technologically unique path or a de facto or horizontally agreed-on industry standard. In the case of software protected as a trade secret, the costs of designing around may be the costs of reverse engineering. Second, the different IP rights differ in their scope for anti-competitive conduct:75 patents protect ideas and functional elements which may constitute the input for multiple products. Therefore, in principle, they have a greater potential to give market power to its holder than copyrights, which only protect a certain original expression in a work. Furthermore, copyrights for artistic works usually do not confer such market power due to available substitutes on the relevant markets for artistic works. This caveat, however, does not hold for utilitarian works such as software and databases, which, additionally, may ‘stretch’ the idea/expression boundary. Third, anti-competitive effects may be long-lasting in cases of trade secrecy (with a potentially indefinite protection) or, in certain circumstances, copyright protection (which lasts for 70 years or more). Taken together, these three factors show that, despite its overall dynamic nature, the software industry is a sector in which IP protection may cause harm to both static and dynamic competition, in particular with regard to interoperability information. Network effects on operating systems markets may lead to de facto standards, rendering interoperability with application software necessary. In the case of trade secret protection (of the textual source code), reverse engineering may prove too costly. Additional copyright protection of the original elements of the compiled object code may further protect the IP holder’s market power. Similarly, database formats may set de facto standards, which—if they constitute an original element—may be copyrighted. With a view to the standard antitrust typology of strategies and sets of rules, practices involving IP rights (or alleged IP rights) may have anti-competitive effects in the following ways. 2.2.2.1 Horizontal and Vertical Practices Involving IP Agreements between actual or potential competitors involving IP rights include, amongst others, price or royalty fixing agreements between licensors, territorial divisions in licences, cross-licensing and patent pool arrangements, standards (set, for example, by

73

See below at 2.5 and 2.6. The three factors are not mutually exclusive, since the type and length of the IP influence the substitutability of the respective protected technology. 75 See Hovenkamp et al (2004), IP and Antitrust, § 4.2. 74

2.2

THE ANTI-COMPETITIVE POTENTIAL OF IP RIGHTS

21

organisations), and the settlement of IP disputes between competitors.76 Such practices may increase the risk of coordinated pricing, output restrictions, the acquisition or maintenance of market power, or retarding or restricting the development of new or improved products or processes. In the US, such horizontal practices may fall under § 1 Sherman Act. In this respect, the Department of Justice (DoJ) and Federal Trade Commission (FTC) follow their 1995 Antitrust Guidelines for the Licensing of Intellectual Property.77 In the EU, horizontal practices involving IP rights may fall under Article 101 TFEU (ex Article 81 EC), and in particular the Technology Transfer Block Exemption Regulation (TTBER).78 Agreements between firms active in vertically related (up- and downstream) markets involving IP rights include tying, exclusive dealing, resale price maintenance in IP licences, and grantback provisions. Vertical bilateral practices raise two basic competition concerns: (i) (both horizontal and vertical) foreclosure and (ii) the facilitation of collusion. Bilateral vertical practices may be captured by § 1 Sherman Act in the US79 and Article 101 TFEU (ex Article 81 EC), as further interpreted by the TTBER, in the EU.80 Both horizontal and vertical agreements may contain additional clauses which protect or extend the core exclusive right by banning specific competition. Such restraints may be either necessary, and therefore categorised as ancillary, or deemed illegal as anti-competitive. 2.2.2.2 Monopolistic or Abusive Practices Involving IP In contrast to the above bilateral practices, § 2 Sherman Act and Article 102 TFEU are concerned with unilateral practices of one or several firms which already have monopoly power or a dominant position respectively, or, under § 2 Sherman Act, which attempt to obtain monopoly power. Exclusionary practices may occur on —

—

the market where the firm already has monopoly power to prevent the erosion of its power or to increase it, first, on the market concerned itself or, second, on a related market (leveraging), or a related market to maintain or increase its power on the market on which it already enjoys market power (defensive leveraging).

76 For an analysis of settlements of IP disputes in general under US antitrust law see Hovenkamp et al (2004), IP and Antitrust, § 7. For a comparative analysis of US antitrust and EC competition law in this regard see Robert & Falconi (2006), ‘Patent Litigation Settlement Agreements in the Pharmaceutical Industry: Marrying the Innovation Bride and the Competition Groom’, 27 European Competition Law Review 524. For an economic analysis see Willig & Bigelow (2004), ‘Antitrust Policy toward Agreements that Settle Patent Litigation’, Antitrust Bulletin 655. 77 See the 1995 Antitrust Guidelines for the Licensing of Intellectual Property by the DoJ and the FTC, in particular 5.1 (horizontal restraints) and 5.5 (cross-licensing and pooling arrangements). For an analysis of the state of US antitrust law with regard to these practices see Hovenkamp et al (2004), IP and Antitrust, §§ 30–36. 78 Commission Regulation (EC) No 772/2004 of 27 April 2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements. See also the Commission Notice ‘Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements’ (published in OJ 2004 C101/2), 4.2. For an analysis of IP licensing under Art 81 EC see Anderman (1998), EC Competition Law and Intellectual Property Rights, pp 25–143. 79 For the US agencies’ approach to vertical practices involving IPRs see the 1995 Antitrust Guidelines for the Licensing of Intellectual Property by the DoJ and the FTC, in particular 5.2 (RPM), 5.3 (tying), 5.4 (exclusive dealing), and 5.6 (grantbacks). For an analysis of the state of US antitrust law with regard to these practices see Hovenkamp et al (2004), IP and Antitrust, §§ 20–35. 80 See the Commission’s Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements, 4.3.

22

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

Exclusionary practices involving existing IP rights may be categorised as follows:81 (i)

improper enforcement of IP claims, in particular enforcement of patents obtained by fraud and ‘sham litigation’; (ii) technological specifications or product design changes which foreclose competitors who (want to) sell vertically related or complementary products; (iii) unilateral refusals to license; (iv) concerted refusals to license; and (v) refusals to license conditional upon the purchase of a product (ie tying). The focus here is on those exclusionary strategies that may impede dynamic competition in the form of research for and the marketing of follow-on innovation. Category (i)—the improper enforcement of IP claims—is therefore only analysed if and to the extent that it has such an effect. Under US antitrust law, such fraud may violate § 2 Sherman Act as an unlawful attempted monopolisation if the firm in question does not yet have monopoly power.82 Similarly, Article 102 TFEU may prohibit the misuse of public procedures by dominant firms.83 Category (ii)—exclusionary product change—is only touched upon here to the extent that such a strategy involves a complementary refusal to supply, which may block innovation.84 All refusals to license IP—whether unilateral, concerted or conditional—may raise the problem of foreclosure. In the case of concerted refusals, this problem may be aggravated due to anticompetitive coordination.85 2.2.2.3

IP Acquisitions through Merger

The transfer of assets or shares of a firm which results in a change of control may include the transfer of ownership of IP. It is not just full-scale concentrations, however, that may fall within the scope of US and EU merger control: the sole transfer of an IP right as an asset or its functional equivalent, an exclusive licence, may also be captured by the two merger control regimes if the transfer involves the ‘loss of going concern’ from a relevant

81 Hovenkamp et al (2004), IP and Antitrust, § 10.3. See similarly Myers (2007), The Intersection of Antitrust and Intellectual Property, Parts II–IV. 82 See Hovenkamp et al (2004), IP and Antitrust, § 11, in particular § 11.2 (on Walker Process claims). 83 See the Commission Decision in Case COMP/A.37.507/F3, AstraZeneca, paras 325–28, in particular para 328: ‘The use of public procedures and regulation, including administrative and judicial processes, may also, in specific circumstances, constitute an abuse, as the concept of abuse is not limited to behaviour in the market only and misuse of public procedures and regulations may result in serious anti-competitive effects on the market. The fact that in such cases the effects in the market may be dependent on further action by public authorities is not decisive to exclude the existence of an abuse.’ The decision, in its legal interpretation of Art 102 TFEU, was confirmed by the General Court (the former Court of First Instance (CFI)) in Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr. See also below at 4.3. For an analysis of the general question of the extent to which the strategic use of public and in particular court procedures may constitute an exclusionary abuse see Grün (2006), Behinderungsmissbrauch durch strategischen Rechtsschutz. 84 For an analysis particularly under the perspective of ‘predatory’ product change see Hovenkamp et al (2004), IP and Antitrust, § 12; Fleischer (1997), Behinderungsmißbrauch durch Produktinnovation. See also Wolf (2004), Kartellrechtliche Grenzen von Produktinnovationen—Lehren aus den Verfahren gegen IBM und Microsoft für die Anwendung des Kartellrechts in Hochtechnologiemärkten. 85 See in more detail below in ch 4.

2.2

THE ANTI-COMPETITIVE POTENTIAL OF IP RIGHTS

23

market, the transfer of market share86 or a business with a market presence to which a market turnover can be attributed.87 The competition concerns that may arise from a concentration involving an IP right are essentially the same for every concentration: any type of concentration may horizontally increase market power and thus lead to unilateral and/or coordinated effects which would be captured under both the ‘substantial lessening of competition’ (SLC) test (§ 7 Clayton Act) and the ‘significant impediment to effective competition’ (SIEC) test (Article 2(3), (4) EU Merger Regulation). Additionally, a concentration may increase the ability and the incentive to engage in exclusionary conduct post-merger. In all these scenarios, IP as a barrier to entry may strengthen the market power of the merged undertaking if competitors cannot obtain access to the IP or if they cannot invent around it.88 In this context, an important terminological clarification is apt: the DoJ, the FTC and the European Commission use ‘compulsory licences’ as a remedy for anti-competitive concerns raised by mergers.89 Such compulsory licences have to be differentiated from the duty to license as the potential substantive legal obligation arising directly from liability under § 2 Sherman Act and Article 102 TFEU.90 2.2.2.4

Practices which Involve IP but which Do Not Raise the Relationship Question

The question of the relationship between (intellectual) property and antitrust only becomes relevant if an exclusivity right covers conduct with anti-competitive effects and if, in turn, a restriction on the exercise of such a right in case of antitrust liability could undermine the property function. Vice versa, in those situations where the potentially anti-competitive practice is not covered by (intellectual) property, there is no property protection and function to be taken into account in the antitrust analysis. From a legal perspective, two basic scenarios can be distinguished: First, the IP as such does not exist or is not valid, such as potentially in the case of a patent obtained by fraud. Second, although the IP as such is valid, it is already clear from the wording of the respective IP statute—ie without an interpretation with a view to antitrust laws and rationales— that the practice concerned is not covered by an exclusivity right and thus shielded from

86

See Hovenkamp et al (2004), IP and Antitrust, § 14.2b, who analyse the position under the Clayton Act. See the Commission Consolidated Jurisdictional Notice under Council Regulation (EC) No 139/2004 on the control of concentrations between undertakings, para 24, for the position under the Merger Regulation. In the context of an outsourcing transaction, it is sufficient if the assets including the IP would allow the acquirer to build up a market presence (para 26 of the Jurisdictional Notice). 88 See eg the 2006 FTC & DoJ Commentary on the Horizontal Merger Guidelines, pp 38, 43–44, citing recent merger cases. A revised version of the Horizontal Merger Guidelines was issued in 2010. 89 For example, in Re Silicon Graphics, Inc, No C-3626 (FTC 14 November 1995), the FTC entered into a consent decree with Silicon Graphics that compelled the firm to license software on non-discriminatory terms. In the merger case Case COMP/M.2861—Siemens/Dräger, the Commission obliged Siemens to disclose interface information. The Canadian Competition Act (in s 32) provides for the general possibility of a compulsory licence as a remedy if one of those IP rights protected has been used to unduly restrict competition. It also provides for other remedies, such as revoking a patent, thus integrating substantive competition analysis and IP remedies. For an analysis see McFetridge (1998), ‘Intellectual Property, Technology Diffusion, and Growth in the Canadian Economy’ in Anderson & Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, pp 65–103, at pp 90–92. 90 In contrast to a substantive duty to license, compulsory licensing has a long history as a remedy under US antitrust law. See Hovenkamp et al (2004), IP and Antitrust, § 6. 87

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THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

potential antitrust liability. One example would be practices which are explicitly excluded from the bundle of IP rights. In practice, the improper enforcement of IP claims is the most important subgroup of potentially anti-competitive practices involving IP rights which do not raise the question of the relationship between IP and antitrust law. Such enforcement practices raise rivals’ costs without being properly covered by IP. In the US, the further sub-distinction between the enforcement of patents obtained by fraud (‘Walker Process’ claims) and the enforcement of IP rights, while not obtained by fraud, but invalid, unenforceable, or not infringed (‘Handgards’ claims or ‘sham litigation’)91 has become common. While captured by § 2 Sherman Act in the US, such cases of improper enforcement of IP rights in the EU may fall under Article 102 TFEU.92 Such behaviour may not only have anti-competitive effects, but may also fall foul of unfair competition laws. In all these cases, there is no enforceable property right which raises the fundamental relationship question. This generally means that a careful analysis of the validity and scope of the (intellectual) property right has to be carried out before raising the question of how to take such a right into account in an antitrust framework.

2.3 APPROACHES TO THE RELATIONSHIP BETWEEN IP AND ANTITRUST

If valid IP exists and if the conduct concerned is covered by an exclusive right, the question of the relationship between IP and antitrust becomes relevant. Neither US nor EU statutory laws provide a general answer to this question. Addressing it has been the task of competition authorities and courts. The two most extreme approaches would be absolute IP domination at one end of the scale and absolute antitrust domination at the other end. Pure and open antitrust domination, that is, application of the antitrust laws to conduct without taking into account in any way the rationale and function of the property concerned, has had no proponents. In contrast, absolute IP domination seemed to have been favoured by, amongst others, the US Supreme Court in its early judgments on the IP/antitrust interface (2.3.1). Still based on the assumption of IP domination, scholarly discussion and case law in the US93 and later in the EU then moved towards a more differentiated approach, drawing the boundary between IP and antitrust based on legal(istic) considerations on the 91 Handgards, Inc v Ethicon, Inc, 601 F2d 986 (9th Cir 1979); Professional Real Estate Investors, Inc v Columbia Pictures, 508 US 49 (1993). Before considering the merits of an anti-competitive litigation claim, courts in the US first have to decide whether the IP owner is immune from liability under the so-called ‘Noerr-Pennington doctrine’ (developed in the cases Eastern Railroad Presidents Conference v Noerr Motor Freight, 365 US 127 (1961); United Mine Workers v Pennington, 381 US 657 (1965)). According to this doctrine, an antitrust defendant who has already pursued an IP claim against the antitrust claimant, is immune from antitrust liability for ‘petitioning the government’. There is an exception to this Noerr-Pennington immunity, however, for ‘sham litigation’ (see Hovenkamp et al (2004), IP and Antitrust, § 11.3b1). In the recent case of Kaiser Health Foundation v Abbott Laboratories (Nos 06-55687, 06-55748, 2009 WL 69269 (13 January 2009)), the US Court of Appeals for the Ninth Circuit upheld the application of the Noerr-Pennington doctrine. In this case, the defendant’s commencement of litigation against generic drug manufacturers was protected. 92 See the decision of the Commission of 15 June 2005 in Case COMP/A.37.507/F3 AstraZeneca, which imposed a fine on AstraZeneca under Art 82 EC [now Art 102 TFEU] for misusing the patent system in order to delay the market entry of competing generic drugs. See in more detail below at 4.1.6. 93 For overviews of approaches of US agencies and courts towards the relationship between patent and antitrust law see Carrier (2003), ‘Resolving the Patent-Antitrust Paradox through Tripartite Innovation’, 56 Vanderbilt Law Review 1047, and Carrier (2002), ‘Unraveling the Patent-Antitrust Paradox’, 150 University of Pennsylvania

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25

‘scope’ or the ‘specific subject matter’ of the IP right concerned (2.3.2). Today, conductspecific rules (either per se rules or rules of reason) dominate, and these are based on the—questionable—idea of balancing IP and antitrust under the assumption of a tension in means, not in goals (2.3.3).

2.3.1

Approach I: Absolute IP Domination

Absolute IP domination can be understood as immunity against illegality under antitrust laws, either in the form of inapplicability of antitrust laws or an exemption from such laws.94 After the enactment of the Sherman Act, the US Supreme Court started out with such an antitrust immunity approach. In E Bement & Sons v National Harrow Co, it held, with regard to a price-fixing cartel under the disguise of a patent pool, that the 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.95

Similarly, the Court held in other cases that ‘a patent is an exception to the general rule against monopolies and to the right to access to a free and open market’,96 that ‘[t]he monopoly granted by the patent laws is a statutory exception to [the antitrust] freedom for competition’,97 and that ‘[t]he patent laws which give a 17-year monopoly on “making, using, or selling the invention” are in pari materia with the antitrust laws and modify them pro tanto’.98 Courts and commentators similarly argued that restraints in licence agreements should always be immune from scrutiny under antitrust laws since the licensor, under IP laws, would not be obliged to grant a licence at all. If, in turn, the licensor were to grant a licence with restrictions, however limited, he would, despite the restrictions, always create additional competition. In the US, the Supreme Court took this position in the early case US v GE, reasoning that a vertical price-fixing scheme in a patent licensing agreement would only be legal because the licensor could have refused to issue the licence altogether.99 This view, under the labels limited licence theory100 or ‘Wettbewerbseröffnungstheorie’,101 also

Law Review 761. For an in-depth historical overview see ABA (2007), Intellectual Property and Antitrust Handbook, pp 67–92. 94 See eg Adelman and Juenger (1975), ‘Patent-Antitrust: Patent Dynamics and Field-of-Use Licensing’, 50 New York University Law Review 273. 95 186 US 70, at 91 (1902). 96 Precision Instrument Manufacturing Co v Automotive Maintenance Machine Co, 324 US 806, at 816 (1945). 97 US v Line Material Co, 333 US 287, at 310 (1948). 98 Simpson v United Oil Co of California, 377 US 13, at 24 (1964). 99 United States v General Electric Co, 272 US 476 (1926). 100 Korah (1996), Technology Transfer Agreements and the EC Competition Rules, pp 71–77. For a description see Dolmans & Odriozola (1998), ‘Site Licence, Right Licence? Site Licenses under EC Competition Law’, 19 European Competition Law Review 493, at 493–94. 101 The German term ‘Wettbewerbseröffung’ means creation of the market and thus of competition. If this alluded to the dynamic function of property rights to create markets, the term would be apt. However, in the context of licensing agreements the term was used to refer to downstream competition between the licensor and a

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THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

had proponents in Europe. The limited licence theory ultimately is a special application of an absolute IP domination approach, since it bases its line of argument on an unrestrainable right of the IP holder not to license the IP at all. Such an approach, however, either begs the question whether, or must assume that, rights of IP holders are already defined in such a way that they encapsulate the solution to every conflict situation involving the rights of anyone other than the IP holder, or at least with the rights of others under antitrust laws. The latter assumption has been trenchantly criticised on a legal level by Baxter, who points out that ‘[a] promise by the licensee to murder the patentee’s mother-in-law is as much within the patent monopoly as is the sum of $50; and it is not the patent laws which tell us that the former agreement is unenforceable and subjects the parties to criminal sanctions’.102 Ten years after Bement, the Supreme Court in Standard Sanitary Manufacturing Company recognised this. Albeit only by distinguishing the case from Bement, the Court held that [r]ights conferred by patents are indeed very definite and extensive, but they do not give any more than other rights a universal license against positive prohibitions. The Sherman law is a limitation of rights—rights which may be pushed to evil consequences, and therefore restrained.103

2.3.2

Approach II: Inherency and the Specific Subject Matter as Legal(istic) Filters

Having abandoned the absolute IP domination approach, the US courts attempted to solve the relationship question by trying to demarcate distinct ‘spheres’: on the one hand, practices falling within the limits of the IP right or ‘inherent’ in it (the approach is called the ‘inherency doctrine’), which automatically would be regarded as immune from antitrust liability; and on the other hand practices falling outside the ‘scope’ of the IP right, which were considered potentially illegal under antitrust law.104 Pursuing this concept, the US

licensee or between different licensees, which, according to this approach, would be created by the decision of the licensor to grant a licence. For a description of the approach see Sack (1997), ‘Der “spezifische Gegenstand” von Immaterialgüterrechten als immanente Schranke des Art 85 Abs 1 EG-Vertrag bei Wettbewerbsbeschränkungen in Lizenzverträgen’, 43 Recht der Internationalen Wirtschaft 449, 449–50. This approach is rejected by Mestmäcker & Schweitzer (2004), Europäisches Wettbewerbsrecht, § 28, Rn 23; Ullrich (2007), in Immenga & Mestmäcker, EG-Wettbewerbsrecht, Bd 1, Gewerblicher Rechtsschutz und Urheberrecht Part B, para 19. 102 Baxter (1966), ‘Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis’, 76 Yale Law Journal 267, at 277. Faced with immunity arguments from Microsoft, the DC Circuit in its judgment (United States v Microsoft Corp, 253 F3d 34, 63 (DC Cir 2001)) referred to Baxter and the Federal Circuit’s judgment, pointing out: ‘Microsoft’s primary copyright argument borders upon the frivolous. The company claims an absolute and unfettered right to use its intellectual property as it wishes: “[I]f intellectual property rights have been lawfully acquired,” it says, then “their subsequent exercise cannot give rise to antitrust liability.” That is no more correct than the proposition that use of one’s personal property, such as a baseball bat, cannot give rise to tort liability. As the Federal Circuit succinctly stated: “Intellectual property rights do not confer a privilege to violate the antitrust laws.”’ 103 Standard Sanitary Manufacturing Company et al v US, 226 US 20, at 49 (1912) (the ‘bath tub’ case). See also Motion Picture Patents Co v Universal Film Manufacturing, 243 US 502 (1917), in which the Supreme Court held that a tie was outside the scope of a patent. 104 Or in a famous formulation: ‘[B]ecause the patentee’s authority is an island of permission in a sea of prohibition, there is no area at the edge of permission toward which the law is indifferent: what is not authorized is forbidden.’ See Baxter (1966), ‘Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis’, 76 Yale Law Journal 267, citing Furth (1958), ‘Price Restrictive Patent Licenses under the Sherman Act’, 71 Harvard Law Review 815, at 821. For a description of the ‘separate spheres’ model—also dubbed the ‘metes and bounds’ approach—and its critique see Tom & Newberg (1997), ‘Antitrust and Intellectual Property: From Separate Spheres to Unified Field’, 66 Antitrust Law Journal 167. The notion of ‘metes and bounds’ goes back to the

2.3 APPROACHES TO THE RELATIONSHIP

27

courts developed formalistic rules as to what conduct fell within the scope of the IP (or within the ‘limits of the patent monopoly’ or the ‘limits of freedom from competition’)105 and what conduct was beyond the boundaries of the IP right.106 Like many other strands of thought dominating US antitrust policy until the 1960s, the inherency approach was eroded by the Chicago school.107 Criticising the assumption of a tension in goals, on which the inherency approach rests, Bowman outlined the complementarity assumption which dominates today’s debate: In terms of economic goals sought, the supposed opposition between these laws is lacking. Both antitrust law and patent law have a common central economic goal: to maximize wealth by producing what consumers want at the lowest cost.108

US antitrust agencies ultimately abandoned the inherency doctrine with their 1995 Guidelines for the Licensing of Intellectual Property, which adopt a more functional, economics-orientated approach. In other jurisdictions, the inherency doctrine had a longer life. Notably in Germany, the former § 17 of the Act against Restraints of Competition (Gesetz gegen Wettbewerbsbeschränkungen) enshrined the similar Inhaltstheorie as the guiding principle for the relationship between in particular patent law and competition law with regard to licensing agreements. § 17 was abolished in 2005. 2.3.2.1 The Specific Subject Matter under EU Law Under EU law, the question of the relationship between IP laws and competition law has an added dimension due to the fact that IP rights are mainly national. Thus two questions have to be distinguished: first, the question of the EU’s competence to legislate in the area and interfere with property rights (2.3.2.1.1) and, second, the substantive question whether holders of an IP right—irrespective of whether it is national or European—should enjoy a functional immunity from scrutiny under EU competition rules (2.3.2.1.2).109 Since the two questions and their answers have not always been strictly separated in the Court’s jurisprudence, its stance is not entirely clear. 2.3.2.1.1

The Competence Question

With regard to the competence question, Article 345 TFEU (ex Article 295 EC) provides that the Treaties ‘shall in no way prejudice the rules in Member States governing the system of property ownership’. This provision bars EU activity in the field of property by limiting the EU’s competence in two ways: first, by ‘confining’ legislative activity to the general

judgment in Brenner v Manson 383 US 519, at 534 (1966), where the Supreme Court held: ‘Until the … claim has been reduced to production of a product shown to be useful, the metes and bounds of [the] … monopoly are not capable of precise delineation. It may engross a vast, unknown, and perhaps unknowable area. Such a patent may confer power to block off whole areas of scientific development, without compensating benefit to the public.’ 105 See eg Ethyl Gasoline v US, 309 US 436, at 452 (1940); US v Univis Lens Co, 316 US 241, 249–51 (1942); US v Line Material Co, 333 US 287, at 310–11 (1948). 106 See eg Q-Tips, Inc v Johnson & Johnson, 109 F Supp 657, 661 (DNJ 1951), modified 207 F2d 509 (3d Cir 1953). 107 See Tom & Newberg (1997), ‘Antitrust and Intellectual Property: From Separate Spheres to Unified Field’, 66 Antitrust Law Journal 167, at 173. 108 Bowman (1973), Patent & Antitrust Law: A Legal & Economic Appraisal, p 1. 109 For an overview of both questions see Coates et al (2007), ‘Intellectual Property’ in Faull & Nikpay (eds), The EC Law of Competition, 10.19–10.35.

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harmonisation competencies;110 and second, and most important in this context, by providing for a limit to EU activity in general. As early as 1966, in the competition case of Consten and Grundig, the ECJ held that [t]he injunction contained in … the contested decision to refrain from using rights under national trade mark law in order to set an obstacle in the way of parallel imports does not affect the grant of those rights but only limits their exercise to the extent necessary to give effect to the prohibition under Article 85(1) EC [now Article 101(1) TFEU]. (emphasis added)111

According to this jurisprudence, EU activity is thus barred from interfering with the existence of IP granted under laws of the Member States, but may restrain its exercise.112 In the sphere of the ‘exercise’ of an IP right, EU competition rules would be superior to national IP laws. This existence/exercise distinction has been heavily criticised.113 Understood correctly as the interpretive filter for the competence question, however, the application of the existence/exercise dichotomy leads to an important insight: an (intellectual) property rule of a Member State presumably never mandates, or at least never inevitably leads to, conduct which infringes Article 101 or 102 TFEU. It is the undertaking’s exercise of the (intellectual) property right that contravenes the competition rules. Decisions (and judgments) based on Articles 101 and 102 TFEU, by their nature, only limit this freedom of action of undertakings and thus presumably never touch on Member States’ grant of—and thus the existence of—IP. In this sense, EU competition rules are superior to national IP laws. As a technical matter of legal hierarchy, there is thus no conflict between EU competition law and IP laws of the Member States. 2.3.2.1.2

The Immunity Question

In the early case of Deutsche Grammophon, the Court applied the existence/exercise distinction to the question of the relationship between the basic freedom of free movement of goods (Article 34 TFEU, ex Article 28 EC) and national IP systems, holding that [a]mongst the prohibitions or restrictions on the free movement of goods which it concedes Article 36 [now Article 36 TFEU] refers to industrial and commercial property. On the assumption that those provisions may be relevant to a right related to copyright, it is nevertheless clear from that article that, although the Treaty does not affect the existence of rights recognized by the legislation of a Member State with regard to industrial and commercial property, the exercise of such rights may nevertheless fall within the prohibitions laid down by the Treaty. Although it permits prohibitions or restrictions on the free movement of products, which are justified for the purpose

110 With regard to harmonisation in the field of IP, the Court, in Netherlands v Parliament and Council (Case C-377/98, [2001] ECR I-7079, para 24), held that ‘… the Community is competent, in the field of intellectual property, to harmonise national laws pursuant to Article 100 of the EC Treaty [now Art 115 TFEU] and Article 100a of the Treaty [now Art 114 TFEU] and may use Article 235 of the EC Treaty [now Art 352 TFEU] as the basis for creating new rights superimposed on national rights, as it did in Council Regulation (EC) No 40/94 of 20 December 1993 on the Community trade mark [OJ 1994 L11, p 1].’ See also the Court’s Opinion 1/94 of 15 November 1994 ([1994] ECR I-5267), para 59. 111 Joined Cases 56 and 58/64 Consten and Grundig v Commission [1966] ECR 299, at 345; see also Case 24/67 Parke, Davis & Co v Probel [1968] ECR 55, at 55, 61, 63, 70. 112 The Court later based the existence/exercise distinction on Art 36 TFEU (ex Art 30 EC). It further developed it in the Centrafarm cases (Case 15/74, Centrafarm v Sterling Drug [1974] ECR 1147; Case 16/74, Centrafarm v Winthrop [1974] ECR 1183). 113 Eg by Govaere (1996), The Use and Abuse of Intellectual Property Rights in EC Law, p 66.

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29

of protecting industrial and commercial property, Article 36 only admits derogations from that freedom to the extent to which they are justified for the purpose of safeguarding rights which constitute the specific subject-matter of such property. (emphasis added)114

In later cases, the Court transferred and applied this concept of the specific subject matter of (intellectual) property to the question of immunity from the competition rules.115 In Volvo, for example, the Court, with regard to a refusal to license a protected design, pointed out that [i]t must also be emphasized that the right of the proprietor of a protected design to prevent third parties from manufacturing and selling or importing, without its consent, products incorporating the design constitutes the very subject-matter of his exclusive right. It follows that an obligation imposed upon the proprietor of a protected design to grant to third parties, even in return for a reasonable royalty, a licence for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right, and that a refusal to grant such a licence cannot in itself constitute an abuse of a dominant position. (emphasis added)116

Similar to the attempts of US courts to determine what practices are ‘inherent’ in the scope of an IP right, the ECJ has tried to define the ‘specific subject matter’ of different IP rights. Since immunity from the EU competition rules subject to national IP laws would contravene the principle of supremacy of EU (competition) law, the specific subject matter of IP is thus an autonomous Union concept.117 For the purposes of EU law, the Court has attempted to determine the specific subject matter for the different types of IP rights.118 2.3.2.1.3

The Three Fields Approach and its Critique

The inherency doctrine and the concept of specific subject matter119 have thus been used as a first interpretative filter to distinguish between practices that should be subject to

114

Case 78/70, Deutsche Grammophon v Metro [1971] ECR 487, para 11. For an analysis of the jurisprudence with regard to the specific subject matter of the different types of intellectual property see Coates et al (2007), ‘Intellectual Property’ in Faull & Nikpay (eds), The EC Law of Competition, at 10.22–10.35; Govaere (1996), The Use and Abuse of Intellectual Property Rights in EC Law, pp 79–100. See also Sack (1997), ‘Der “spezifische Gegenstand” von Immaterialgüterrechten als immanente Schranke des Art 85 Abs 1 EG-Vertrag bei Wettbewerbsbeschränkungen in Lizenzverträgen’, 43 Recht der Internationalen Wirtschaft 449. 116 Case 238/87, AB Volvo v Erik Veng (UK) Ltd [1988] ECR 6211, para 8. 117 This view is controversial. See eg Mestmäcker (2004), ‘Gewerbliche Schutzrechte und Urheberrechte in der Eigentums- und Wirtschaftsordnung’ in Fuchs et al (eds), Festschrift Immenga, pp 261–76. 118 For the specific subject matter of patents see Case 15/74, Centrafarm v Sterling Drug [1974] ECR 1147, para 9; Case 187/80, Merck v Stephar and Exler [1981] ECR 2063, para 9. For the specific subject matter of copyrights see Joined Cases C-92/92 and C-326/92, Phil Collins and Others [1993] ECR I-5145, para 20. Although there is no analogous definition for the specific subject matter of know-how (and thus trade secrecy) in the case law of the Court, the common treatment of patents and know-how in the TTBER, according to commentators, suggests that they are the same for the purposes of the competition rules (see Coates et al (2007), ‘Intellectual Property’ in Faull & Nikpay (eds), The EC Law of Competition, at 10.28). 119 The Court itself has used the terms ‘inherent’ and ‘concept of specific subject matter’ synonymously. Citing Deutsche Grammophon, the CFI, in Case T-76/89, ITP v Commission [1991] ECR II-575, para 54, held: ‘Under Article 36 [now Article 36 TFEU], as it has been interpreted by the Court of Justice in the light of the objectives pursued by Articles 85 and 86 [now Article 101 and 102 TFEU] and the provisions governing the free movement of goods or services, only those restrictions on freedom of competition, free movement of goods or freedom to provide services which are inherent in the protection of the actual substance of the intellectual property right are permitted in Community law’ (emphasis added). 115

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antitrust scrutiny and those that should not. According to these approaches, three ‘fields’120 can be distinguished: (1) practices inherent in the IP right or falling within its specific subject matter respectively and thus legal under antitrust law; (2) practices not inherent in the IP right or falling within its specific subject matter respectively, but still legal under antitrust law; (3) practices not inherent in the IP right or falling within its specific subject matter respectively and illegal under antitrust law. The inherency doctrine and the concept of specific subject matter attempt to draw a line between field 1 on the one hand and fields 2 and 3 on the other. This attempt, however, is methodologically flawed: assuming that the interpretation of ‘inherency’ and ‘specific subject matter’ stick to the wording of IP statutes and thus considering field 1 as all practices not already prohibited by IP laws, both approaches would equate the question of antitrust immunity with the scope of an IP right. Deriving the answer to the relationship question solely from IP law, however, would amount to absolute IP domination. On this interpretation, the inherency doctrine and the concept of specific subject matter would be subject to the same criticism as absolute IP domination.121 If the notions of ‘inherency’ or ‘specific subject matter’ were applied such that not all practices not prohibited by IP law were inherent in or fell into the specific subject matter of the IP right, the concepts could potentially have interpretative value. These notions, however, use the wrong lenses: they do not ask the right question for the goals of IP and antitrust laws, but confine themselves to the legal(istic) interpretation of IP laws. In this sense, both the inherency doctrine and the notion of specific subject matter—similar to the attempt to conceptualise a purely legalistic notion of ‘freedom of competition’—are methodologically doomed to fail. This becomes particularly clear in cases in which the IP right obviously belongs to the specific subject matter of the IP, but at the same time the practice covered by it raises serious competition concerns. For example, in the abovementioned Volvo case, the right of the proprietor of a protected design to prevent third parties from manufacturing and selling or importing, without its consent, products incorporating the design clearly belonged to the core rights of the proprietor of the design. But at the same time, the Court noted that the exercise of such an exclusive right may be illegal under Article 102 TFEU if it involves, on the part of an undertaking holding a dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers … (emphasis added)122

Some have attempted to ‘save’ the inherency approach by acknowledging conduct such as occurred in the Volvo case as a fourth category: practices inherent in the IP right or falling into its specific subject matter respectively, but illegal under antitrust law. Such a fourfield approach has been put forward in its most abstract form in the Draft International

120 121 122

Heinemann (2002), Immaterialgüterschutz in der Wettbewerbsordnung, p 55. See above at 3.3.1. Case 238/87, AB Volvo v Erik Veng (UK) Ltd [1988] ECR 6211, para 9.

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Antitrust Code (DIAC), a proposal put forward by scholars for an international trade agreement,123 which provides as follows: Article 6: Restraints in Connection with Intellectual Property Rights Sec. 1: Exercise of Intellectual Property Rights (a) The exercise of an intellectual property right within the limits of the legal content of such right does not entail restraints of competition. (b) Abusing a dominant position by obtaining or exercising intellectual property rights is prohibited … Pooling intellectual property rights to suppress technology or raise prices is prohibited … (c) When the exploitation of an intellectual property right exceeds the limits of its legal content, any resulting restraint of competition may be illegal under the provisions of this Agreement.

Lit. a covers field 1, lit. b field 4, and lit. c contains fields 2 and 3.124 This extension of the inherency doctrine finally acknowledges that the wording of IP laws, even if interpreted through a lens such as ‘inherency’ (or the ‘legal content’), cannot without more provide the answer to the relationship problem. As such, the four fields approach is a mere categorisation without heuristic value. 2.3.2.1.4 ‘Essential Function’—A Bridge into Economic Thinking Aside from the (empty) notion of ‘arbitrary’ refusal to supply in the abovementioned Volvo judgment, the jurisprudence of the Court of Justice offers two other topoi to distinguish between practices falling into the specific subject matter of an IP right which are legal under the competition rules from those which are prohibited. In RTÉ, one of the Magill cases, the CFI held that the protection of the specific subject matter of a copyright entitles the copyright holder to reserve the exclusive right to reproduce the protected work. It then stated: However, while it is plain that the exercise of the exclusive right to reproduce a protected work is not in itself an abuse, that does not apply when, in the light of the details of each individual case, it is apparent that that right is exercised in such ways and circumstances as in fact to pursue an aim manifestly contrary to the objectives of Article 86 [now Article 102 TFEU]. In that event, the copyright is no longer exercised in a manner which corresponds to its essential function, within the meaning of Article 36 of the Treaty [now Article 36 TFEU], which is to protect the moral rights in the work and ensure a reward for the creative effort, while respecting the aims of, in particular, Article 86 … In that case, the primacy of Community law, particularly as regards principles as fundamental as those of the free movement of goods and freedom of competition, prevails over any use of a rule of national intellectual property law in a manner contrary to those principles. (emphasis added)125

123 See Fikentscher & Immenga (1995), Draft International Antitrust Code. For an overview of the DIAC see Baetge (2009), Globalisierung des Wettbewerbsrechts, pp 445–52. 124 Heinemann (2002), Immaterialgüterschutz in der Wettbewerbsordnung, p 611. See also Ullrich (2003), ‘IP-Antitrust in Context: Approaches to International Rules on Restrictive Uses of Intellectual Property Rights’, 48 Antitrust Bulletin 837. 125 Case T-69/89, RTÉ v Commission [1991] ECR II-485, para 71.

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Referring to the Volvo case and the similar CICCRA v Renault case, the CFI went on, stating that [c]onduct of that type—characterized by preventing the production and marketing of a new product, for which there is potential consumer demand, on the ancillary market of weekly television guides and thereby excluding all competition from that market solely in order to secure the applicant’s monopoly—clearly goes beyond what is necessary to fulfil the essential function of the copyright as permitted in Community law. The applicant’s refusal to authorize third parties to publish its weekly listings was, in this case, arbitrary … (emphasis added)126

On appeal, the ECJ, confirming the CFI, referred to its Volvo judgment and stated: [T]he exercise of an exclusive right by the proprietor may, in exceptional circumstances, involve abusive conduct. (emphasis added)127

Whereas the topos of ‘exceptional circumstances’ does not provide any substantive guidance, the notion of ‘essential function’ constitutes a first step in the right direction. First, it provides for an interpretative lens to analyse the purposes of IP laws (‘reward for creative effort’) and competition laws. This renders the criterion of the specific subject matter superfluous. Second, the interpretation of the Court heads in the direction of balancing these purposes (‘while respecting the aims of [the competition rules]’).

2.3.3

Approach III: Balancing Different Means to Enhance Consumer Welfare

The above analysis has shown that it is positively and normatively unsound to postulate the domination of IP laws or that a solution to the relationship problem can be derived solely from IP laws. Therefore, in particular the competition authorities in the US and later those in the EU have moved towards balancing approaches. They mainly attempt to reconcile IP and antitrust on the level of general guidelines and conduct-specific rules for the antitrust analysis of conduct involving IP rights. Balancing in this context means that neither IP nor antitrust law are assumed to dominate the other as such. Instead, a type of conduct is analysed under the antitrust lens, taking into account that an antitrust prohibition of conduct covered by IP may interfere with the purpose of the underlying IP. Such analysis may lead to the adoption of more or less detailed conduct-specific rules by competition authorities and courts. The notion of ‘rules’ denominates the layer(s) of rules below the level of statutory wording, ie in this context in particular the practice of competition authorities as well as jurisprudence interpreting the notions of ‘monopolization’ in § 2 Sherman Act and ‘abuse’ in Article 102 TFEU. Thus the notion of ‘rules’ is not used here in the sense of the label ‘rule-based (or form-based) approach’, which has been put forward within the discussion in the EU on the reform of Article 102 TFEU in opposition to the ‘more effects-based approach’. Both labels—‘rule-based approach’ and ‘more effects-based approach’—are terminologically misguided: legislators, competition authorities and courts may (and should) set rules addressing conduct in the light of the economic effects of the conduct and of the rules. The relevant trade-off is thus not between rule-based regulation

126

Ibid, para 73. Joined Cases C-241/91P and C-242/91P, Raidió Teilifís Éireann (RTÉ) and Independent Television Publications Ltd (ITP) v Commission [1995] ECR-I 743, para 50. 127

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and effects-based regulation, but between more detailed and less detailed rules.128 Less detailed rules may explicitly require or implicitly allow for balancing in a specific case. Thus ‘balancing’ in this context encompasses both the abstract analysis leading to the adoption of conduct-specific rules and the application of such rule to a specific case.129 Balancing could mean either (i) balancing different goals as well as different means of IP and antitrust or (ii) ‘just’ balancing IP and antitrust as different means in the light of a common goal. The latter approach has become prevalent among competition authorities and the vast majority of commentators, early on in the US and later in the EU. The 1995 US DoJ/FTC Guidelines for the Licensing of Intellectual Property, citing the judgment in the Atari case, state as follows: 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. In the absence of intellectual property rights, imitators could more rapidly exploit the efforts of innovators and investors without compensation. Rapid imitation would reduce the commercial value of innovation and erode incentives to invest, ultimately to the detriment of consumers. 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. (emphasis added)130

Similarly, in its 2001 Evaluation Report on the Transfer of Technology Block Exemption Regulation 240/96, the European Commission states its view that [a]t the highest level of analysis IPR and competition law are complementary because they both aim at promoting consumer welfare. (emphasis added)131

In the same vein, the Commission’s Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements promulgate this complementarity assumption: The aim of Article 81 [now Article 101 TFEU] as a whole is to protect competition on the market with a view to promoting consumer welfare and an efficient allocation of resources. … The fact that intellectual property laws grant exclusive rights of exploitation does not imply that intellectual property rights are immune from competition law intervention. Articles 81 and 82 [Articles 101 and 102 TFEU] are in particular applicable to agreements whereby the holder licenses another undertaking to exploit his intellectual property rights. Nor does it imply that there is an inherent conflict between intellectual property rights and the Community competition rules. Indeed, 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

128

See in more detail below at 3.3.1. In the US, as a common law jurisdiction with its stare decisis doctrine, the material facts of a case are part of the rule in the above sense. The ratio decidendi of a precedent binds lower courts unless the case before such court does not fall within this ratio decidendi. 130 1995 Guidelines for the Licensing of Intellectual Property, at 1.0. In its judgment in Atari Games Corp v Nintendo of America, Inc, 897 F2d 1572, at 1576 (1990), the Federal Circuit held that ‘[t]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are actually complementary, as both are aimed at encouraging innovation, industry and competition’ (emphasis added). 131 Commission Evaluation Report on the Transfer of Technology Block Exemption Regulation No 240/96, para 29. See also the comment by the Commission official responsible for conducting the review of the EU licensing regime: Peeperkorn (2003), ‘IP Licenses and Competition Rules: Striking the Right Balance’, 26 World Competition 527. 129

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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. (emphasis added)132

The above statements also reflect the competition authorities’ thinking in non-licensing contexts. Complementarity of IP and antitrust laws as the consequence of the assumed common goal of enhancing consumer welfare has thus emerged as the standard paradigm.133 The reasons for this evolution away from inherency and the specific subject matter as empty legalistic concepts towards teleological economics-based balancing are various: First, the development is part of a general move, started by US antitrust scholars and agencies and partially by courts in the 1970s and 80s, towards (welfare) economics-led reasoning.134 Second, the majority of cases (except for an antitrust defence within an IP case) are decided by antitrust (and not IP) lawyers and economists, for whom it is common to assess cases in the light of consumer welfare as the overall objective. Third, assuming complementarity and thus balancing means in the light of one goal is less complex than balancing different means in the light of different goals. Such a strong assumption of normative complementarity, however, would be over-simplifying, as a closer look at the goals of antitrust (2.3.3.1 and 2.3.3.2) and intellectual property laws (2.3.3.3) shows. 2.3.3.1 Goals of US Antitrust Law Over time, the goals of US antitrust law have narrowed. In the 1950s, the Supreme Court (still) embraced a broad set of goals, stating that [t]he Sherman Act was designed to be a comprehensive charter of economic liberty aimed at preserving free and unfettered competition as the rule of trade. It rests on the premise that the unrestrained interaction of competitive forces will yield the best allocation of our economic resources, and lowest prices, the highest quality and the greatest material progress, while at the same time providing an environment conducive to the preservation of our democratic political and social institutions.135

Due to the influence of the Chicago School, US agencies and courts have increasingly endorsed the promotion of consumer welfare as the overarching goal of US antitrust law. Since the 1980s the Supreme Court has decided antitrust cases in the light of this objective,136 even approvingly citing Bork for the view that Congress designed the

132 OJ 2004 C101/2, paras 5, 7. The Guidelines explain Regulation (EC) No 772/2004 on the application of Article 81(3) of the Treaty to categories of technology transfer agreements (‘TTBER’). 133 See eg Peeperkorn & Paulis (2005), ‘Competition and Innovation: Two Horses Pulling the Same Cart’ in Lugard & Hancher (eds), On the Merits: Current Issues in Competition Law and Policy, pp 17–29. See also Gallini & Trebilcock (1998), ‘Intellectual Property Rights and Competition Policy: A Framework for the Analysis of Economic and Legal Issues’ in Anderson & Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, pp 17–61, at p 18, referring to the 1989 Report of the OECD on Competition Policy and Intellectual Property Rights; Lemley (2007), ‘A New Balance Between IP and Antitrust’, 13 Southwestern Journal of Law and Trade in the Americas 237; Schmidtchen (2009), ‘Zur Beziehung zwischen dem Recht geistigen Eigentums und dem Wettbewerbsrecht—eine ökonomische Analyse’ in Lange et al (eds), Geistiges Eigentum und Wettbewerb, pp 27–51. 134 This development has led to partial ‘soft’ convergence between US and EU competition policies, ie convergence not by adjusting statutory provisions, but through interpretation (eg via interpretive guidelines). 135 Northern Pacific Railway Co v United States, 356 US 1, at 4 (1958). 136 See eg Jefferson Parish Hospital District No 2 v Hyde, 466 US 2, at 45 (1984).

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Sherman Act as a ‘consumer welfare prescription’.137 Neither agencies nor courts engage (at least not openly) in, eg, industrial policy considerations or consider non-efficiency values such as fairness. The agencies refer to both static and dynamic efficiency as the objective of their policy, with a strong emphasis on dynamic efficiency in the IP context.138 The Supreme Court, without explicitly using the notion of dynamic efficiency, endorses the concept.139 The concrete interpretation of efficiency as the goal of US antitrust law, in particular the relationship between static and dynamic efficiency in the view of US agencies and courts, still has to be analysed.140 But it is fair to conclude that the above complementarity assumption—that both the Sherman Act in its interpretation by agencies and courts today and IP laws serve the purpose of promoting consumer welfare—is valid with regard to its first part. 2.3.3.2 Goals of EU Competition Law Discussion about its objectives has bedevilled EU competition law since the entry into force of the EC Treaty. Without being able to explore all the dimensions of the debate here, it is useful to distinguish between two categories of potential objectives: competition and non-competition goals. 2.3.3.2.1

Competition Goal(s)

Mirroring the earlier development in the US, since the 1990s141 the Commission has moved away from legalistic approaches to prohibitions on anti-competitive bilateral practices (now Article 101 TFEU) and abuses of a dominant position (now Article 102 TFEU) with the overall twin goals of achieving ‘undistorted competition’ by protecting ‘freedom of competition’142 and integration within the internal market as referred to in the former Article 3(1)(c) and 3(1)(g) of the EC Treaty.143 In its roles as public enforcer and legislator, the Commission, in its decisions and block exemptions, has shifted its focus away

137 Reiter v Sonotone Corp, 442 US 330, at 343 (1979). For differences between a total and a consumer welfare standard and a normative discussion of these standards see Pittman (2007), ‘Consumer Surplus as the Appropriate Standard for Antitrust Enforcement’, 3 Competition Policy International 205, and Motta (2004), Competition Policy, pp 19–22, who prefers a total welfare standard. 138 See eg the speeches of the Assistant Attorney-General of the DoJ’s Antitrust Division, Thomas A Barnett: ‘Interoperability between Antitrust and Intellectual Property’, Washington, 13 September 2006, and ‘The Gales of Creative Destruction: The Need for Clear and Objective Standards for Enforcing Section 2 of the Sherman Act’, Washington, 20 June 2006. See also the speech of Gerald F Masoudi, ‘Intellectual Property and Competition: Four Principles for Encouraging Innovation’, Sao Paolo, April 2006. 139 Verizon Communications Inc v Law Offices of Curtis v Trinko, LLP, 540 US 398, at 408 (2004). 140 See below at 7.2 and 7.3. Posner (2001), ‘Antitrust in the New Economy’, 68 Antitrust Law Journal 925, observes that the most powerful explanatory variable of US antitrust law during its evolution is the state of economic opinion. In this view, antitrust doctrine has changed in tandem with changes in economic theory, albeit with a time lag. 141 For a discussion of different objectives of EU competition policy see Jones & Sufrin (2004), EC Competition Law, pp 35–40. 142 Competition law and policy from the enactment of the EC Treaty to the 1990s can be traced back to some extent to the German ordoliberal Freiburg school. For a description of the development of competition policy in Europe see Gerber (1998), Law and Competition in Twentieth Century Europe: Protecting Prometheus. 143 Art 3(1)(g) has been repealed by the Lisbon Treaty. On the legal consequences see below, 3.2.1.4.

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from forms of competition to the economic effects of conduct and competition rules on this conduct. At the same time, in its guidelines144 and policy statements,145 the Commission has embraced the protection of competition as a means to enhance consumer welfare and ensure allocative efficiency, both static and dynamic, as the primary goal of EU competition policy.146 Accordingly, the public enforcement of EU competition law by the Commission is increasingly characterised by efficiency-based language.147 At the same time, the market integration goal148 has become less important as an explicit second objective on its own, partly due to the success of the integration process, and partly since the goal, over a sufficiently long time horizon, can be integrated into the consumer welfare objective. Thus in the Commission’s interpretation, the economic goals of EU competition law have been

144 See Commission Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, paras 5, 13, as cited above (n 132), and the Guidelines on Vertical Restraints (OJ 2000 C291/1), para 7: ‘The protection of competition is the primary objective of EC competition policy, as this enhances consumer welfare and creates an efficient allocation of resources.’ See also the 2005 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 88: ‘The Community competition rules protect competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources.’ 145 See eg the speech of Mario Monti, ‘The Future for Competition Policy: Converging Towards What?’, London, 9 July 2001, Commission press release SPEECH/01/340 of 10 July 2001: ‘… the goal of competition policy, in all its aspects, is to protect consumer welfare by maintaining a high degree of competition in the common market. Competition should lead to lower prices, a wider choice of goods, and technological innovation, all in the interest of the consumer’. See also the speech of Neelie Kroes, ‘Preliminary Thoughts on Policy Review of Article 82’ (Speech/05/537), Fordham Corporate Law Institute, New York, 23 September 2005: ‘In our view, the objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and ensuring an efficient allocation of resources’; similarly, see her speech ‘European Competition Policy—Delivering Better Markets and Better Choices’ (Speech/05/512), London, 15 September 2005: ‘Consumer welfare is now well established as the standard the Commission applies when assessing mergers and infringements of the Treaty rules on cartels and monopolies. Our aim is simple: to protect competition in the market as a means of enhancing consumer welfare and ensuring an efficient allocation of resources.’ 146 Contributions to the debate by (former) Commission officials arguing in favour of a focus on efficiency include: Röller (2005), ‘Der ökonomische Ansatz in der Wettbewerbspolitik’ in Monopolkommission (ed), Zukunftsperspektiven der Wettbewerbspolitik, pp 37–46; Wils (2002), The Optimal Enforcement of EC Antitrust Law: Essays in Law and Economics. Arguing against a result-oriented approach and in favour of defining legal rights as the basis of competition as process, see Mestmäcker (2005), ‘Die Interdependenz von Recht und Ökonomie in der Wettbewerbspolitik’ in Monopolkommission (ed), Zukunftsperspektiven der Wettbewerbspolitik, pp 19–35; Möschel (2006), ‘Wettbewerb zwischen Handlungsfreiheiten und Effizienzzielen’ in Engel & Möschel (eds), Festschrift für Mestmäcker, pp 355–70. See also Kirchner (2008), ‘Goals of Antitrust and Competition Law Revisited’ in Schmidtchen et al (eds), The More Economic Approach to European Competition Law, pp 7–26; Roth (2008), ‘The “More Economic Approach” and the Rule of Law’ in Schmidtchen et al (eds), The More Economic Approach to European Competition Law, pp 37–58; Hellwig (2006), ‘Effizienz oder Wettbewerbsfreiheit? Zur normativen Grundlegung der Wettbewerbspolitik’ in Engel & Möschel (eds), Festschrift für Mestmäcker, pp 231–68; Zimmer (2008), ‘On Fairness and Welfare: The Objectives of Competition Policy—A Comment on Papers by Gerber and by Ahlborn & Padilla’ in Ehlermann & Marquis (eds), A Reformed Approach to Article 82 EC, European Competition Law Annual 2007, pp 103–07; Lovdahl Gormsen (2010), A Principled Approach to Abuse of Dominance in European Competition Law, in particular pp 20–112. 147 For an analysis see Akman (2009) ‘“Consumer Welfare” and Article 82 EC: Practice and Rhetoric’, 32(1) World Competition 71, who criticises the gap between policy statements and the Commission’s decisional practice. 148 See Kirchner (1998), Discussion Paper III, Panel on Future Competition Law in Ehlermann & Laudati (eds), Objectives of Competition Policy, European Competition Law Annual 1997, pp 513–23.

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narrowed to the protection of consumer welfare as the over-arching objective.149 In recent judgments, the CFI seems to have endorsed this view. In GlaxoSmithKline, it held that: In effect, the objective assigned to Article 81(1) EC [now Article 101 TFEU] … is to prevent undertakings, by restricting competition between themselves or with third parties, from reducing the welfare of the final consumer of the products in question. (emphasis added)150

On appeal, however, the ECJ stated that it has held that, like other competition rules laid down in the Treaty, Article 81 EC aims to protect not only the interests of competitors or of consumers, but also the structure of the market and, in so doing, competition as such. (emphasis added)151

While the ECJ has made this argument in the specific context of the question whether a restriction of competition by object requires proof of consumer harm, the statement may well be read as a general comment on the goals of Articles 101 and 102 TFEU. The Court of Justice of the European Union (CJEU) arguably may also in the future shy away from adopting such a narrow consumer welfare interpretation in order to retain discretion for itself. So far, the Court has used rather vague notions such as the protection and promotion of ‘effective competition’152 without adopting a specific economic paradigm as a leitmotiv. 2.3.3.2.2

Non-Competition Goals?

Non-competition objectives, which the Commission and the Community at large must pursue and which may blur the picture of a competition policy focused purely on competitive concerns, may include environmental protection (Article 11 TFEU), employment policy (Articles 9, 147(2) TFEU), and industrial policy (Article 173 TFEU). Whether and to what extent the Treaty allows (and obliges) the Commission, national agencies, the Court and national courts to take into account and to pursue non-competition goals when applying EU competition rules is a matter of intense discussion.153 This debate has an institutional154 and several substantive155 dimensions. In this context, it is useful to distinguish between competition rules which mandate the pursuit of non-competitive goals and thereby alter the competitive paradigm, on the

149 This has wrongly been labelled the ‘more economic approach’—wrongly, since the protection of consumer welfare is a specific economic goal among other potential welfarist and non-welfarist economic objectives. 150 Case T-168/01, GlaxoSmithKline v Commission [2006] ECR II-2969, para 118. See also Joined Cases T-213/01 and T-214/01, Österreichische Postsparkasse and Bank für Arbeit und Wirtschaft v Commission [2006] ECR II-1601, para 115: ‘… the ultimate purpose of the rules that seek to ensure that competition is not distorted in the internal market is to increase the well-being of consumers’ (emphasis added). For an analysis of the role of consumer welfare in EU competition law see Schweitzer (2009), ‘The Role of Consumer Welfare in EU Competition Law’ in Drexl et al (eds), Technology and Competition: Contributions in Honour of Hanns Ullrich, pp 511–40. 151 Joined Cases C-501/06 P, C-513/06 P, C-515/06 P and C-519/06 P, GlaxoSmithKline v Commission [2009] ECR I-9291, para 63. 152 The Court defines a dominant position under Art 102 TFEU as an undertaking’s power to ‘prevent effective competition being maintained on the relevant market’; see eg Case 2/76, United Brands v Commission [1978] ECR 207, para 65; Case 85/76, Hoffman-La Roche & Co AG v Commission [1979] ECR 461, para 38. 153 See eg Roth (2006), ‘Zur Berücksichtigung nichtwettbewerblicher Ziele im europäischen Kartellrecht—eine Skizze‘ in Engel & Möschel (eds), Festschrift Mestmäcker, pp 411–36. 154 The Directorate General for Competition is not an independent public authority, but part of the European Commission as a political body which takes decisions collectively in the field of competition policy. 155 See Kirchner (1998), Discussion Paper III, Panel on Future Competition Law in Ehlermann & Laudati, Objectives of Competition Policy, European Competition Law Annual 1997, pp 513–23.

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one hand, and competition rules which, as such, do not allow for the consideration of non-competitive goals (cogent rules), in particular Article 101(1) TFEU.156 The latter are not relevant when answering the question what goals underly a competition regime. Even if Treaty articles, in particular policy linking clauses, mandate integration or take into account a non-competition goal, Article 101(1) TFEU does not adopt these objectives as its own.157 To the contrary, these goals may lead to a conflict with competition policy as mandated by Article 101(1) TFEU. Such conflicts can be resolved in different ways.158 But these conflicting goals, per definitionem, are not objectives under Article 101(1) TFEU. In contrast, Article 101(3) TFEU, as applied directly under Regulation 1/2003, exempts from the Article 101(1) TFEU measures which ‘[contribute] to improving the production or distribution of goods or to promoting technical or economic progress, while allowing consumers a fair share of the resulting benefit’. The Commission’s view today on the question of what objectives may be to taken into account under this provision conflicts to some extent with its previous decisional practice.159 In the past, the Commission was occasionally ready to consider non-competition objectives.160 In its ‘White Paper on Modernisation of the Rules Implementing Articles 85 and 86 of the EC Treaty’, however, the Commission sees the purpose of Article 101(3) TFEU as providing ‘a legal framework for the economic assessment of restrictive practices and not to allow application of the competition rules to be set aside because of political considerations’.161 In its 2004 Guidelines on the application of Article 81(3) of the Treaty, the Commission states that [g]oals pursued by other Treaty provisions can be taken into account to the extent that they can be subsumed under the four conditions of Article 81(3) [now Article 101 TFEU] … The assessment under Article 81(3) of benefits flowing from restrictive agreements is in principle made within the confines of each relevant market to which the agreement relates. … However, where two markets are related, efficiencies achieved on separate markets can be taken into account provided that the group of consumers affected by the restriction and benefiting from the efficiency gains are substantially the same.162

156

See Mestmäcker & Schweitzer (2004), Europäisches Wettbewerbsrecht, § 3, paras 71–86. For an explanation of the much-debated Wouters judgment of the ECJ (Case C-309/99, Wouters v Algemene Raad van de Nederlandse Orde van Advocaten [2002] ECR I-1577), as a conflict between competition rules and domestic mandatory requirements see Monti (2002), ‘Article 81 EC and Public Policy’, Common Market Law Review 1057, at 1087–88. 158 The Treaty may mandate express exclusion, eg in the case of Art 346(1)(b) TFEU, or mandate or leave room for balancing. If there is no specific guidance, a balance may be achieved by the principle of practical concordance (praktische Konkordanz). See Komninos (2005), ‘Non-Competition Concerns: Resolution of Conflicts in the Integrated Article 81 EC’, University of Oxford, Working Paper (L) 08/05. 159 Jones & Sufrin (2004), EC Competition Law, p 192. 160 For an overview see Monti (2007), EC Competition Law, pp 89–123. In its decision in CECED (Commission Decision 2000/475/EC of 24 January 1999, OJ 2000 L187/47), for example, the Commission considered ‘savings for consumers, in particular by reducing pollutant emissions from electricity generation’, taking account of this as a ‘positive contribution to the EU’s environmental objectives, for the benefit of present and future generations’. See also Commission Decision 2001/837/EC of 17 September 2001 (DSD), OJ 2001 L319/1, paras 142–46. Gyselen ((2002), ‘The Substantive Legality Test under Article 81–3 EC Treaty—Revisited in Light of the Commission’s Modernization Initiative’ in Von Bogdandy (ed), European Integration and International Co-ordination, pp 181–98, at p 185) dismisses such references as ‘obiter dicta’, and Marenco (2001), ‘Panel Three Discussion: Courts and Judges’ in Ehlermann & Atanasiu (eds), European Competition Law Annual 2000: The Modernisation of EU Competition Law, p 500) as ‘forgivable weakness’. 161 OJ 1999 C132/1, para 57. 162 OJ 2004 C101/97, paras 42, 43. For conflicting views on Art 101 TFEU see Odudu (2006), The Boundaries of EC Competition Law—The Scope of Article 81 (preferring consumer welfare as single objective) vs Townley (2009), Article 81 EC and Public Policy (arguing for taking into account public policy considerations). 157

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While older judgments of the ECJ may be interpreted as accepting non-competition concerns as benefits under (what is now) Article 101(3) TFEU,163 the ECJ has not explicitly ruled on the Commission’s recent narrow reading of such benefits. It has been argued that, unlike Article 101(3) TFEU, Article 102 is a cogent rule which does not allow for the consideration of non-competition concerns.164 The Commission and the Court, however, have developed the concept of (objective) justification, with efficiency gains as one potential justification. In its Guidance Paper on its enforcement priorities in applying Article 102 TFEU, the Commission explicitly transfers the conditions of Article 101(3) TFEU to Article 102 TFEU as requirements of such an efficiency defence.165 In particular, the conduct must be undertaken to contribute to improving the production or distribution of products or to promote technical or economic progress according to the proposal. Thus Article 102 TFEU would be open to non-competition factors in the same way as Article 101 TFEU. However, in accordance with its recent focus under Article 101(3) TFEU, the Commission, under Article 102 TFEU, wants to acknowledge only economic efficiencies, which benefit consumers.166 2.3.3.2.3 Conclusion From an abstract point of view, one may distinguish between four paradigms that a set of competition rules might follow: (I) consumer (or total) welfare, (II) a pragmatic conception of competition, taking into account the process of competition as such, its effects on consumers, and the (fundamental) rights of the actors, (III) a broad conception of economic welfare, which subsumes non-competition factors under the notion of welfare, and (IV) the open pursuit of both economic and non-economic goals. Whereas in the past the Commission mostly followed paradigm II and in some cases paradigm III, it has now adopted the objective of preserving consumer welfare. The ECJ, however, has not given its blessing to this narrow paradigm and, instead, will probably stick to the more pragmatic notion of ‘effective competition’ in the sense of paradigm II, as its recent judgment in GSK has shown. This is welcome, since there may be scenarios where a narrowly interpreted utilitarian consumer welfare approach—even if restricted to the sphere of substantive competition

163 Eg positive impact on employment in Case 26/76, Metro-SB-Großmärkte v Commission (No 1) [1977] ECR 1875. 164 Mestmäcker & Schweitzer (2004), Europäisches Wettbewerbsrecht, § 3, para 71. 165 Communication from the Commission, ‘Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’, OJ 2009 C45/7, para 30; see the Commission’s Discussion Paper on the application of Art 82 of the Treaty to exclusionary abuses at paras 84–92. See in more detail below at 3.3.3.3. For an analysis of the Guidance Paper see Adam and Maier-Rigaud (2009), ‘The Law and Economics of Article 82 EC and the Commission Guidance Paper on Exclusionary Conduct’, Journal of Competition Law (ZWeR) 131; Ezrachi (2009), ‘The Commission’s Guidance on Article 82 EC and the Effects Based Approach—Legal and Practical Challenges’ in Ezrachi (ed), Article 82 EC: Reflections on its Recent Evolution, pp 51–66. Aside from the efficiency defence, the Commission’s Guidance Paper acknowledges an ‘objective necessity’ justification (paras 28–29). Under this defence, the dominant company may be able to show that the conduct concerned is objectively necessary, for instance because of reasons of safety or health related to the dangerous nature of the product in question. This, however, constitutes a way of balancing conflicting interests. 166 Communication from the Commission, ‘Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’, paras 84, 85.

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law—may not be compatible with the aim of protecting economic freedom itself.167 A more open approach that is based on comparative institutional economic analysis and that at the same time limits (public or private) power and ensures economic and civil freedom may be preferable.168 Given the ECJ’s jurisprudence, the assumption that the EU competition rules are solely designed to enhance consumer welfare, as a matter of description, would be an over-simplification. Thus EU competition law does not fit in with the complementarity assumption. 2.3.3.3

Collision Scenarios and Goals of IP Laws

Whether the second part of the complementarity conjecture is accurate—that not only antitrust, but also IP laws only serve the goal of fostering economic efficiency—depends on the respective IP law which defines the rights that may be restrained by the applicable antitrust law. In particular, proponents of the complementarity proposition in the US often assume that US antitrust law only ‘interacts’ with US IP law. As a consequence, those who acknowledge that IP may create or increase competition problems favour an amendment of IP laws over case-by-case antitrust intervention.169 Due to the co-existence of national IP legislation and both European IP rights and harmonising legislation at the EU level, there is no single IP legislator in Europe. In light of the diversity of IP laws, it is clear from the outset that it would be, at the least, an over-simplification to generally assume that IP laws only serve the goal of fostering consumer welfare. There is, however, an even more fundamental problem that militates against the complementarity assumption for US antitrust and IP laws and which has not been acknowledged in the debate so far: antitrust law may potentially interact with foreign IP law. Which IP law may ‘collide’ with US antitrust and EU competition rules depends on (1) what conduct the antitrust laws may apply to territorially (2.3.3.3.1 and 2.3.3.3.2), and (2) the rules for the choice of IP law that apply in the respective jurisdiction (2.3.3.3.3). 2.3.3.3.1

Territorial Reach of US Antitrust Law

Since the Alcoa judgment, in which the court laid down the ‘effects doctrine’,170 US antitrust law, in principle, applies to conduct which affects domestic or foreign commerce, regardless of where such conduct occurs or the nationality of the parties involved. With regard to foreign import commerce, ie direct sales into the United States, the Supreme Court held in Hartford Fire Insurance that ‘the Sherman Act applies to foreign conduct that was

167 For some incompatibilities between the freedom of competition and effects-based approaches see Zäch & Künzler (2009), ‘Efficiency or Freedom to Compete? Towards an Axiomatic Theory of Competition Law’, Journal of Competition Law (ZWeR) 269, at 277–81. For a general discussion see Eidenmüller (1998), Effizienz als Rechtsprinzip. 168 For an extensive analysis of the welfare vs economic freedom debate in EU competition law and policy see Künzler (2008), Effizienz oder Wettbewerbsfreiheit? 169 Eg Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 303. 170 US v Aluminium Co of America, 148 F2d 416. Judge Learned Hand stated (at 443) that it was ‘settled law … that any state may impose liabilities, even upon persons not within its allegiance, for conduct outside its borders that has consequences within its borders which the state reprehends’. Confirmed by the US Supreme Court in Continental Ore Co v Union Carbide & Carbon Corp, 370 US 690, at 704–05 (1962). On the territorial reach of US antitrust law see Noonan (2008), The Emerging Principles of International Competition Law, pp 224–73.

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meant to produce and did in fact produce some substantial effect in the United States’.171 After jurisdiction has been determined according to the effects doctrine, it may be declined on grounds of negative international comity.172 With respect to foreign commerce other than imports, § 6a Sherman Act, as amended by the Foreign Trade Antitrust Improvements Act of 1982 (FTAIA), also provides for a test which is very similar to the Alcoa formula. According to the FTAIA, Sections 1 to 7 of [the Sherman Act] shall not apply to conduct involving trade or commerce (other than import trade or import commerce) with foreign nations unless 1. such conduct has a direct, substantial, and reasonably foreseeable effect A. on trade or commerce which is not trade or commerce with foreign nations, or on import trade or import commerce with foreign nations; or B. on export trade or export commerce with foreign nations, of a person engaged in such trade or commerce in the United States; and 2. such effect gives rise to a claim under the provisions of sections 1 to 7 of [the Sherman Act], other than this section. If sections 1 to 7 of [the Sherman Act] apply to such conduct only because of the operation of paragraph (1) (B), then sections 1 to 7 of this title shall apply to such conduct only for injury to export business in the United States.

Paragraph 1(A) covers the situation where a cartel of foreign enterprises, or a foreign monopolist, reaches the US market through any mechanism that goes beyond direct sales. Aside from the use of an unrelated intermediary, the 1995 DoJ/FTC Antitrust Enforcement Guidelines for International Operations173 provide as an example the case where foreign IP licensing arrangements have an anti-competitive effect on US commerce. In Empagran, the Supreme Court clarified that the statute requires the claim arising from domestic effects (cf § 6a(1)(A), (2)) to be the same claim that is asserted by the plaintiff in the particular lawsuit. This means that a plaintiff cannot base its claim on foreign anti-competitive conduct unless he is harmed by its domestic effect.174 As regards § 2 Sherman Act, then, either as the basis for a claim or as a defence, the conduct in question must have a direct, substantial and reasonably foreseeable effect on imports, domestic commerce or American exporters. In concreto, a concerted refusal to license IP by, for instance, Indian software firms, or a unilateral refusal to license IP by, for example, a Chinese computer firm, to a firm based in the US which intends to enter the technology market in the United States (‘IP imports’), may pass the Hartford Fire test if such refusal is meant to produce and does produce some substantial anticompetitive effect in the United States. If a US-based firm needs the licence to enter products markets in the United States, such a refusal may similarly pass the test set out in § 6a(1)(A), (2).175

171

Hartford Fire Insurance Co v California, 509 US 764, at 796 (1993). Ibid, at 798 (1993). 173 At 3.121. 174 For suggestions for a post-Empagran reform of the FTAIA within the hearings of the US Antitrust Modernization Commission see the testimony of Eleanor M Fox before the Commission in Washington, 15 February 2006 and the comments of the American Bar Association. 175 For an analysis of the application of US antitrust law to international licensing arrangements see Hovenkamp et al (2004), IP and Antitrust, § 41. 172

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The logic of the effects doctrine thus has two implications: First, § 2 Sherman Act applies irrespective of whether the firm(s) concerned enjoys or attempts to attain market power in a relevant market which geographically overlaps with the US.176 Second, as will be shown below (2.3.3.3.3), the Sherman Act may ‘collide’ with the exercise of rights other than US IP rights. 2.3.3.3.2

Territorial Reach of EU Competition Law

In its consequences similar to the effects doctrine,177 the ECJ established an ‘implementation doctrine’ in Wood Pulp. According to the Court, the decisive question under Article 101 TFEU is not the formation of the agreement, but whether it is implemented within the internal market.178 In its Gencor judgment179 the CFI, in the view of many commentators,180 adopted the effects doctrine to determine jurisdiction under the Merger Regulation, verifying whether a merger has an immediate, substantial and foreseeable effect on the internal market.181 In both cases the ECJ and the CFI adopted a similar principle of negative comity to that adopted by the US Supreme Court. So far, however, the Court has not yet ruled on the territorial reach of Article 102 TFEU. Unlike Article 101, which requires that the bilateral measure has as its ‘object or effect the prevention, restriction or distortion of competition within the internal market’, Article 102 requires that the undertaking(s) concerned must abuse a ‘dominant position within the internal market or in a substantial part of it’.182 This is, however, no jurisdictional criterion, but a substantive condition. Underlying the implementation doctrine is the division of a bilateral measure into the stages of coordination (or formation of an agreement), implementation183 and effect on the market(s). Unilateral conduct may similarly be divided into the phases of (i) taking the decision at the firm level, (ii) implementation vis-à-vis another undertaking, and (iii) effect on the market(s). Transferring the logic of the implementation doctrine to unilateral conduct thus means that the focus is not on the place where the undertaking concerned is seated, but on where it implements the decision in question. As the ECJ explicitly held in Wood Pulp, implementation also covers those situations where the undertaking(s) concerned do not have ‘recourse to subsidiaries, agents, sub-agents, or branches within the Community’.184 Accordingly, a refusal to license IP by a firm based outside the EU vis-à-vis

176 In the same vein for German antitrust law: Immenga (2006), ‘Internationales Wettbewerbs- und Kartellrecht’ in Rebmann et al (eds), Münchener Kommentar zum Bürgerlichen Gesetzbuch (4th ed), vol 11, Internationales Wettbewerbs- und Kartellrecht, para 59. 177 For potential differences in the results between the doctrines see Basedow (1998), Weltkartellrecht, p 19. 178 Cases 89, 104, 114, 116, 117, and 125–29/85, Ahlström Oy v Commission [1988] ECR 5193, paras 11–23 (the ‘Wood Pulp judgment’). On the territorial reach of EU competition law see Noonan (2008), The Emerging Principles of International Competition Law, pp 273–85. 179 Case T-102/96, Gencor Ltd v Commission [1999] ECR II-753, paras 78–111. 180 But see Immenga (2006), ‘Internationales Wettbewerbs- und Kartellrecht’ in Rebmann et al (eds), Münchener Kommentar (4th ed), vol 11, Internationales Wettbewerbs- und Kartellrecht, para 3, who assumes that the Court follows the implementation principle. 181 Although the Merger Regulation still uses the notion of ‘common market’ instead of ‘internal market’, the Commission uses the latter notion under the TFEU for the purpose of consistency. 182 According to the jurisprudence of the ECJ, however, dominance and abuse may occur on different markets (see eg Cases 6 and 7/73, Istituto Chemioterapico Italiano SpA & Commercial Solvents v Commission [1974] ECR 223). 183 In its Wood Pulp judgment (para 16), the Court distinguishes only between these two elements. 184 Ibid, para 17.

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firms operating inside the internal market could fall under the EU’s jurisdiction under the implementation doctrine. Commentators have argued that ‘implementation’, in contrast to the US effects doctrine, does not, or at least should not, cover omissions or failures to act, such as agreements or decisions not to sell within the Community.185 The term ‘implementation’ might be interpreted as implying positive conduct. Such an interpretation, however, would run counter to the purpose of the implementation doctrine, since even hard-core restrictions like quota cartels by definition partly imply a negative decision not to supply. To avoid any uncertainty, de interpretatione ferenda, the best solution would be to adopt the effects doctrine with its elements of directness, substantiality and foreseeability by the Court, since the ultimate aim of Article 102 TFEU is to protect the internal market from anti-competitive conduct by dominant firms. 2.3.3.3.3 Private International Law of IP As regards antitrust as both a ‘sword’ and a ‘shield’, the IP law that may cover the specific conduct of the IP holder—such as his refusal to license or his infringement claim— depends on the choice of law rule which applies in the respective jurisdiction. Generally, international (and European) harmonisation of IP laws has made it easier for courts to understand and apply the IP laws of foreign countries.186 In the patent area, with regard to the first question of jurisdiction (choice of forum), it is well established, at least in continental Europe, that the courts, despite the general principle of territoriality, can hear infringement claims based on foreign patents.187 Under US law, it is at least possible that a US court has jurisdiction over a dispute involving a foreign patent.188 With respect to non-registered copyrights, European courts have been inclined to adjudicate cases requiring the application of foreign copyright laws.189 Whereas US courts, on the basis of a forum non conveniens analysis, were in the past reluctant to adjudicate such cases, they seem to be less willing today to reject such cases.190

185 Eg van Gerven (1990), ‘EC Jurisdiction in Antitrust Matters: The Wood Pulp Judgment’, 1989 Fordham Corporate Law Institute 451, at 471. 186 See Blumer (2001), ‘Patent Law and International Private Law on Both Sides of the Atlantic’, WIPO/ PIL/01/3, pp 6–7. 187 Blumer (2001), ‘Patent Law and International Private Law on Both Sides of the Atlantic’, WIPO/PIL/01/3, p 9. Jurisdiction for infringement claims has to be differentiated from the understanding in both the US and the EU that the validity of registered IPRs such as patents can only be challenged in the country for which the right is registered. This leads to the problem of whether the defendant may invoke the invalidity defence in such ‘foreign’ infringement cases. Another question to be differentiated is the territorial scope of the claim. 188 See Blumer (2001), ‘Patent Law and International Private Law on Both Sides of the Atlantic’, WIPO/ PIL/01/3, pp 20–28. 189 Fawcett & Torremans (1998), Intellectual Property and Private International Law, pp 595 et seq. IntraEuropean claims are governed by the Brussels I Regulation (Council Regulation (EC) No 44/2001 of 22 December 2000 on jurisdiction and the recognition and enforcement of judgments in civil and commercial matters), which is currently under revision. 190 See Austin (2001), ‘Private International Law and Intellectual Property Rights—A Common Law Overview’, WIPO/PIL/01/5, p 8; Ginsburg (2000), ‘Private International Law Aspects of the Protection of Works and Objects of Related Rights Transmitted through Digital Networks (2000 Update)’, WIPO/PIL/01/2. On the use of the forum non conveniens defence by US courts in copyright cases see Goldstein (2001), International Copyright, pp 95–97.

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With regard to second question of applicable law, the basic choice for a jurisdiction is between two choice-of-law rules: the lex loci protectionis and the lex originis.191 Current dominant private international law doctrine suggests that the law of the country in whose territory protection is claimed governs IP issues, whether it concerns existence (patentability or copyrightability), scope, duration, ownership, transfer or infringement.192 If a court accepts jurisdiction, and, as part of its lex fori, applies this lex loci protectionis or ‘law of the protecting country rule’ (Schutzlandprinzip), this court applies the IP law of the country where the infringement of the IP right in question takes place. Outside the copyright area, this lex loci protectionis based on the territoriality principle dominates. With regard to copyright, the lex loci protectionis also still dominates,193 but there have been judgments applying the rule of origin.194 Particularly in the latter case, an interaction or conflict between a ‘foreign’ IP right and ‘domestic’ antitrust law may arise: for example, a foreign IP law may govern copyrightability. An IP right may then conflict with an antitrust defence based on the effects doctrine. Vice versa, a ‘domestic’ court or competition authority may have to decide on an antitrust claim, against which the undertaking concerned raises a justification based on an IP right governed by ‘foreign’ IP law. 2.3.3.4

Conclusion

The above analysis has shown that US antitrust and EU competition law may potentially collide with a ‘foreign’ IP right. The possibility of such a scenario arising partially invalidates the line of argument of those critics of antitrust interference with IP law who, by favouring IP reform over antitrust ‘fine-tuning’ of IP rights, assume that it is only domestic law that collides with antitrust and which thus can be changed relatively easily.195 Even more importantly, the analysis ultimately demonstrates that neither US nor EU legislators, competition authorities and courts can always resolve the relationship question between antitrust and IP by simply assuming that the applicable IP law has as its objective the fostering of efficiency. The assumption that all IP laws have such an efficiency goal is an over-simplification. The IP laws of different countries and jurisdictions may have different goals. The standard distinction would be between utilitarian and non-utilitarian goals.196 Since certain concepts of economic utility may also be philosophically founded on a

191 Private international law of IP has grown into a field of its own, in particular after the increase in information transfer due to the development of the internet. See eg Basedow et al (eds) (2005), Intellectual Property in the Conflict of Laws. 192 See Katzenberger (2006) in Schricker (ed), Urheberrecht, §§ 120 et seq, paras 120–27. Due to the increase in the transnational use and infringement of information protected under national IP laws, the laws of conflict with regard to IP rights are the subject of intense debate, particularly regarding the adequacy of the lex loci protectionis. See eg van Eechoud (2005), ‘Alternatives to the Lex Protectionis as the Choice-of-Law Rule for Initial Ownership of Copyright’ in Drexl & Kur (eds), Intellectual Property and Private International Law, pp 289–307. 193 Drexl (2006) in Rebmann et al, Münchener Kommentar zum Bürgerlichen Gesetzbuch (4th ed), vol 11, Internationales Immaterialgüterrecht, paras 7, 8, 127–32. 194 See eg in the US: Itar-Tass Russian News Agency v Russian Kurier, Inc, 153 F3d 82 (2d Cir 1998). See also Goldstein (2001), International Copyright, p 100. 195 A proponent of such an approach in the context of refusals to license is Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253. See in more detail below at 2.5.1. 196 For an overview of theories of property in general see Munzer (1990), A Theory of Property. For overviews of the theories of IP see Menell (2000), ‘Intellectual Property: General Theories’ in Bouckaert & Geest (eds), Encyclopedia of Law & Economics, pp 129–88; Fisher (2001), ‘Theories of Intellectual Property’ in Munzer (ed), New Essays in the Legal and Political Theory of Property, pp 168–200.

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non-utilitarian basis, such as social contract and hypothetical consent thinking197 in particular, and since advocates of the complementarity assumption usually refer to a common efficiency goal, it is preferable to distinguish between efficiency-related and nonefficiency-related objectives. Whereas for the US the assumption of an efficiency-oriented goal even of copyright law might fit,198 other countries’ IP laws also expressly pursue nonefficiency-related goals, which, amongst others, translate into moral rights.199 The assumption of normative complementarity of antitrust and IP laws to de-conflict their relationship would thus not mirror the multitude of different legislatory intentions behind IP laws.200 The approach of balancing IP and antitrust laws in the light of the common objective of economic efficiency might therefore be valid as a ‘hard’ assumption for US IP and antitrust laws. US courts strike this balance in different ways.201 Such an approach, however, is not appropriate for European competition and IP laws. One may wonder why the assumption of ‘hard’ normative complementarity is relatively widespread.202 Proponents of such an approach may argue that usually only rights relating to technological innovations or functional copyrights (such as for software or databases) come into conflict with antitrust laws, since, for creative works, there are usually enough substitutes such that no market power problem would exist. As regards IP rights relating to technological innovations, software and databases, the assumption that fostering innovation and dynamic efficiency is their goal may be considered more appropriate than for rights involving creative and aesthetic expression. However, it would not be sound, at least for European patent laws, to assume that they have a narrow efficiency goal. Another explanation would be that the approach of balancing IP and antitrust laws in the light of the same objective is ultimately an antitrust domination approach ‘in disguise’, ie IP law is seen in the light of the—presumed— efficiency goal of antitrust laws and (some of) IP law’s objectives are ‘read into’ dynamic efficiency considerations amenable to antitrust analysis. As a matter of legal methodology, however, it would be unsound to assume that US or EU antitrust laws are superior to IP

197

In particular Rawls (1999), A Theory of Justice. Advocates of such an assumption usually refer to the US Constitution, which, in Art I, § 8, cl 8, conditions the grant of power in the Patent and Copyright Clause on the aim of ‘promot[ing] the Progress of Science and useful Arts’. With regard to this clause, the Supreme Court, in Mazer v Stein, explained that ‘“[t]he copyright law, like the patent statutes, makes reward to the owner a secondary consideration” … The economic philosophy behind the clause empowering Congress to grant patents and copyrights is the conviction that it is the best way to advance public welfare through the talents of authors and inventors in “Science and useful Arts”’ (347 US 201 (1954) at 219, quoting US v Paramount Pictures, Inc, 334 US 131, 158 (1948) and US Const Art I, § 8, cl 8). However, the Patent and Copyright Clause would only justify a (broader) utilitarian approach, not a (more narrow) efficiency-oriented approach to patent and copyright law. And while the Mazer judgment refers to ‘public welfare’, it is most unlikely that the Supreme Court, in the 1950s, was referring to a narrow notion of economic welfare. 199 Non-utilitarian property theory may be sub-divided into two strands: first, Lockean labour or natural rights theories (see Locke (1690), The Second Treatise on Government in Two Treatises of Government, Book II, ch 5; Shiffrin (2001), ‘Lockean Arguments for Private Intellectual Property’ in Munzer (ed), New Essays in the Legal and Political Theory of Property, pp 138–67), and, second, personhood or personality theories (see Radin (1981), ‘Property and Personhood’, 34 Stanford Law Review 957). 200 Doubting a pure efficiency function of property rules: Kirchner (1994), ‘Patentrecht und Wettbewerbsbeschränkungen’ in Ott & Schäfer (eds), Ökonomische Analyse der rechtlichen Organisation von Innovationen, pp 157–87, at pp 183–84; similarly Mestmäcker & Schweitzer (2004), Europäisches Wettbewerbsrecht, § 28, para 14, emphasising the constitutional function of property rights for competition in the ordoliberal tradition. 201 See below at 7.2.1. 202 For some potential reasons see above at 2.3.3. 198

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laws. It would therefore be unsatisfactory to proceed on the assumption of normative complementarity.

2.4

A POSITIVE ECONOMIC ANALYSIS OF THE IP/ANTITRUST INTERFACE

As the above analysis has shown, any assumption of normative complementarity of IP and antitrust would be too simplified and too strong. This does not mean, however, that an economic paradigm for the assessment of the IP/antitrust interface would be baseless. A positive analysis of the costs and benefits of antitrust limits to the exercise of IP rights has to include all intended and unintended consequences of such limits, as compared to nonintervention and as compared to alternative instruments.203 Such an economically informed approach may make transparent for legislators, public authorities and courts the different economic effects of different sets of rules.204 The costs of anti-competitive conduct covered by IP and, vice versa, the benefits of antitrust limits to such behaviour have already been outlined.205 To complete the picture, this section analyses the economic functions and social benefits of IP and, in turn, the potential costs of antitrust limits on the exercise of IP rights. The public benefit gained from IP protection may be defined as the social value it creates and helps to disseminate. This social value is the ‘difference in value between the market option[s] created by the [IP] and the preexisting market options’.206 Economic theory has developed (related and overlapping) ideas on the ways in which IP protection enhances societal welfare.207 According to an early explanation expounded by Kitch,208 an initial invention may open up a range of follow-on inventions. On this view, a (broad and early) patent on this ‘prospect opening’ initial invention avoids wasteful races for information, since the basic innovator (‘prospector’) is in the best position to coordinate subsequent research efforts and to organise the market to develop follow-on products efficiently. This ‘prospect or exploration control’ theory, however, is flawed in several ways: First, competition in the search for information, ie competition on innovation markets, tends to yield better results in innovation.209 Second, the prospector’s private interests may not be aligned

203 See Kirchner (2006), ‘Die ökonomische Theorie’ in Riesenhuber (ed), Europäische Methodenlehre, pp 93–119. 204 For the theoretical underpinnings of such an approach see Kirchner (1997), Ökonomische Theorie des Rechts. 205 See above at 2.2.2. For an overview of different cost-benefit frameworks for the analysis of the effects of conduct based on IP see Rahnasto (2003), Intellectual Property Rights, External Effects, and Anti-Trust Law, pp 62–78. 206 Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 301. 207 The literature on the economic justifications for IP protection is legion. For an overview (focusing on patents) see Mazzoleni & Nelson (1998), ‘The Benefits and Costs of Strong Patent Protection: A Contribution to the Current Debate’, 27 Research Policy 273. Their terminology with regard to the underlying theories is adopted here. 208 See Kitch (1977), ‘The Structure and the Function of the Patent System’, 20 Journal of Law and Economics 265. The underlying problem had been raised earlier by Barzel (1968), ‘Optimal Timing of Innovation’, 50 Review of Economics and Statistics 348. 209 Merges & Nelson (1990), ‘On the Complex Economics of Patent Scope’, 90 Columbia Law Review 839. This view is also reflected in the 1995 US Antitrust Guidelines for Licensing Intellectual Property. See also Duffy (2004), ‘Rethinking the Prospect Theory of Patents’, 71 University of Chicago Law Review 439.

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with the interests of society,210 as the problem of strategic blocking of follow-on innovation shows. IP may enhance public welfare in four related and overlapping ways:211 (i)

by providing for private incentives to innovate and create (‘incentive theory’) (2.4.1), as well as (ii) by lowering transaction costs by making innovations transferable and thus providing incentives to commercialise (‘induce commercialisation theory’), (iii) by reducing the innovator’s incentive to hide the new information, and (iv) by providing for informational signals and reducing informational asymmetries between patentees and observers (‘signalling theory’) ((ii)–(iv) are analysed at 2.4.2). The first two incentives are needed to overcome the public good characteristics of information and lead to the dynamic benefits associated with the production and revelation of useful information. The latter two mechanisms reduce the cost of information production, diffusion and commercialisation. The following analysis shows to what extent antitrust limits on the exercise of IP rights may interfere with these mechanisms and thus to what extent they may cut into the benefits associated with the production and dissemination of information.

2.4.1

Preventing Competition by Imitation (Reward Mechanism)

As has been pointed out,212 certain post-innovation appropriability conditions may be necessary to provide for sufficient ex ante incentives to create information. Appropriability can be enhanced through, amongst other things, lead time, protection against imitation in the form of IP, and/or the existence of market power. In the case of market power, IP may be one factor to stabilise such power. The main mechanism of IP protection is to prevent free-riding by imitation on the innovator’s investment and thereby increase the appropriability of rewards from this investment and thus the private monetary incentive (inducement effect) to invest ex ante. There are three basic routes by which an IP holder may reap this reward: first, by selling the product that (partially) benefits from protection by a patent, a copyright or a trade secret; second, by licensing the IP; and third, in the case of patents and trade secrets, by using the protected technology himself to reduce its production costs and thereby gain a competitive advantage. Antitrust law reduces the strategic options of IP holders at the level of liability and/or remedy by (negatively) prohibiting or (affirmatively) prescribing certain conduct. Specifically, if antitrust rules restrict the exercise of market power on the technology market post-innovation, this may enable competitors to compete on the product market (with an improved product) and/or to create follow-on innovation. While such restrictions thus enhance static efficiency and foster innovation by rivals, they reduce the initial innovator’s

210

See Scotchmer (2004), Innovation and Incentives, pp 152–55. For a short summary of the benefits of IP protection see Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 12–16; Hahn (2005), ‘An Overview of the Economics of Intellectual Property Protection’ in Hahn (ed), Intellectual Property Rights in Frontier Industries, pp 11–44. 212 See above at 2.1.1. 211

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profits on the technology market (in the case of licensing) or on the product markets ‘covered’ by the technology (in case the initial innovator markets the product himself). Such an increase in post-innovation competition thereby reduces the appropriability of rewards from an investment into the IP and thus has a negative effect on the initial innovator’s ex ante incentive to invest.213 In its Guidance Paper on its enforcement priorities in applying Article 82 EC (now Article 102 TFEU), the Commission has acknowledged this effect, stating that [t]he existence of … an obligation [to supply on a dominant undertaking]—even for a fair remuneration—may undermine undertakings’ incentives to invest and innovate and, thereby, possibly harm consumers. The knowledge that they may have a duty to supply against their will may lead dominant undertakings—or undertakings who anticipate that they may become dominant—not to invest, or to invest less, in the activity in question. Also, competitors may be tempted to free ride on investments made by the dominant undertaking instead of investing themselves. Neither of these consequences would, in the long run, be in the interest of consumers.214

Since this argument, as conventional wisdom, is central to the debate about (certain forms of) antitrust interference with IP protection, it deserves a closer look. 2.4.1.1 A Theoretical Minimum Threshold The above incentive argument has led in particular to three misconceptions: —

— —

first, that there would always be a trade-off between the incentive to innovate and the dynamic benefits arising from such an incentive on the one hand, and reducing static and dynamic market distortions on the other hand; second, that innovators should always capture the full social value of their investment; and third, that antitrust interference would always be in danger of eliminating the incentive to invest.

To clarify these misconceptions, it is helpful to analyse the major parameters in the ex ante calculus of a rational innovator. One of these parameters is the uncertainty faced by such an innovator with regard to the outcome of his investment into innovation. Depicting the probability of success as psuccess and assuming that the innovator produces the product embodying the IP himself, his expected reward, in a stylised way, would be: Πe = psuccess * turnoverexpected(i, n, m, s) – investment – variable costs.215

Expected turnover is a function of the ‘appropriation strength’216 of IP (in particular the threshold for protection and the length and breadth of the respective IP217) denoted i,

213 For an early analysis see Nordhaus (1969), Invention, Growth and Welfare: A Theoretical Treatment of Technological Change, p 70; Hirshleifer (1971), ‘The Private and Social Value of Information and the Reward to Inventive Activity, 61 American Economic Review 561. 214 Guidance Paper, para 75. 215 Firms such as those in the pharmaceutical sector may invest in more than one way of achieving an innovation target. Multiple projects may be aggregated into an overall probability of success and total investment. 216 Barnett (2011), ‘Do Patents Matter? Empirical Evidence on the Incentive Thesis’ in Litan (ed), Handbook on Law, Innovation and Growth, pp 178–211, at p 181. 217 For an overview of the economics of IP policy levers see Menell & Scotchmer (2007), ‘Intellectual Property’ in Polinsky & Shavell (eds), Handbook of Law & Economics, vol 2, ch 19, pp 6–34.

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the appropriation strength of alternative non-IP protection mechanisms n, the expected market structure and size m (supply side),218 and the expected social value s of the new market option (demand side), with the four parameters being partially interdependent. The social value s (ie the additional utility due to the innovation) equals the difference in value between the market option created by the IP and pre-existing market options. It puts an upper boundary on turnover, since even a monopolist is not able to extract more than the social value from an innovation. The social value s in turn may be positively correlated to the investment. Thus, the innovator would choose the optimal investment by trading off his expected turnover and the investment as cost. Assuming that an antitrust limitation on the exercise of an IP right reduces the expected turnover (by reducing i), the calculus shows that the expected turnover may not fall below a minimum threshold. Otherwise, the innovator would not invest. Below this threshold (or ‘investment condition’), the IP would not rationally be created, and there would thus be no trade-off between IP and antitrust goals. Competition policy, either through substantive standards and rules or through the remedy, thus has to ensure, as a minimum threshold, that innovators can always expect a positive reward (in the sense of a reasonable profit). In concreto, an investor facing the decision whether to invest into technological innovation or an expressive work may assume that there is a probability of getting monopoly power or a dominant position on the relevant market for the IP. He then may expect to face an antitrust duty to license IP at a price below that which he could charge on the market. In this case, a potential antitrust obligation to license may lower his expected reward. By diminishing expected profits or cost savings, an antitrust duty to license might thus cut into the incentives to invest into technological innovation or in expressive works. If the incentive falls below the relevant threshold, the innovator will decide not to invest at all, with the consequence that society has to forgo the potential benefits of the innovation.219 On the other hand, the above relevant investment threshold shows that full internalisation of the social value by the creator is not always necessary.220 As a corollary, (antitrust) limitations on the exercise of IP are not always in danger of eliminating the incentive to invest, assuming that data on the above variables is available. Based on this, commentators have advocated applying a consistent harm requirement, for example in copyright cases. Under such a requirement, copying from a copyrighted work will only constitute an infringement if it causes harm of a nature and extent likely to decrease ex ante incentives to create or disseminate the copyrighted work.221 Such proposals are welcome to the extent that they push effects on incentives to innovate to the centre of analysis.

218 One may assume that the bigger the product market and the more post-innovation market power the innovator has, the higher its profit will be. Indeed, there is evidence that the size of the market correlates positively with innovation activity (see Acemoglu and Linn (2004), ‘Market Size in Innovation: Theory and Evidence from the Pharmaceutical Industry’, 119(3) Quarterly Journal of Economics 1049. This has led commentators to suggest that the length of IP protection should correspond to the size of the market (see Boldrin & Levine (2009), ‘Market Size and Intellectual Property Protection’, 50 International Economics Review 855). 219 For example, the European Commission’s ‘Guidance on its Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’ (para 75) acknowledges that an obligation to supply under Art 102 TFEU ‘even for a fair remuneration—may undermine undertakings’ incentives to invest and innovate and, thereby, possibly harm consumers’. 220 See generally Frischmann & Lemley (2007), ‘Spillovers’, 107 Columbia Law Review 257, at 275–78. 221 Bohannan (2010), ‘Copyright Infringement and Harmless Speech’, 61 Hastings Law Journal 1083, at 1125. (US) copyright law takes into account ‘harm to the market’ for the copyrighted work as a factor in fair use analysis (see below at 7.1.2.1).

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The third potential misconception cited above—that antitrust or other limitations on the exercise of IP would always be in danger of eliminating incentives to invest and innovate—may, however, be re-interpreted as an uncertainty argument: antitrust authorities and courts usually do not have information on the above variables. In that sense, the above minimum threshold is hard to approximate. Due to this uncertainty, competition authorities and courts are in danger of interfering such that an innovator facing a similar investment decision in the future would not invest. Finally, the incentive to invest would indeed be greatest if the investor were able to capture the full social value of the innovation. Furthermore, such an incentive would ensure that innovation by an initial innovator would take place at the highest velocity.222 However, such an incentive is not always necessary. Furthermore, it may come at the cost of reduced competition and follow-on innovation. This is the trade-off or balance that IP laws themselves as well as antitrust laws need to strike. 2.4.1.2 Some Behavioural Caveats and Modifications A fundamental inroad into the standard reward mechanism concept and, consequently, into the standard thinking on the effects of antitrust interference would be to question the assumptions underlying the reward mechanism. Psychological and experimental research223 as well as the emerging field of neuroeconomics224 has revealed that an assumption of perfect or unbounded rationality225 does not fit with reality. Instead, this assumption is increasingly being replaced by the concept of bounded rationality.226 According to this concept, decision makers have only limited cognitive resources and are affected by emotion and motivation. To function effectively under complex circumstances, boundedly rational individuals have to rely on cognitive heuristics, ie simplifying mental shortcuts. Moreover, they suffer from certain biases. Both heuristics and biases lead them to make decisions which systematically deviate from those predicted by rational actor models.227 It is subject to debate, however, whether such behavioural biases are wiped out in market

222 Monetary rewards are usually assumed to decrease in value because of the decreasing marginal utility of money. However, one could argue that this assumption (with regard to the profit from the innovation) does not hold given globalised financial markets and the opportunity for multiple investors to join in the investment. 223 See eg Kahneman (1994), ‘New Challenges to the Rationality Assumption’, 150 Journal of Institutional and Theoretical Economics 18, and the comments by Kirchner (1994), 150 Journal of Institutional and Theoretical Economics 37 and Selten (1994), 150 Journal of Institutional and Theoretical Economics 42. 224 See eg Camerer et al (2005), ‘Neuroeconomics: How Neuroscience Can Inform Economics’, 43 Journal of Economics Literature 9. 225 The still widespread assumption of perfect rationality may partly be explained by the fact that models building on this assumption are mathematically better tractable. 226 See Korobkin & Ulen (2000), ‘Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics’, 88 California Law Review 1051. 227 Tversky & Kahneman (1974), ‘Judgment under Uncertainty: Heuristics and Biases’, 185 Science 1124. The concept of bounded rationality was originally developed by Simon (1955), ‘A Behavioral Model of Rational Choice’, 69 Quarterly Journal of Economics 99; (1958), ‘Rational Choice and the Structure of the Environment’, 63 Psychological Review 129. In Simon’s terminology, however, bounded rationality only referred to the cognitive limitations of the human mind due to its limited abilities to process information. According to more recent thinking, the concept of bounded rationality also encompasses the biases caused by motivation and emotion. For an overview of the behavioural law and economics approach see Jolls et al (1998), ‘A Behavioral Approach to Law and Economics’, 50 Stanford Law Review 1471; Korobkin & Ulen (2000), ‘Law and Behavioral Science: Removing the Rationality Assumption from Law and Economics’, 88 California Law Review 1051.

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environments228 and how they could and should be taken into account under competition theory and policy.229 With regard to the decision to engage in potentially risky innovative activity which will yield profits only in the future, risk aversion on the one hand and over-optimism on the other hand230 as well as hyperbolic discounting231 may change the standard incentive theory.232 In particular, over-optimism may lead to ‘excess’ innovative activity as compared to current standard theory.233 An even more fundamental caveat to the above inducement effect story would be to ask whether every potential innovator is driven by the expectation of monetary reward for his investment. Such monetary reward may be unnecessary if the innovator instead experiences ‘intrinsic hedonic rewards’ or is inspired by ‘social-psychological rewards’ such as reputation,234 as advocates of the free software and open source movement emphasise.235 Others argue that the use of monetary rewards may even undermine processes which are based on voluntary cooperation.236 This suggests that, on average, the threshold of monetary rewards to induce innovation may be lower than under the assumption that all innovators fit the standard assumptions of homo oeconomicus. Again, however, much of the technological innovation that may lead to market power and thus potentially to competition problems takes place in business environments where firms may be driven by, for example, capital market expectations. Here, the caveats may apply to a lesser extent.

228 For a nuanced view see Fehr & Tyran (2005), ‘Individual Rationality and Aggregate Outcomes’, 19 Journal of Economic Perspectives 43. 229 See, eg Ellison (2006), ‘Bounded Rationality in Industrial Organization’ in Blundell et al (eds), Advances in Economics and Econometrics: Theory and Applications, pp 142–74; Stucke (2007), ‘Behavioral Economists at the Gate: Antitrust in the 21st Century’, 38 Loyola University Chicago Law Journal 513; Armstrong & Huck (2010), ‘Behavioral Economics as Applied to Firms: A Primer’, 6 Competition Policy International 2. 230 According to empirical research, people tend to overestimate low and underestimate high probabilities. See Kahneman & Tversky (1979), ‘Prospect Theory: An Analysis of Decisions under Risk’, 47 Econometrica 263; Kahneman & Tversky (1992), ‘Advances in Prospect Theory: Cumulative Representation of Uncertainty’, 5 Journal of Risk and Uncertainty 297. 231 See eg Laibson (2003), ‘Intertemporal Decision Making’ in Nadel (ed), Encyclopedia of Cognitive Science, vol I, pp 915–19. 232 For an attempt to integrate these behavioural modifications into the standard incentive model see Tor & Oliar (2002), ‘Incentives to Create under a “Lifetime-Plus-Years” Copyright Duration: Lessons from a Behavioral Economic Analysis for Eldred v Ashcroft’, 36 Loyola LA Law Review 437. 233 Over-optimism may serve as factor to explain ‘excess’ entry on markets. See Tor (2002), ‘The Fable of Entry: Bounded Rationality, Market Discipline, and Legal Policy’, 101 Michigan Law Review 482. 234 Benkler (2002), ‘Coase’s Penguin, or, Linux and The Nature of the Firm’, 112 Yale Law Journal 369, and Benkler (2006), The Wealth of Networks: How Social Production Transforms Markets and Freedom. Benkler defines social-psychological rewards as ‘a function of the cultural meaning associated with the act [which] may take the form of actual effect on social associations and status perception by others or on internal satisfaction from one’s social relations or the culturally determined meaning of one’s action’ ((2002), ‘Coase’s Penguin, or, Linux and The Nature of the Firm’, 112 Yale Law Journal 369, at 426–27). See also Scotchmer (2004), Innovation and Incentives, p 98, who also points out that some ‘innovators’ like artists or scientists do not take individual decisions to ‘innovate’, but take a ‘lifestyle choice’. 235 See eg Moglen (1999), ‘Anarchism Triumphant: Free Software and the Death of Copyright’ (available at emoglen.law.columbia.edu/publications/anarchism.html). For a more traditional economic explanation of open source activities see Lerner & Tirole (2002), ‘Some Simple Economics of Open Source’, 50 Journal Industrial Economics 197. 236 Fehr & Gächter (2002), ‘Do Incentive Contracts Undermine Voluntary Cooperation?’, Institute for Empirical Research in Economics, University of Zurich, Working Paper No 34, available at www.unizh.ch/cgi-bin/ iew/pubdb2.

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2.4.1.3

Countervailing Effects?

Leaving aside the behavioural caveats, the general conclusion that we can draw from the above stylised incentive mechanism is that the stronger the IP protection and the fewer the antitrust restrictions on the exercise of IP, the higher the incentive to invest in innovation. Even assuming unbounded rationality, however, economic theory suggests that the relationship between IP protection and competition policy on the one hand and incentives to innovate on the other may not be monotonic. Indeed, contrary to the above negative effect on the incentives to innovate which antitrust boundaries to the use of IP rights may have, the European Commission, analysing the justification for Microsoft to terminate licensing, came to the conclusion that … on balance, the possible negative impact of an order to supply on Microsoft‘s incentives to innovate is outweighed by its positive impact on the level of innovation of the whole industry (including Microsoft). As such, the need to protect Microsoft’s incentives to innovate cannot constitute an objective justification that would offset the exceptional circumstances identified. (emphasis added)237

In essence, the Commission thus argued that its enforcement of Article 102 TFEU prevented a structural effect which would have reduced Microsoft’s incentives to innovate. This meant, in turn, that restricting Microsoft’s exercise of its IP rights enhanced or at least preserved Microsoft’s current incentives to innovate.238 In its decision, the Commission makes assumptions regarding several relationships such as those (i) between Microsoft’s incentives to innovate and the R&D efforts of its competitors239 and (ii) between forced licensing and Microsoft’s and its competitors’ incentives to innovate.240 Most importantly in this context, the Commission concluded that … there is a serious risk that Microsoft will succeed in eliminating all effective competition in the work group server operating system market. This would have a significant negative effect on its incentives to innovate as regards its client PC and work group server operating system products. Microsoft’s research and development efforts are indeed spurred by the innovative steps its competitors take in the work group server operating system market. Were such competitors to disappear, this would diminish Microsoft’s incentives to innovate. By contrast, were Microsoft to supply Sun and other work group server operating systems with the interoperability information at stake in this case, the competitive landscape would liven up as Microsoft’s work group server operating system products would have to compete with implementations interoperable with the Windows domain architecture. Microsoft would no longer benefit from a lock-in effect that drives consumers towards a homogeneous Microsoft solution, and such competitive pressure would increase Microsoft’s own incentives to innovate.241

237 Commission Decision of 24 March 2004, notified under document number C(2004)900, Case COMP/ C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, para 712. The Decision as published in the OJ includes only a summary of the infringement, remedies and fines. A non-confidential version of the full text is available through the Commission website. 238 See also below at 8.2.1.3.5. 239 Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, para 725. 240 Ibid, para 783. 241 Ibid, para 725. See also paras 724, 726–27. In its judgment, the CFI regards the Commission’s statement as merely dealing with Microsoft’s argument that its products might be cloned as a consequence of the Commission’s decision (see Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 710).

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More generally, in its Guidance Paper on its enforcement priorities in applying Article 82 EC (now Article 102 TFEU), the Commission stated, in the context of the final condition of an efficiency defence, that [r]ivalry between undertakings is an essential driver of economic efficiency, including dynamic efficiencies in the form of innovation. In its absence the dominant undertaking will lack adequate incentives to continue to create and pass on efficiency gains …242

These statements ultimately reflect an assumption about the relationship between the preinnovation structure of product markets and innovation incentives. This relationship is the subject of extensive theoretical and empirical debate, which has been framed around the well-known contributions of Schumpeter and Arrow. The link between current pre-innovation market structure (at point t1) and innovation is also relevant for the relationship between innovation incentives and expected future market structures (at post-innovation point t2) as depicted by the above IP incentive mechanism. The reason is that an innovator may anticipate future antitrust enforcement (at t2) aimed at stimulating innovation. From an economic rational expectations view, antitrust authorities thus cannot successfully ‘stimulate’ innovation at t1 (eg by mandating licensing to competitors) without giving a signal to market participants which would allow them to anticipate future interference.243 Such market participants, however, may still prefer to aspire to a dominant, but ‘regulated’, position. Before embarking on an analysis of the debate about the relationship between innovation and the degree of competition on technology and product markets, and, in turn, of market power, it is important to clarify that market shares are not an indicator of the latter, particularly not in innovative industries. Extending his contestability theory,244 Baumol has suggested that particularly in oligopolistic industries driven by innovation the few firms in the market must ‘innovate as fast as they can just to stand still’ and keep their market position,245 without being able to exert market power. The debate246 about (temporary) market power as a condition for innovation started with Schumpeter. He conjectured that monopolists may be more innovative than firms in competitive markets, since, on the cost side, they have higher economies of scale in innovation and production and, due to their pre-existing market power, they can better profit from innovation.247 Against Schumpeter’s hypothesis, Arrow, in short, argued that monopolists have less of an incentive to innovate than firms in competitive markets: they continue to reap monopoly profits by using their existing technology. Such monopolists would only ‘replace themselves’ by innovating and

242

Ibid, para 30. For the similar classic argument with regard to central bank interventions see Lucas (1972), ‘Expectations and the Neutrality of Money’, 4 Journal of Economic Theory 103. Bounded rationality weakens such expectation and adaption, but would not prevent it completely. 244 See Baumol et al (1982), Contestable Markets and the Theory of Industry Structure. 245 Baumol (2002), The Free-Market-Innovation Machine: Analyzing the Growth Miracle of Capitalism, pp 286–87. This innovation ‘arms race’ is dubbed the ‘red queen effect’ (alluding to the ‘Red Queen Game’ in Lewis Carroll’s Alice in Wonderland). 246 For overviews of discussion and surveys of the literature see Gilbert (2006), ‘Looking for Mr Schumpeter: Where Are We in the Competition-Innovation Debate? in Jaffe et al (eds), Innovation Policy and the Economy, vol 6, pp 159–215; Kamien & Schwartz (1982), Market Structure and Innovation. See also the testimony of Richard J Gilbert before the Antitrust Modernization Commission (‘New Antitrust Laws for the “New Economy”?’), Washington, DC, 8 November 2005. 247 Schumpeter (1942), Capitalism, Socialism and Democracy, pp 81–106. 243

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thus have the least to gain from innovation.248 This ‘replacement effect’249 is likely to be strongest in the case of drastic innovation, such as when the new product or process may be expected to completely displace the old one. The Commission’s statement in its Microsoft decision sided with Arrow’s view.250 On a theoretical level, both polar views have been criticised and attracted refinements.251 To account for both the Schumpeterian and the replacement effect, one modern approach by Aghion et al focuses on the incremental profits from cost-reducing innovations, ie the difference between post- and pre-innovation rents.252 According to them, more preinnovation product market competition may increase incentives to innovate if it decreases pre-innovation profits of a firm by more than it reduces its post-innovation profits. In this case, competition may increase incremental rents from innovating and thereby stimulate investments aimed at ‘escaping competition’.253 This may particularly be the case in ‘neckand-neck industries’,254 that is in sectors in which oligopolistic firms compete at similar technological levels and production costs. In such industries, competition particularly reduces pre-innovation rents. Accordingly, an increase in product market competition may enhance the incremental profits from innovating even though this may decrease the overall level of absolute profits in the industry.255 On the other hand, in industries with more varied cost structures where ‘laggard’ firms with low initial profits innovate, product market competition would have a larger negative effect on post-innovation rents.256 In this case, more intense product competition would mean lower profits as a result of catching up with the industry leader and thus less innovation in the sense of a Schumpeterian effect. Similarly, Segal and Whinston have focused on the value of incumbency.257 They argue that, on the one hand, competition policy which ‘protects’ new entrants against incumbents’ conduct increases a successful innovator’s initial profits and may thereby encourage innovation. But, on the other hand, since entrants hope to become ‘the next Microsoft’ (or ‘the next Apple’ or ‘the next Google’), reducing the profits of incumbency may retard innovation.

248 Arrow (1962), ‘Economic Welfare and the Allocation of Resources for Invention’ in Nelson (ed), The Rate and Direction of Inventive Activity, pp 609–26. 249 This terminology has been introduced by Tirole (1997), The Theory of Industrial Organization, p 392. 250 For an analysis of both conjectures and their relationship with IP see Spulber (2008), ‘Competition Policy and the Incentive to Innovate: The Dynamic Effects of Microsoft v Commission’, 25 Yale Journal on Regulation 101. 251 For an analysis of competition in and for the market with endogenous entry see Etro (2007), Competition, Innovation and Antitrust—A Theory of Market Leaders and Its Policy Implications, pp 131–69. 252 Aghion et al (1997), ‘Competition and Growth with Step-by-Step Innovation: An Example’, 42 European Economic Review, Papers and Proceedings, pp 771–82; Aghion and Griffith (2005), Competition and Growth: Reconciling Theory and Evidence (Zeuthen Lectures); Aghion et al (2005), ‘Competition and Innovation: An Inverted-U Relationship’, Quarterly Journal of Economics 701. For a model explaining an inverted U-relationship between product market competition and growth see Bucci (2007), ‘An Inverted-U Relationship between Product Market Competition and Growth in an Extended Romerian Model’ in Cellini & Cozzi (eds), Intellectual Property Rights, Competition and Growth, pp 177–205. 253 Aghion et al (2005), ‘Competition and Innovation: An Inverted-U Relationship’, Quarterly Journal of Economics 701. 254 Ibid. 255 Aghion et al (2001), ‘Competition, Imitation and Growth with Step-by-Step Innovation’, 68(3) Review of Economic Studies 467, 468. 256 Aghion et al (2005), ‘Competition and Innovation: An Inverted-U Relationship’, Quarterly Journal of Economics 701, 702. 257 Segal & Whinston (2007), ‘Antitrust in Innovative Industries’, 97 American Economic Review 1703. Other parameters relevant to the relationship between competition and innovation would be, for example, the difference between process and product innovations and firm size. For an overview see Gilbert (2007), ‘Competition and Innovation’ in Collins (ed), Issues in Competition Law and Policy, ch 26.

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Introducing discounting, Segal and Whinston show in a stylised duopoly model that a challenger’s incentives to innovate are greater if the incumbent has a lower profit share when competing against and being replaced by the entrant.258 This means that maximising the value of incumbency does not amount to maximising incentives to innovate. 2.4.1.4

Empirical Evidence

The above overview of the theoretical debate has shown that both IP (in particular patent) protection and product market competition are assumed to influence incentives for initial innovation.259 Empirical research with the aim of testing theoretical conjectures on the effects of IP and competition on the incentive to innovate of initial innovators may be grouped into three broad categories: (i) research on the relationship between the level of IP protection (as opposed to other appropriation mechanisms) and the incentive to innovate, (ii) vice versa, research on the relationship between forced licensing and the incentive to innovate, and (iii) research on the relationship between (pre- and post-innovation) product market competition and the incentive to innovate. With regard to the first relationship, empirical research has yielded mixed results.260 Landes and Posner conclude that the ‘belief [that without legal protection the incentives to create intellectual property would be inadequate] cannot be defended confidently on the basis of current knowledge’.261 In his recent extensive review of the empirical research, Barnett262 distinguishes between a ‘strong’ and a ‘weak’ form of the basic incentive thesis: IP protection as a necessary ‘but for’ condition for providing any level of investment in innovation (strong form), and IP protection as a necessary condition for providing the highest level of investment (weak form). According to Barnett’s review, the strong form of the incentive thesis has been confirmed in particular for markets where innovation costs are relatively high and imitation costs are relatively low, such as the pharmaceuticals and chemicals markets.263 Studies on the ‘mirror’ relationship between forced licensing and the incentive to innovate yield a similarly mixed picture. Scherer264 and Levin et al265 conclude that, with the exception of the pharmaceuticals sector, empirical evidence of a chilling effect of compulsory licensing on R&D expenditure is scant. To the contrary, an examination of Federal Trade Commission antitrust decrees from 1980 to 1999, mostly part of merger settlements, concludes that decrees with substantial compulsory licensing provisions significantly

258 Since time-discounting makes the near-term effect for the entrant more important, Vickers ((2009), ‘Competition Policy and Property Rights’, University of Oxford, Department of Economics Discussion Paper No 436, at p 14) has called it the ‘front-loading’ effect. 259 The incentive to innovate in a cumulative innovation setting is addressed in detail in particular in ch 4. 260 See the literature cited at fnn 13 and 14. 261 Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 9–10. 262 Barnett (2011), ‘Do Patents Matter? Empirical Evidence on the Incentive Thesis’ in Litan (ed), Handbook on Law, Innovation and Growth, pp 178–211, in particular at p 182. 263 Ibid, in particular at pp 195–96. 264 Scherer (1977), The Economic Effects of Compulsory Patent Licensing; and Scherer (2007), ‘The Political Economy of Patent Policy Reform in the United States’, Harvard Kennedy School of Government Working Research Paper 07-042, citing other studies. 265 Levin et al (1987), ‘Appropriating the Returns from Industrial Research and Development’, 3 Brookings Papers on Economic Activity 783, at 804.

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reduce the incentive to invent as measured by R&D expenditure.266 This study has been criticised, since it does not take into account the effect of mergers, ie that a firm with high R&D expenditure may have acquired a firm with low R&D investment.267 In addition, the correlation between R&D expenditure and innovative activity may be weak. Finally, with regard to the relationship between competition and the incentive to innovate, some studies find an inverted U-relationship in the sense that innovative activity is highest at intermediate levels of concentration on product markets and decreases as concentration approaches a lower degree of concentration or monopoly.268 These studies have been criticised since not only the correlation between R&D expenditure and innovative activity, but also the correlation between concentration of the market and the degree of competition, have been found to be weak.269 An inverted U-relationship, however, has been confirmed to some extent by a more sophisticated recent study by Aghion et al,270 who use data on the Lerner index and the number of patents. 2.4.1.5

Lessons for Competition Policy?

The above summary of current literature shows that the theoretical and empirical approaches are becoming richer and better able to give a fuller picture of the relationship between product market competition and innovation.271 So far, the effects of strong IP protection and, in turn, deferential competition policy on follow-on innovation have not been addressed.272 Even focusing only on non-cumulative innovation, however, the abovementioned replacement and ‘escape competition’ effects suggest that there are countervailing mechanisms to the basic incentive theory. Thus time-consistent IP and competition policies have to address difficult trade-offs. The debate is, by its nature, far from conclusive. Even if it could provide concrete solutions, competition policy lacks the instruments, and competition authorities and courts the knowledge, to actively impose a specific ‘optimal’ structure on (product) markets which then would yield the highest incentive to innovate. Antitrust rules are primarily designed ‘merely’ to prevent anti-competitive effects, that is, to prevent negative changes in market conditions. As the Microsoft decision shows, however, when setting and applying rules, competition authorities and courts (as well as legislators) need to predict what effects a restriction on the exercise of IP rights will have on future innovation. And as both the above behavioural caveats to the traditional incentive mechanism and the debate about

266 Preis (2005), The Incentive Theory of Patents in Action: The Effects of Patent Relief on the Incentive to Invent and the Incentive to Disclose, Harvard JSD thesis (as yet unpublished). According to the summary of the thesis, in the few years following the merger incentives to innovate, measured by R&D/sales ratios, fell significantly. However, after the decrease, a reversal is observed. In addition, the results of the survey vary widely. 267 Scherer (2007), ‘The Political Economy of Patent Policy Reform in the United States’, Harvard Kennedy School of Government Working Research Paper 07-042, fn 16. 268 For a survey see Baldwin & Scott (1987), Market Structure and Technological Change, pp 63–113. 269 See Cohen & Levin (1989), ‘Empirical Studies of Innovation and Market Structure’ in Schmalensee & Willig (eds), Handbook of Industrial Organization, vol 2, pp 1059–1107, at pp 1074–79. 270 Aghion et al (2005), ‘Competition and Innovation: An Inverted-U Relationship’, Quarterly Journal of Economics 701. 271 See Baker (2007), ‘Beyond Schumpeter vs Arrow: How Antitrust Fosters Innovation’, 74 Antitrust Law Journal 575. 272 The intricate relationship between initial and follow-on innovation will be addressed in detail in ch 4.

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the relationship between product market competition and innovation show, the incentive relationships are complex and thus inherently hard to predict. Scholars have attempted to infer certain policy principles from the Schumpeter vs Arrow debate.273 It has been suggested, for example, that there should be a presumption that competition promotes innovation, but that such presumption should be rebuttable, particularly in industries where it is difficult for firms to earn back their investment into innovation.274 More cautiously, Baker275 has suggested applying certain principles, the two most important of which are as follows: First, ‘[c]ompetition among rivals producing an existing product encourages those firms to find ways to lower costs, improve quality, or develop better products’. This principle would mirror Arrow. Second, ‘[f]irms that expect to face more product market competition after innovating have less incentive to invest in R&D’. This mirrors the above ex ante incentive theory and Schumpeter’s view that the expectation of post-innovation profits drives innovation. As has been pointed out above, however, competition rules and their application need to be time-consistent to stimulate innovation. Thus the two principles cannot be applied in the sense of ‘stimulating competition today, granting monopoly tomorrow’. The fundamental question underlying the transfer of the above discussion to antitrust policy is the extent to which antitrust policy can and should shift its focus away from competition on product and technology markets to incentives to innovate or innovation as decisive parameters. In the context of the European debate about the (Magill) ‘new product’ and the (Microsoft) incentive balance test,276 it has been argued that incentives to innovate are a ‘good proxy of consumers’ benefits’, whereas the concept of new product would be imprecise.277 This view seems misguided, since the ‘new product’ concept refers to future product markets, whereas the incentive to innovate refers to the innovation market at the top of the innovation chain. If competition policy aspires to prevent restraints on competition at all stages of this chain, the two concepts are not mutually exclusive and should be integrated into the concept of dynamic efficiency. Without being able to fully unfold the innovation market debate in detail here,278 the US Guidelines, in favouring the traditional potential competition analysis over innovation market analysis, reflect the view that incentives to innovate and innovation markets are more remote and a prognosis is thus harder to make. The question of how to take into account and assess innovation under competition policy is thus ultimately a problem of which time horizon competition authorities and courts should adopt when taking

273 For discussion see Wright (2011), ‘Antitrust, Multidimensional Competition, and Innovation: Do We Have an Antitrust-Relevant Theory of Competition Now?’ in Manne & Wright (eds), Competition Policy and Patent Law under Uncertainty, pp 228–51. 274 Gilbert (2005), ‘New Antitrust Laws for the “New Economy”?’, testimony before the Antitrust Modernization Commission, Washington DC, 8 November 2005. 275 Baker (2007), ‘Beyond Schumpeter vs Arrow: How Antitrust Fosters Innovation’, 74 Antitrust Law Journal 575. 276 See in more detail below at 8.2.1.3.4 and 8.2.1.3.5. 277 Lévêque (2005), ‘Innovation, Leveraging and Essential Facilities: Interoperability Licensing in the EU Microsoft Case’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyrights—EU and US Perspectives, pp 103–26. 278 See also below at 4.4.2. For an overview of the potential approaches in the IP context see Gallini & Trebilcock (1998), ‘Intellectual Property Rights and Competition Policy: A Framework for the Analysis of Economic and Legal Issues’ in Anderson & Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, pp 17–61, at pp 24–25.

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decisions, given the problem of lack of knowledge or uncertainty respectively. As alluded to by Demsetz, an antitrust policy aimed at enhancing innovation would require knowledge in particular about the rate of substitution between innovation and product market competition.279 As the above inconclusive debate has shown, there is no sufficient knowledge about this relationship. Since not only the parameters of competition, but also the rules of the game itself, may change over time it is also hard to draw inferences from past data for application in the future. The conclusions to be drawn from the above discussion are thus threefold: First, competition policy, in terms of both setting and applying rules, which restricts the exercise of IP rights to enhance rivals’ ability to compete on current product, technology or innovation markets should ask whether it reduces prospective IP holders’ incentives to innovate. Second, since the Schumpeter vs Arrow debate is inconclusive, this question should not be answered on the basis of broad general presumptions or principles regarding the relationship between competition on product and technology markets on the one hand and innovation markets on the other hand. If the assessment of the effects on innovation incentives goes beyond the above classic IP mechanism, such an analysis must be industry-specific.280 Third, inferences drawn from historical industry data can only be used if there is a reasonable probability that such data can be extrapolated into the future, eg that the underlying competition ‘game’ has not changed.

2.4.2

Other Functions of IP and their Relation to Antitrust

In addition to the above ‘exclusion’ and reward rationale, IP laws also serve other important functions. A second benefit of IP is that the holding of an IP right at an early stage of development gives its holder a legal position which can either be transferred, at low transaction costs, to potentially more specialised developers, or used to finance further development (thus inducing commercialisation). More generally, every type of (intellectual) property makes the system of commercialising innovation more modular.281 Transferability of IP also generally enhances technology diffusion. Antitrust restrictions on the transfer of IP which may lead to anti-competitive effects (eg concerning a transfer to an entity with market power) can be analysed in a similar way to restrictions on the bundle of rights that enables the IP holder to exclude others from competition by imitation.282 The above mentioned public benefit of enhanced modularity also increases the private value of the IP for the innovator. The 279 See Demsetz (1991), The Economics of the Business Firm, p 144: ‘If we agree that many relevant forms of competition relate inversely to each other and that no plausible method exists for converting intensities of different forms of competition into a common unit of intensity, then, it would seem, we also must agree that the Sherman Antitrust Act is logically impossible to carry out if its goal is interpreted as increasing the overall intensity of competition (or to reducing the overall intensity of monopoly).’ This (over-)broad ‘antitrust impossibility theorem’ could be considered a specific expression of Hayek’s lack of knowledge argument. 280 See similarly recommendation no 2 of the US Antitrust Modernization Commission: ‘In industries in which innovation, intellectual property, and technological change are central features, just as in other industries, antitrust enforcers should carefully consider market dynamics in assessing competitive effects and should ensure proper attention to economic and other characteristics of particular industries that may, depending on the facts at issue, have an important bearing on a valid antitrust analysis’ (emphasis added). 281 Smith (2007), ‘Intellectual Property as Property: Delineating Entitlements in Information’, 116 Yale Law Journal 1742, at 1822. 282 See above at fn 7 for a list of the different exclusivity rights.

2.4 A POSITIVE ECONOMIC ANALYSIS

59

way in which antitrust restrictions on the transfer of IP touch on the innovator’s expected post-innovation return and his ex ante incentives to innovate is thus comparable to the influence restrictions on the rights to exclude others from competition by imitation have on incentives to innovate. As a consequence, the above ex ante incentive minimum threshold283 is sufficient to account also for the ‘commercialisation function’ of IP. A third benefit specifically of the patent system is that it allows for the disclosure of information. As Arrow recognised, an information holder may face a dilemma absent legal protection for his information: in order to sell the information, he must disclose it to a potential buyer to enable him to judge its value. But once he discloses the information, he may have nothing left to sell, since the potential buyer may have the incentive to claim that he thought of the idea himself.284 Patent law helps to overcome this information or disclosure paradox by giving the innovator protection not only against prospective buyers (with whom he could also contract), but also against third parties to whom the information as a positive externality may spill over.285 Such a private disclosure incentive for the innovator creates societal benefits, associated with the use of the information by others than the innovator.286 This reasoning, with some exceptions, does not apply to copyrights, which are only granted for an idea as already expressed in a work and not for information.287 A more recent strand of the literature, building on general signalling theory in information economics,288 has identified a fourth benefit of patent protection: it provides a signalling mechanism which helps to reduce informational asymmetries between patentees and observers.289 According to this line of argument, owners of patents may be actors on capital, labour and product markets and thus may need to convey information to observers, in particular to investors on the capital market, both regarding the invention and regarding

283

See 2.4.1.1. Arrow (1962), ‘Economic Welfare and the Allocation of Resources for Invention’ in Nelson (ed), The Rate and Direction of Inventive Activity, pp 609–25, at p 615. See also Anton & Yao (1994), ‘Expropriation and Inventions: Appropriable Rents in the Absence of Property Rights’, 84 American Economic Review 190. 285 As a consequence of Arrow’s disclosure paradox, information in the pre-patented stages of the innovation process may not be traded. According to Bar-Gill and Parchomovsky ((2004), ‘Intellectual Property Law and the Boundaries of the Firm’, Harvard John M Olin Center Discussion Paper No 480, 06/2004), pre-patent innovation must thus be carried out within a single firm. IP thereby influences the boundary between the firm and the market. 286 Therefore, this line of argument has been dubbed ‘information disclosure theory’. This incentive to disclose information provided for by the expectation of a patent grant has to be distinguished from the strategic incentive of an innovator in a patent race to disclose new information to the public not in order to obtain a patent, but to raise the prior art bar, ie the novelty and nonobviousness standard. Such strategic disclosure may preempt the issuance of a patent to a rival who is (considered to be) ahead in the race. See Parchomovsky (2000), ‘Publish or Perish?’, 96 Michigan Law Review 926; Lichtman et al (2000), ‘Strategic Disclosure in the Patent System’, 53 Vanderbilt Law Review 2175. 287 See Posner & Landes (2003), The Economic Structure of Intellectual Property Law, pp 294–95. Expressive works, for which there may exceptionally be an incentive to conceal them, include blueprints for copyrighted works, which themselves are copyrighted (eg building plans), and software (Landes & Posner (2003), pp 331–32). 288 See Akerlof (1970) ‘The Market for “Lemons”: Quality Uncertainty and the Market Mechanism’, 84(3) Quarterly Journal of Economics 488; Rothschild & Stiglitz (1976), ‘Equilibrium in Competitive Insurance Markets: An Essay on the Economics of Imperfect Information’, 90 Quarterly Journal of Economics 629; Spence (1973), ‘Job Market Signaling’, 87 Quarterly Journal of Economics 355; Fudenberg & Tirole (1991), Game Theory, pp 324–29, 446–60. 289 See Long (2002), ‘Patent Signals’, 69 University of Chicago Law Review 625; Thomas (2001), ‘Collusion and Collective Action in the Patent System: A Proposal for Patent Bounties’, University of Illinois Law Review 305. 284

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the patentee himself. Communicating this private information may be costly, and observers may not be willing to expend the costs necessary to obtain the information. In this situation, a patent, which, in contrast to copyright, has undergone a screening process, may provide a relatively cost-effective and credible quality signal about the invention and the prospects of the patentee.290 Antitrust policy, however, usually does not interfere with either the above ‘disclosure’ or the ‘signalling’ function of patent law. These IP functions will therefore not be further analysed here.

2.5

IP OR ANTITRUST? SOME META RULES

The above positive analysis of the IP/antitrust relationship has shown that restricting IP rights may reduce harm to static and dynamic competition due to IP protection, but at the same time may reduce the ex ante incentive to innovate. On a legislative level, one approach that might be used to balance these costs and benefits in the long term to foster competition and innovation could be to use the IP levers and instruments in the sense of a ‘pure’ IP solution to avoid the need of antitrust even as ‘safety net’ (approach I). The other extreme approach would be to use antitrust as a fine-tuning device on a case-by-case basis (approach II). Both ways of balancing the substantive costs of conduct protected by IP, however, come with various costs and benefits.

2.5.1

Approach I: ‘Pure’ IP Solution

Mirroring the interpretive approaches of absolute IP domination,291 one may attempt to balance the abovementioned benefits and costs of IP protection solely through IP laws. As a theoretical reference point for the design of an IP system, economics would indeed suggest that such a system is optimal if the marginal benefits to society of additional property protection are equal to its marginal costs. Such an approach would understand property rights theorists such as Demsetz in a normative way. Demsetz has pointed out that [t]he problem of defining ownership is precisely that of creating properly scaled legal barriers to entry.292

Probably due to the strong influence of property rights theory, this view has prominent supporters in the current US debate on its IP system and the IP/antitrust interface. On this view, the ideal solution to (perceived) competitive problems due to ‘over-shooting’ IP protection would be to change the (intellectual) property system and to set IP levers such

290 Long (2002), ‘Patent Signals’, 69 University of Chicago Law Review 625, at 636–37. Whether obtaining information about the invention and the patentee has not only private value for the patentee and the observer but also positive social value largely depends on whether patent signalling leads to the disclosure of information that would not have been available otherwise. If it does, this increases allocative efficiency (ibid, at 675). 291 See above at 2.3.1. 292 Demsetz (1982), ‘Barriers to Entry’, 72 American Economic Review 47, at 49 and 52.

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61

as the threshold for protection as well as the scope, breadth and duration of protection293 by trading off the costs and benefits of protection.294 Such an approach, however, is neither feasible nor preferable. It is not feasible since legislators (as well as courts) cannot have the knowledge to ‘optimally’ balance the (competition-related) costs and benefits of (intellectual) property protection and allocate the IP rights between different innovators.295 More fundamentally, the definition of property rights cannot account for all situations where the exercise of such rights may conflict with the public interest. Even more importantly, it would not be desirable to conceive of IP as providing ‘optimal’ barriers to entry in the sense of already balancing all costs and benefits of protection. Such a ‘pure’ IP approach would forgo the comparative advantages that competition rules offer: even taking into account internal IP law balancing instruments such as patent and copyright misuse,296 antitrust offers the comparative advantage of providing for a more specialised, differentiated and consistent effects-based system of rules. Balancing potential anti-competitive effects of conduct covered by IP at least by the traditional IP levers and thus within the IP system is thus, from a substantive perspective, not desirable. Furthermore, competition authorities and courts are institutionally better equipped than other institutions to deal with the competitive problems that arise from the exercise of IP rights.

2.5.2

Approach II: Antitrust as a Discretionary ‘Fine-Tuning’ Device

At the other end of the scale, one could imagine competition policy being used to ‘fine-tune’ an over-shooting—from the social point of view—IP system. For example, Scotchmer has suggested that ‘[c]ompetition policy has more flexibility than IP policy to fine-tune incentives to innovate … [and i]t is easier to exercise the flexibility to mitigate problems of over-broad patents than to mitigate problems of too-narrow patents’.297 One reason that is advanced for this view is that ‘[i]n a period when intellectual property rights are being rapidly expanded, it must be wise for competition authorities to retain some

293 For a heuristic model of copyright protection see Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 71–84. For a heuristic model of patent protection see Denicolò (2007), ‘Do Patents Over-Compensate Innovators?’, 52 Economic Policy 681. 294 This solution is advocated by, eg, Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 303 (‘Even if critics are right that the property rights provided by patent law are broader than necessary to encourage innovation, the fact is that Congress reached a contrary empirical judgment when it enacted the patent statutes. Antitrust law does not authorize judges and juries to second-guess that legislative judgment based on contrary academic theories or empirical studies. Those theories and studies should instead be argued to Congress, and if they are persuasive, they would call for far more sweeping changes in patent laws than occasional (and haphazardly applied) antitrust duties to deal with rivals. … [P]roperty rights are recognized to protect investment and innovation, and are defined in the way that this body of law deemed optimal to do so’). See also Kovacic (2005), ‘Competition Policy and Intellectual Property: Redefining the Role of Competition Authorities’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyright—EU and US Perspectives, pp 1–11. 295 On this question see Möschel (2009), ‘Gibt es einen optimalen Schutzumfang für ein Immaterialgüterrecht?’ in Lange (eds), Geistiges Eigentum und Wettbewerb, pp 119–29. 296 These doctrines will be analysed in more detail below at 7.1.1.2 and 7.1.2.2. 297 Presentation delivered 26 February 2002 within the DoJ/FTC Hearings on ‘Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy’.

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ultimate means of curbing their range in egregious cases, which, in the scramble to satisfy industrial lobbies, legislatures may not have sufficiently cogitated’.298 One obvious tool for such discretionary fine-tuning would be the essential facilities doctrine. Indeed, Tirole, in the line of reasoning of industrial economics, has pointed out that [f]or economists, there is some rate of return to be guaranteed to innovators. On the legal side, we have IP law on the one hand, and then [antitrust law/the essential facilities doctrine] on the other hand. From the economics viewpoint they are exactly the same. They are just located at different locations in the spectrum of rates of ‘return guarantees’.299

It has been argued that a case-by-case approach would by definition be superior to generally applicable legislative provisions on the scope of IP, since the market information available when IP rights are granted would not be as complete as the information available when antitrust cases arise. Accordingly, competition authorities would be likely to have much better information about innovation in and the structure of the market(s) concerned.300 However, such ‘fine-tuning’ via antitrust in the sense of case-by-case rate-of-return regulation is not always feasible without violating the minimum threshold as set out above in 2.4.1.1. Competition authorities and courts may not be able to obtain sufficient information about a firm’s costs and the ex ante risk of failure.301 Even if such rate-of-return regulation on a case-by-case basis were feasible, it would not be desirable as a matter of general policy, since antitrust restrictions on the exercise of IP come at further cost: First, due to their often discretionary nature, antitrust restrictions introduce an element of uncertainty which may unnecessarily reduce the ex ante incentive to innovate302 and which cannot be completely eliminated through case law and guidelines. Second, institutionally, competition authorities and courts, on the basis of a prognostic short-term time horizon, may be prone to an ex post bias in the sense of being inclined to stimulate short-term static competition at the expense of long-term ex ante incentives to innovate. Using competition policy to regulate the rate of return on a case-by-case basis would therefore be deficient as a general approach.303 One might counterargue that the periods of protection (eg in the case of copyright 70 years, and in trade secrecy a potentially indefinite period) lead to (unnecessary) high static losses, which could outweigh the above costs of antitrust intervention.304 To mitigate the

298

Cornish & Llewellyn (2003), Intellectual Property: Patents, Copyright, Trade Marks and Allied Rights, p 755. In Tirole’s opinion, ‘[w]e have to balance … an overscrupulous IP enforcement. … we should not have any religious belief that IP should be exploited in any way by the person who owns the IP’. See the Transcript of the AEI-Brookings Joint Center for Regulatory Studies discussion on ‘Is Sharing a Virtue? Compulsory Licensing and Essential Facilities after Trinko’, San Francisco, 5 April 2004, available at aei-brookings.org/admin/authorpdfs/ page.php?id=936. 300 Ritter (2005), ‘Refusal to Deal and “Essential Facilities”: Does Intellectual Property Require Special Deference Compared to Tangible Property?’, 28 World Competition 281. In the same vein see Schmidt (2010), Refusal to License Intellectual Property Rights as Abuse of Dominance, pp 65–66. 301 See above at 2.4.1.1. 302 See Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 300–05. 303 See similarly Katz (2002), ‘Intellectual Property Rights and Antitrust Policy: Four Principles for a Complex World’, 1 Journal on Telecommunications & High Technology Law 325, at 351 (‘Absent legislation, using antitrust policy to fine tune intellectual property laws would very likely create more problems that it would solve’). For an analysis in an international context see Fox (2005), ‘Can Antitrust Policy Protect the Global Commons from the Excesses of IPRs?’ in Maskus & Reichman (2005), International Public Goods and Transfer of Technology under a Globalized Intellectual Property Regime, pp 758–69. 304 See eg Peeperkorn (2003), ‘IP Licenses and Competition Rules: Striking the Right Balance’, 26 World Competition 527, at 527–28, arguing in this direction: ‘while not delaying follow-on innovation or leading to unnecessary long periods of high prices for consumers’ (emphasis added). 299

2.5

IP OR ANTITRUST? SOME META RULES

63

monopoly problem, especially in cases of functional IP protected by copyright or trade secrecy such as potentially in the case of software, a strict application of IP laws and IP reform would be the better ways than generally re-designing basic IP levers via antitrust. More importantly, one may counterargue that the catch-all nature of IP levers such as scope and length may not allow for sufficient differentiation with regard to the different incentive situations in different industries. However, industry-specific tailoring or modulation via IP reform would be both possible and desirable.305 Systematically (ab)using antitrust to re-balance the IP system with a view to the competitive distortions it may lead to would thus potentially mitigate not only the incentive for leapfrog and inter-technology competition, but also the need for better-suited IP reform.

2.5.3

Approach III: Comparative Cost-Benefit Analysis According to the Competition Problem

The above analysis of the contrasting approaches has shown that, on the one hand, changing IP levers (in that regard no different from tangible property) would not be sufficient to solve competition problems that arise as a result of the use of IP; antitrust analysis is better suited to this task, and competition authorities and courts have greater expertise to solve competition-related problems. On the other hand, the discretionary nature of antitrust standards and rules may cause uncertainty and may not be sufficient to prevent competition authorities and courts from biased case-by-case intervention. This suggests that there should be a substantive and institutional allocation of tasks between IP and competition rules and the authorities that enforce these laws, in the sense of a governance system of, or meta rules on, the IP/antitrust interface. The main determinants for such an allocation of tasks should be (i) the type of conduct, (ii) the competition problem caused by such conduct, and (iii) the costs and benefits of different rules to avert the respective problem, which may be interpretation of current IP laws, legislative reform of IP laws or the application of competition law. Such an approach may be distilled into the following analytical steps: — — —

—

What is the competition problem, ie what kind of foreclosure of which markets does the conduct in question lead to? What are the costs and benefits of an IP rule that could prevent such a competition problem? What are the costs and benefits of an antitrust rule? Costs may comprise the costs of increased uncertainty due to discretionary standards and the costs incurred as a result of an ex post bias on the part of competition authorities and courts. Both costs may be reduced through credible (self-binding) rules, eg interpretative guidelines which are enforceable by courts. Ultimately, which of the solutions yields the best cost-benefit relation?

305 See in particular Burk & Lemley (2009), The Patent Crisis and How the Courts Can Solve It. See also Burk & Lemley (2005), ‘Designing Optimal Software Patents’ in Hahn (ed), Intellectual Property Rights in Frontier Industries, pp 81–108.

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Such cost-benefit analyses are highly complex, especially in a world of path dependent law. A comparative positive analysis of the respective costs and benefits of the application of IP and competition laws, however, would help legislators, courts and authorities in charge of enforcing IP and competition laws to find better solutions to competition problems involving IP. Such a comparative analysis may also help to prevent the use of competition rules to ‘fine-tune’ IP rights if fundamental IP reform would be a preferable solution and such use would mitigate the need for reform. Such a cost-benefit approach would allow for a deeper and more differentiated look at the IP/antitrust interface than current suggestions on offer, such as distinctions that IP policy should follow an ‘innovation rationale’, while competition policy should pursue a ‘competition rationale’306 or that IP rights should prevent competition by imitation, but not by substitution.307 Based on the cost-benefit framework and the above analysis, four meta rules for legislators, competition authorities and courts are suggested to govern the IP/antitrust interface: (1) Integrated thinking Both IP and antitrust legislation and interpretation have repercussions on the incentives for research into and the marketing of initial and follow-on innovation. Overemphasising the basic functional division of tasks between the two sets of laws, eg through an ‘innovation vs competition rationales’ schism, would distract from the need for an integrated positive analysis on the effects on incentives for cumulative innovation within the legislative and enforcement processes. Generally, IP policy may to some extent anticipate and, to a lesser extent, avoid the emergence of competition problems.308 Such integrated thinking could be spurred by, eg, a right of competition authorities to be consulted in IP legislation procedures. (2) Per se rules and conduct-specific test under antitrust laws as the right place to determine the relationship To prevent legal uncertainty, competition authorities and courts should avoid determining the relationship between IP rights and antitrust rules via a legalistic interpretation of IP laws. Since antitrust rules are always effects-based, the right place and the best way to determine the relationship are per se rules and conduct-specific tests under antitrust laws. (3) Per se antitrust legality of unilateral exploitative pricing if IP reform may prevent harm to competition To avoid unnecessary static inefficiency on technology and product markets due to unilateral exploitative pricing of IP holders, setting IP levers properly is often a preferable solution to discretionary antitrust ‘fine-tuning’. Industry-specific differentiation of IP is one option to reduce the costs of the catch-all nature of current IP regimes. As a corollary, legislators, competition authorities and courts should ask whether a legislative change of IP policy levers such as the scope and length of protection or a change in their interpretation could prevent such static harm and whether such change

306

See Schweitzer (2007), ‘Controlling the Unilateral Exercise of Intellectual Property Rights’, EUI Working

Paper. 307 See Ullrich (2001), in Immenga & Mestmäcker (ed), EG-Wettbewerbsrecht, Gewerblicher Rechtsschutz und Urheberrecht Part B, para 38. 308 In the same vein see Drexl (2008), ‘Is there a “More Economic Approach” to Intellectual Property and Competition Law?’ in Drexl (ed), Research Handbook on Intellectual Property and Competition Law, pp 27–53, at p 53.

2.6 WHICH ANTITRUST RULES? SOME PRINCIPLES

65

in IP policy is feasible. If these conditions are met, one option for competition policy could be to establish a per se rule with only narrow exceptions allowing exploitative pricing by holders of IP (as opposed to owners of tangible property) under antitrust law. Similarly, under these conditions, competition policy could accept the unilateral exploitative exercise of IP rights which prevents imitation and the marketing of pure ‘clone’ technologies or products and which thus causes purely static harm and does not impede dynamic efficiency in the form of follow-on innovation or improvements. (4) Presumption in favour of IP rules for innovation markets As will be pointed out in more detail in the context of refusals to deal based on IP,309 the antitrust assessment of innovation markets is inherently difficult and thus prone to errors, while technology and product markets are usually more amenable to antitrust analysis. This would imply that IP rules (such as research exemptions) should play a stronger role on innovation markets than antitrust rules.

2.6

WHICH ANTITRUST RULES? SOME PRINCIPLES

The previous section focused on the question of when (ie, in what situations) competition law should be applied to conduct covered by IP rights. The second question is how this should be done. In order to reduce uncertainty for market actors and to prevent competition authorities from exercising ex post bias, antitrust should provide for clear rules which may restrict and thus supersede IP rights, but at the same time take into account the incentive function of IP. The question of how antitrust should take into account the incentive function of IP has several dimensions. The first sub-question in this context—whether the mode of analysis of intellectual property under antitrust laws should differ from that of tangible property—has been correctly answered by most commentators310 as well as competition authorities311 in the negative. The costs and benefits of tangible property and IP

309

See below at 4.4. See eg Gilbert’s statement during the 2002 hearings, Welcome and Overview of Hearings, 6 February 2002, at 85 (available at www.ftc.gov/opp/intellect/020206ftc.pdf): ‘What this mean[s is] not that intellectual property is the same as other forms of property. It cleary is not the same … [B]ut in terms of how to analyse intellectual property issues, the same [antitrust] principles apply.’ See also O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 421–23; Forrester (2007), ‘Regulating Intellectual Property Via Competition? Or Regulating Competition Via Intellectual Property? Competition and Intellectual Property: Ten Years On, The Debate Still Flourishes’ in Ehlermann & Atanasiu (eds), The Relation Between Competition Law and Intellectual Property Law (European Competition Law Annual 2005), pp 59–90; Lowe & Peeperkorn (2007), ‘Intellectual Property: How Special is its Competition Case?’ in Ehlermann & Atanasiu (eds), European Competition Law Annual 2005, pp 91–104; Ritter (2005), ‘Refusal to Deal and “Essential Facilities”: Does Intellectual Property Require Special Deference Compared to Tangible Property?’, 28 World Competition 281. 311 See eg the 1995 DoJ/FTC Antitrust Guidelines for the Licensing of Intellectual Property, at 2.1: ‘The Agencies apply the same general antitrust principles to conduct involving intellectual property that they apply to conduct involving any other form of tangible or intangible property.’ With regard to the differences between different types of IP rights, the Guidelines similarly state that ‘[a]lthough there are clear and important differences in the purpose, extent, and duration of protection provided under the intellectual property regimes of patent, copyright, and trade secret, the governing antitrust principles are the same. Antitrust analysis takes differences among these forms of intellectual property into account in evaluating the specific market circumstances in which transactions occur, just as it does with other particular market circumstances.’ See similarly the Commission’s Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements (OJ 2004 C101/2), para 9: ‘In assessing licensing agreements under Article 81, the existing analytical framework is sufficiently flexible to take due account of the dynamic aspects of technology licensing.’ 310

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and between different types of property within these two categories differ.312 However, the abstract analytical antitrust framework is able to take into account these differences and is thus appropriate for both tangible and intellectual property.313 The reason is that antitrust rules focus on the conditions (market power) and effects of market behaviour. From this perspective, (intellectual) property rights, beyond their constitutional function of enabling competition, may be analysed as barriers to entry314 and strategic means to compete and thus are amenable to the standard analysis. A matter that is subject to fiercer debate is (i) on which level and (ii) to what extent competition policy should take into account the incentive function of IP. The latter question concerns the design of antitrust standards and rules, including the burden of proof. Assuming that antitrust law is applicable to IP rights, the incentive function of IP may be accounted for by per se (legality) rules or within a standard or standard-like balancing rule. Chapter 3 deals in more detail with this question with regard to § 2 Sherman Act and Article 102 TFEU, and in particular addresses the question whether taking into account the incentive function of (intellectual) property at the level of a defence or objective justification would be sufficient. With regard to the question to what extent competition rules must respect IP’s incentive function, the above analysis allows the following principles to be divined:315 (1) Keeping up the ex ante incentive to innovate for initial innovation To keep up the ex ante incentive to innovate, it is necessary to reward an initial innovator with a (reasonable) positive profit, allowing in particular for the recoupment of costs, in particular fixed costs, and taking into account the risk of failure. Antitrust standards and rules should respect this minimum threshold or ‘participation constraint’.316 Guaranteeing the recoupment of costs and taking into account the risk of failure (potentially plus a ‘reasonable profit’), however, should only serve as minimum ex ante investment condition. Competition policy should not systematically attempt to restrict owners of (intellectual) property to such minimum (or ‘reasonable’) profit.

312

See eg Lemley (2004), ‘Property, Intellectual Property and Free Riding’, 83 University of Texas Law Review

1031. 313 This question has to be differentiated from the more fundamental debate whether the concept of property as developed for material things is apt for ideas from an economic point of view. For a resounding ‘no’ in response see eg Hayek (1948), Individualism and Economic Order, p 114. 314 See also below at 6.1.1.2.1. 315 For other principle-based approaches to the IP-antitrust interface see eg Katz (2002), ‘Intellectual Property Rights and Antitrust Policy: Four Principles for a Complex World’, 1 Journal on Telecommunications & High Technology Law 325; Mauer & Scotchmer (2004), ‘Profit Neutrality in Licensing: The Boundary Between Antitrust Law and Patent Law’, NBER Working Paper 10546. 316 A good example of competition rules acknowledging this minimum threshold are the Commission’s Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements (OJ 2004 C101/2), which state that: ‘[I]t must be kept in mind that the creation of intellectual property rights often entails substantial investment and that it is often a risky endeavour. In order not to reduce dynamic competition and to maintain the incentive to innovate, the innovator must not be unduly restricted in the exploitation of intellectual property rights that turn out to be valuable. For these reasons the innovator should normally be free to seek compensation for successful projects that is sufficient to maintain investment incentives, taking failed projects into account. … Article 81 cannot be applied without considering such ex ante investments made by the parties and the risks relating thereto. The risk facing the parties and the sunk investment that must be committed may thus lead to the agreement falling outside Article 81(1) or fulfilling the conditions of Article 81(3), as the case may be, for the period of time required to recoup the investment.’

2.7

CONCLUSION

67

(2) Avoiding Distortions between Exclusivity Rights Competition policy should not discriminate between strategies which appropriate returns from the technology market through licensing on the one hand and from the product market through sales of the product on the other. Otherwise, the decision as to whether and how to vertically integrate would be distorted. (3) Competition policy to prevent leveraging and foreclosure of dynamic competition Competition policy should prevent unilateral or bilateral practices which go beyond the mere unilateral exploitation of market power, ie in particular prevent the IP holder from leveraging its market power into adjacent markets or from foreclosing dynamic competition.

2.7

CONCLUSION

The idea of de-conflicting IP and competition laws by assuming that both have the sole goal of fostering economic efficiency or consumer welfare is an over-simplification. Avoiding such an approach of normative complementarity, this chapter has proceeded on the basis of a positive economic analysis of the relationship between the two sets of laws. This analysis has shown that an absolute IP domination approach, according to which IP rights determine the scope of antitrust intervention, would amount to a reverse Nirvana approach317 in the sense of taking the given as perfect and forgoing the benefits that competition rules and institutions have to offer. On the other hand, trying to fine-tune ‘over-shooting’ IP barriers to entry via antitrust on a case-by-case basis would result in uncertainty and thus would unnecessarily diminish incentives to innovate. Instead, decisions regarding the allocation of tasks between IP and antitrust should be guided by a comparative cost-benefit analysis of the two policies and should come in the form of conduct-specific rules under antitrust. The availability of some levers within IP law, such as the scope and length of protection, suggests that competition policy should be reluctant to interfere if unilateral exploitative strategies cause only static harm and if a legislative or interpretive solution via IP law to reduce such harm is feasible. Competition policy should focus in particular on the prevention of harm to dynamic competition. When restricting IP rights, competition policy needs to take into account their incentive function and thus respect the necessity for recoupment of the underlying investment.

317 The term ‘Nirvana approach’ has been coined by Demsetz (1969), ‘Information and Efficiency: Another Viewpoint’, 12 Journal of Law and Economics 1.

3 The Concepts of Monopolisation and Abuse: What is the Correct Test? We’ve all gotten used to a little vagueness in law. Sometimes you just can’t foresee or account for the full complexity of life, and, when that is so, the best the law can do is define some general guidelines for courts and juries to apply to particular facts. But for decades monopolization doctrine has been governed by standards that are not just vague but vacuous. Einer Elhauge1 Referring to § 2 Sherman Act and Article 102 TFEU: If there is one area of all our cooperation— United States, European Union, and inside the European Union—where there is certainly not a monopoly of good ideas, it is this one. Philipp Lowe2

The question of how to interpret the terms ‘monopolisation’ under § 2 Sherman Act and ‘abuse of a dominant position’ under Article 102 TFEU is both a seminal and a current one. The general labels used by courts in this interpretive task, such as ‘competition on the merits’ (or Leistungswettbewerb in the terminology of the Freiburg school) as opposed to ‘no normal competition’ (Behinderungswettbewerb),3 merely replace the terms to be interpreted with similarly open terms. As has been noted by many commentators, both jurisdictions thus suffer from normatively vacuous substantive criteria,4

1

Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 255. Speech delivered by Philip Lowe at the Fordham Antitrust Conference, Washington, DC, 23 October 2003, available at www.europa.eu.int/comm/competition/speeches/text/sp2003_040_en.pdf. 3 For a critique see Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, in particular at 264–65. For an overview of the very similar notions used by the CFI and the ECJ see O’Donoghue & Temple Lang (2005), ‘The Concept of an Exclusionary Abuse under Article 82 EC’, Global Competition Law Center Research Papers on Article 82 EC, pp 38–64. 4 With regard to the case law under § 2 Sherman Act see, aside from the introductory quote, Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 253: ‘Monopolization doctrine currently uses vacuous standards and conclusory labels that provide no meaningful guidance about which conduct will be condemned as exclusionary.’ In the same vein, the case law under Art 102 TFEU (ex Art 82 EC) has been criticised as lacking clarity, consistency and economic rigour. Summing up for both jurisdictions see Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244, at 245: ‘significant intra-jurisdictional uncertainties on both sides of the Atlantic’. For potential explanations for these deficiencies see Temple Lang (2004), ‘Anti-competitive Non-Pricing Abuses under European and National Antitrust Law’ in Hawk (ed), International Antitrust Law & Policy: Fordham Corporate Law 2003, pp 235–340. 2

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which necessarily produce inconsistent case law. This criticism has given rise to policy reviews5 and (accompanying) academic debate6 on both sides of the Atlantic. From an ‘economics of rules’ perspective, two interpretive layers may be distinguished: First, the tests for determining what constitutes illegal conduct under § 2 Sherman Act and Article 102 TFEU used by courts and suggested in the literature7 provide standards, ie relatively imprecise tests which leave relatively wide room for interpretation. Second, tests for specific types of conduct such as refusals to deal provide rules, ie relatively precise tests which leave only relatively narrow or no room for interpretation.8 The standard, ie the first interpretive layer, should influence the conduct-specific rules in two major ways: First, only if the rules for specific types of conduct are derived from a common standard, conduct with the same anti-competitive effect is treated equally. This prevents firms from adopting strategies which would have the same anti-competitive effect as strategies with similar private benefits,9 but which would fall under the more lax rule. This also prevents firms and public authorities from framing conduct so as to fit under a more lax or a stricter rule respectively. Second, the rule relating to a specific type of conduct must be interpreted in the light of a common objective and standard across cases. Only when both such ‘inter-coherence’ across conduct-specific rules (or ‘horizontal coherence’ respectively) and ‘intra-coherence’

5 In the US, the DoJ issued its Report on Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act in 2008, which is based on extensive hearings by the DoJ and the FTC. However, the Report was withdrawn by the DoJ in 2009 (see in more detail below at 7.5). In 2007, the Antitrust Modernization Commission issued its final Report and Recommendations, available at www.amc.gov/report_recommendation/amc_final_ report.pdf. In the EU, the Commission has published its Communication ‘Guidance on its Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’ (‘Guidance Paper’), OJ 2009 C45/7. The Guidance Paper is the result of a public consultation on DG Competition’s 2005 Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses. 6 Conferences, conference papers and speeches on the topic are legion. For an overview of the debate see the 2005 OECD Report Competition on the Merits, DAF/COMP(2005)27. See in particular Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244. See also, amongst many others, Eilmannsberger (2005), ‘How to Distinguish Good from Bad Competition under Article 82 EC: In Search of Clearer and More Coherent Standards for AntiCompetitive Abuses’, 42 Common Market Law Review 129; Ehlermann & Atanasiu (eds) (2004), European Competition Law Annual 2003: What is Abuse of a Dominant Position?; Ehlermann & Marquis (eds) (2008), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC; the 2005 Global Competition Law Center Research Papers on Article 82 EC; issue 2 of the 2006 (vol 73) Antitrust Law Journal, which includes papers for the 2006 symposium ‘Identifying Exclusionary Conduct under Section 2’; and the address ‘The Common Law Approach and Improving Standards for Analyzing Single Firm Conduct’ given by R Hewitt Pate before the 13th Annual Conference on International Antitrust Law and Policy, Fordham Corporate Law Institute, New York, 23 October 2003. 7 For more detail see below at 3.3.3. 8 Usually, the literature distinguishes between rules and standards by asking whether the law is given content ex ante or ex post by an adjudicator (see eg Kaplow (2000), ‘General Characteristics of Rules’ in Bouckaert & De Geest (eds), Encyclopedia of Law and Economics, vol V, pp 502–28, at p 508; in an antitrust context see Crane (2006), ‘Rules Versus Standards in Antitrust Adjudication’, Cardozo Legal Studies Research Paper No 162, who defines rules as ‘ex ante, limited factor liability determinants’ and standards as ‘ex post, multi-factor liability determinants’). Ex ante and ex post, according to these definitions, mean before and after a decision or judgment by an adjudicator. The relevant point of time for the effect of a provision, however, is the time when a firm decides on its strategy, since then it has to forecast how the adjudicator will interpret the norm. Thus the relevant variable is the precision, clarity or non-differentiation of the norm. Therefore, rules and standards are understood here as points on a continuous scale of differentiation. Accordingly, a standard translates an objective of a body of law into a relatively general test. 9 In many instances, alternative practices can serve the same purpose and have the same anti-competitive effect, eg predatory pricing can take the form of selective rebates, targeted at the competitor’s prospective customers (Economic Advisory Group for Competition Policy (2005), An Economic Approach to Article 82, Report for DG Competition, p 3).

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within a rule across cases (‘vertical coherence’) are ensured will such rules provide for an undistorted incentive for firms to behave in a supposedly non-anti-competitive way. Only a common standard for every type of conduct can ensure this coherence. Before addressing the rules specific to refusals to deal in the next chapters, this chapter presents an analysis of the standards (to be) used to determine exclusionary behaviour. Section 3.1 briefly analyses the criteria currently used under § 2 Sherman Act and Article 102 TFEU. Section 3.2 explores the potential for a common approach in both jurisdictions. Finally, section 3.3 discusses the standards that have been advanced more recently with a view to determining the test that may provide for coherence across conduct-specific rules.

3.1

THE TESTS USED UNDER § 2 SHERMAN ACT AND ARTICLE 102 TFEU

Since the enactment of the Sherman Act and the EC Treaty, competition authorities and courts in both jurisdictions have been rather consistent, or stagnant respectively, as regards the general test interpreting § 2 Sherman Act and Article 102 TFEU. § 2 of the Sherman Act provides: Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished by fine … or by imprisonment … or by both said punishments, in the discretion of the court.

This notion of ‘monopolisation’ has been translated into a two-element test, articulated by the Supreme Court in Grinnell: The offense of monopoly under § 2 of the Sherman Act has two elements: [1] the possession of monopoly power in the relevant market and [2] the 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.10

As writers such as Elhauge have pointed out poignantly, the latter distinction is not distinctive, since it is in the very nature of efficient dynamic competition that innovative firms which have developed a superior product drive out competitors in order to acquire market power.11 Trying to refine the Grinnell test and borrowing from Areeda and Turner, the Supreme Court, in Aspen Skiing, circumscribed the second element as: conduct that (1) tends to impair the opportunities of rivals, but also (2) either does not further competition on the merits or does so in an unnecessarily restrictive way. (emphasis added)12

To some extent similar to § 2 Sherman Act, Article 102 TFEU requires the elements of market power (dominant position) and abusive conduct. With regard to the latter, commentators

10

United States v Grinnell Corp, 384 US 563, at 570–71 (1966). Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, in particular at 261–63. 12 Aspen Skiing Co v Aspen Highlands Skiing Corp, 472 US 585, at 595–96, 605 n 32 (1985). For a legal and economic analysis of the monopolisation doctrine under § 2 Sherman Act see Kaplow & Shapiro (2007), ‘Antitrust’ in Polinsky & Shavell (eds), Handbook of Law and Economics, pp 1073–1225; Hovenkamp (2005), ‘Exclusion and the Sherman Act’, 72 University of Chicago Law Review 147. 11

3.1

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have argued that the four clauses of Article 102 TFEU generally represent the categories of exploitative (lit. a), exclusionary (lit. b), discriminatory (lit. c) and tying (lit. d) abuses.13 The ‘classic’ general definition of the notion of exclusionary or anti-competitive abuse was given by the ECJ in Hoffmann-La Roche: The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such to 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. (emphasis added)14

Thus the test for exclusionary conduct under Article 102 TFEU, similar to the above Grinnell and Aspen tests under § 2 Sherman Act, requires that the behaviour in question (1) must be capable of having a structural effect in the sense of causing an (opportunity) loss in the degree of competition and (2) does not reflect ‘normal competition’.15 Both the US and the EU standards imply two necessary elements of anti-competitive conduct: first, such behaviour must be capable, by its nature, of impairing the opportunities of competitors, and, second, as a consequence of this impairment, in the specific market context, a distorting effect may arise.16 These two conditions, however, are not sufficient, since even highly beneficial strategies like marketing new and innovative products could impair the opportunities of competitors and enhance the market power of the firm applying these strategies. The above tests recognise this by adding that the conduct in question must not constitute ‘competition on the merits’ or ‘normal competition’ in order to be captured. But leaving the most problematic distinction between aggressive, competitive conduct and aggressive, exclusionary conduct17 to such legalistic notions which do not provide heuristic

13 Eg, O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 194–207; Temple Lang & O’Donoghue (2005), ‘The Concept of an Exclusionary Abuse under Article 82 EC’, GCLC Research Papers on Article 82 EC, pp 38–64, at pp 39–40. For an economic analysis see Vickers (2009), ‘Some Economics of Abuse of Dominance’ in Vives (ed), Competition Policy in the EU—Fifty Years from the Treaty of Rome, pp 71–94. 14 Case 85/76, Hoffmann-La Roche & Co AG v Commission [1979] ECR 461, para 91. Similarly, in Michelin (Case 322/82, NV Nederlandsche Banden-Industrie Michelin v Commission [1983] ECR 3461, para 70) the Court stressed that ‘in prohibiting any abuse of a dominant position on the market … Article [82] covers practices which are likely to affect the structure of a market where, as a direct result of the presence of the undertaking in question, competition has already been weakened and which, through recourse to methods different from those governing normal competition in products or services based on traders’ performance, have the effect of hindering the maintenance or development of the level of competition still existing on the market’ (emphasis added). See also Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr, para 352. 15 Similar to US courts, the ECJ has also referred to the notion of ‘competition on the merits’. See Case T-203/01, Michelin v Commission [2003] ECR II-4071, para 97. For a Commission decision using the notion see Commission Decision of 14 December 1985, AKZO, OJ 1985 L374/1, para 81. For an overview of the Court’s attempts to fill the notion of ‘abuse’ see Temple Lang & O’Donoghue (2005), ‘The Concept of Exclusionary Abuse under Article 82 EC’, GCLC Research Papers on Article 82, pp 38–64. See also Temple Lang (2004), ‘Anti-competitive Non-Pricing Abuses under European and National Antitrust Law’ in Hawk (ed), International Antitrust Law & Policy: Fordham Corporate Law 2003, pp 235–340. 16 See on both elements the 2005 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 58. 17 See Easterbrook (2003), ‘When is it Worthwhile to Use Courts to Search for Exclusionary Conduct?’, Columbia Business Law Review 345, at 345: ‘Aggressive, competitive conduct by any firm, even one with market power, is beneficial to consumers. Courts should prize and encourage it. Aggressive, exclusionary conduct is deleterious to consumers, and courts should condemn it. The big problem lies in this: competitive and exclusionary conduct look alike.’

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value gives wide and, more importantly, unguided discretion to competition authorities and courts.18 Several reasons may explain the poor legalistic standards and thus the poor state of the art in the field of anti-monopolisation and abuse of dominance. The first might be that both conduct-specific standards (such as in the form of a rule of reason) and rules (such as per se rules), as leges speciales, have to some extent mitigated the problem of discretion and legal uncertainty and have provided for better substantive guidance. This has mitigated the need for reform. Another reason may be that such reform can ultimately only be adopted by the courts. Judges generally tend to be reluctant both to self-impose restraints on their judicial discretion and, at the same time, to substitute a legal test with a ‘more economic approach’ (to use EU parlance). Normatively, the notions of ‘competition on the merits’ and ‘normal competition’ can only be replaced by focusing on the effects of conduct in light of the objectives of § 2 Sherman Act and Article 102 TFEU.

3.2

OBSTACLES TO CROSS-FERTILISATION?

Despite the two common main elements of market power and conduct, there are notable differences between § 2 Sherman Act and Article 102 TFEU in terms of substance and enforcement.19 As the following positive analysis will show, however, these differences should not prevent a mutual learning process and, ultimately, the use of a similar or even the same substantive standard for exclusionary conduct under the two provisions.20 This analysis has to be strictly differentiated from the questions of (i) what type of problems the noncoordinated implementation of different competition regimes raises,21 and (ii) whether there should be substantive convergence towards common standards22 (as compared to other ways of solving problems resulting from different substantive regimes such as institutional cooperation).23

18 See Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 264: this test ‘boils down to the mystery of which forms of competition will be judged “on the merits” (or “normal competition”) and which won’t be’. 19 For an overview of the differences see Elhauge & Geradin (2007), Global Competition Law and Economics, pp 233–34. 20 But see Schweitzer (2007), ‘Parallels and Differences in the Attitudes towards Single-Firm Conduct: What are the Reasons? The History, Interpretation and Underlying Principles of Sec 2 Sherman Act and Art 82 EC’, EUI Working Paper LAW 2007/32, which explains and defends differences between the two jurisdictions. For an analysis of the convergence debate see Kovacic (2008), ‘Competition Policy in the European Union and the United States: Convergence or Divergence in the Future Treatment of Dominant Firms?’, 4 Competition Law International 8. 21 See eg Geradin (2009), ‘The Perils of Antitrust Proliferation: The Globalization of Antitrust and the Risks of Overregulation of Competitive Behavior’, 10 Chicago Journal of International Law 189 (identifying a ‘strictest regime wins’ problem); Campbell & Rowley (2008), ‘The Internationalization of Unilateral Conduct Laws—Conflict, Comity, Cooperation and/or Convergence?’, 75 Antitrust Law Journal 267 (predicting a ‘highest common denominator effect’ in supranational markets, at 312–14). See also Fox (2000), ‘Antitrust and Regulatory Federalism: Races Up, Down, and Sideways’, 75 NYU Law Review 1781. 22 On a substantive level, adherents of substantive convergence emphasise the costs of different regimes and non-coordinated intervention, whereas opponents highlight the benefits of competition of competition laws. See eg Budzinski & Kerber (2004), ‘Competition of Competition Laws: Mission Impossible?’ in Epstein & Greve (eds), Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy, pp 31–65. 23 For an analysis of the various possibilities see Campbell & Rowley (2008), ‘The Internationalization of Unilateral Conduct Laws—Conflict, Comity, Cooperation and/or Convergence?’, 75 Antitrust Law Journal 267.

3.2

3.2.1

OBSTACLES TO CROSS-FERTILISATION?

73

Exploitative Abuses

One difference between § 2 Sherman Act and Article 102 TFEU that is sometimes highlighted is that the latter may also capture purely exploitative behaviour under its lit. a. With regard to the question whether there can be a common general standard for illegal conduct under § 2 Sherman Act and Article 102 TFEU, one might argue that the availability of an instrument against exploitative abuses, as a ‘repair tool’, would reduce the costs of false negatives in exclusionary conduct cases. This could rationalise a more lax approach to exclusionary behaviour under Article 102 TFEU than under § 2 Sherman Act. Such an argument, however, would be limited from the outset. Some of those types of conduct that are exploitative are at the same time exclusionary and treated as exclusionary. For example, a refusal to deal has an exploitative effect on the upstream market and an exclusionary effect on downstream markets. Article 102 TFEU, in its current interpretation by the Court, only prohibits such refusals because of its exclusionary effects on a downstream market and not for reasons of immediate static inefficiency on the upstream market. The Commission and the Court have construed a duty to deal only under Article 102(b) TFEU. Similarly, in price squeezing cases, Article 102(a) TFEU has been invoked together with Article 102(b).24 More generally, in particular because of the theoretical and de facto difficulties of using Article 102 TFEU as an instrument against purely exploitative behaviour,25 such abuses do not feature prominently in the Commission’s practice.26 Policy statements indicate that the Commission will not use Article 102(a) TFEU to regulate purely exploitative prices.27 Therefore, the fact that Article 102 TFEU may also capture purely exploitative conduct does not prevent, and should have no influence on, the search for a common standard to identify exclusionary conduct under § 2 Sherman Act and Article 102 TFEU.

See also First (2003), ‘Evolving toward What?—The Development of International Antitrust’ in Drexl (ed), The Future of Transnational Antitrust: From Comparative to Common Competition Law, pp 23–51. The Unilateral Conduct Working Group of the International Competition Network (ICN) has issued Recommended Practices on ‘Dominance/Substantial Market Power Analysis Pursuant to Unilateral Conduct Laws’, which is based on its 2007 Report on the Objectives of Unilateral Conduct Laws, Assessment of Dominance/Substantial Market Power, and State-Created Monopolies. 24

See eg Commission Decision of 21 May 2003, Deutsche Telekom, OJ 2003 L263/9. For an overview of the difficulties that arise when price regulation is used as an antitrust remedy for exploitative pricing see Faull & Nikpay (eds) (2007), The EC Law of Competition, 3.13–3.15. See above at 2.5.2 for arguments as to why competition policy, including Art 102 TFEU, is not suited to the purpose of general rate-of-return regulation. For exceptional circumstances in which Art 102(a) TFEU may be applied against exploitative pricing see Faull & Nikpay (2007), The EC Law of Competition, at 3.24, and O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 638. 26 For an overview of the—limited—decisional practice of the Directorate General for Competition see Geradin (2007), ‘The Necessary Limits to the Control of “Excessive” Prices by Competition Authorities—A View from Europe’, Tilburg University Legal Studies Working Paper. 27 The Commission stated in its 1994 Competition Report that it ‘does not normally control or condemn the high level of prices as such. Rather it examines the behaviour of the dominant company designed to preserve its dominance, usually directed against competitors or new entrants who would normally bring about effective competition and the price level associated with it’. This was reiterated by Neelie Kroes in her speech ‘Preliminary Thoughts on Policy Review of Article’, delivered at the Fordham Corporate Law Institute, New York, 23 September 2005. See, in the same vein, the speech ‘Consumer Welfare and Efficiency—New Guiding Principles of Competition Policy?’ given by Philipp Lowe, Munich, 27 March 2007. 25

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3.2.2

The Elements of § 2 Sherman Act and Article 102 TFEU

The discussion of the differences between § 2 Sherman Act and Article 102 TFEU centres on the substantive elements that have to be established for conduct to be exclusionary. The main elements are: (1) the existence a certain degree of market power, (2) an act or omission on the part of the firm enjoying market power, (3) harm to competition, and thereby (4) harm to consumers. Although the focus here is on the standard for exclusionary conduct, ie on elements (2), (3) and (4), conduct and its effects cannot be assessed without taking into account the threshold for market power. One reason for this is that the lower the market power threshold within an anti-monopolisation or abuse test, the higher the risk of a false positive. With regard to the element of market power, it has often been emphasised that § 2 Sherman Act, in contrast to Article 102 TFEU, also captures attempts to monopolise. In such attempt cases, there must be (i) intent, (ii) conduct28 and (iii) a dangerous probability of achieving monopoly power.29 The difference with regard to the market power element is offset to some extent, however, since a dangerous probability of achieving monopoly power presupposes that the firm in question already possesses market power sufficiently proximate to monopoly. Although US case law is not clear-cut and although there is some controversy in the literature, the trend in more recent judgments has been to impose significant minimum market share requirements in attempt cases.30 Furthermore, a dominant position under Article 102 TFEU requires less market power than monopoly power under § 2 Sherman Act. This further narrows the gap to the US concept of attempted monopolisation. Therefore, the fact that § 2 Sherman Act captures attempts to monopolise, whereas Article 102 TFEU only prohibits abuses of existing dominant positions, constitutes no obstacle in the search for a common standard on exclusionary conduct. According to some commentators,31 a second difference is that § 2 Sherman Act requires a causal link between the exclusionary conduct and the acquisition or maintenance of monopoly power, whereas Article 102 TFEU does not impose such a requirement. Taken together with the inclusion of attempted monopolisation under § 2 Sherman Act, on this view, the causal chain under § 2 Sherman Act is ‘conduct—monopoly power’, whereas there is no such causality requirement under Article 102 TFEU.32 It is true that the wording of Article 102 TFEU does not demand that the abusive behaviour feeds back into the position of the dominant firm, reinforcing or at least maintaining its dominant position. As the early Hoffman-La Roche definition made clear, however, in order to be deemed abusive, exclusionary behaviour must be capable of weakening competition or at least hindering its growth. The chain,

28 Commentators argue that the ‘conduct’ element in an attempted monopolisation case should be defined in the same way as in a monopolisation case (see eg Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 8.04). 29 This test has been reiterated by the Supreme Court in Spectrum Sports v McQuillan, 506 US 447 (1993). For an analysis of the elements see Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, §§ 8.02–8.05. 30 Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 8.05d, in particular at fn 54. 31 Eg Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 331–32. 32 This has to be distinguished from the question whether there must be a causal link between the market power existing at the time of the conduct and the behaviour. Under Art 102 TFEU, the abusive conduct ‘does not necessarily have to consist in the use of the economic power conferred by a dominant position’ (Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr, para 354 with references to previous judgments), ie the dominant position must not be ‘causal’ for the conduct.

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according to settled interpretation of Article 102 TFEU, is thus ‘dominance—conduct— likely33 structural effect’. Thus the question arises as to whether there is a difference in substance between requiring a negative structural effect on competition and an enforcement or (re)inforcement in the position of the firm that behaves in an (allegedly) exclusionary manner. Put differently, the question is whether there is a strategy which reduces the (potential) degree of competition, but does not increase the market power of the firm applying the strategy. Theoretically, a strategy could potentially exclude rivals from the market, while feeding only into the position of other competitors. There seem to be no scenarios, however, in which a firm would have an incentive to engage in such an ‘altruistic’ strategy. Therefore, the structural (opportunity) loss in competition due to the conduct in question, as required under Article 102 TFEU, is the mirror side of the increase in or maintenance of the market power of the firm engaging in the conduct, as demanded by § 2 Sherman Act. The fact that Article 102 TFEU ‘merely’ requires a likely structural effect instead of the creation or at least maintenance of monopoly power may become virulent, however, in the case of leveraging, ie if the abusive conduct takes place on a second market.

3.2.3

Leveraging

Closely related to the aforementioned questions regarding the elements of § 2 Sherman Act and Article 102 TFEU, is the question whether § 2 Sherman Act imposes more stringent requirements on the concept of leveraging than Article 102 TFEU.34 Leveraging—although imprecise as a label—usually refers to the situations where a firm has monopoly power or a dominant position respectively on market A and (1) uses this market power on market A to enhance its position on a second adjacent ‘target’ market B which is economically linked (horizontally, vertically or otherwise)35 with market A, or (2) engages in conduct on market B to protect its position on A. Scenario 2 is captured by both § 2 Sherman Act and Article 102 TFEU.36 One could assume, however, that § 2 Sherman Act is stricter as regards the structural effect required on the

33 The degree of likelihood required is to some extent intertwined with the question whether the effect of the conduct must be direct. This has become relevant in the AstraZeneca case, where the conduct (misrepresentation in a patent procedure) required the cooperation of a third party (the patent office). The General Court (Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr, paras 376–77) held that ‘it is not at all apparent from the case-law that, in order to constitute an abuse of a dominant position, behaviour must have a direct effect on competition. In a situation such as that of the present case, where the practices in question—if they are established—cannot, in any way, be regarded as being covered by normal competition between products on the basis of an undertaking’s performance, it is sufficient for it to be established that, in view of the economic or regulatory context of which those practices form part, they are capable of restricting competition. Thus, the ability of the practice in question to restrict competition may be indirect, provided that it is shown to the requisite legal standard that it is actually liable to restrict competition’ (emphasis added). 34 For an analysis see Langer (2007), Tying and Bundling as a Leveraging Concern under EC Competition Law. 35 For potential economic links between markets see, in the context of predatory pricing, the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 101. 36 For an analysis of the respective case law under § 2 Sherman Act see Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 6.05, in particular at 6-31; for an analysis of the case law under Art 102 TFEU see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 212.

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second market in scenario 1. In Trinko, the Supreme Court indeed clarified that, under § 2 Sherman Act, a monopoly leveraging theory presupposes that there is (1) a dangerous probability of success in monopolising the second market and (2) anti-competitive conduct.37 That means that at least the conditions of attempted monopolisation of one of the markets—in scenario 1 market B—must be met.38 Under Article 102 TFEU, leveraging does not constitute an independent concept of abuse.39 In the literature, the label serves as a—rather vague—collective term for horizontal and vertical foreclosure.40 With regard to vertical foreclosure, the Court’s jurisprudence suggests that a refusal to deal constitutes an abuse only if effective competition is likely to be eliminated on the second market.41 With regard to the structural effect required on the second market in vertical settings, Article 102 TFEU, in its interpretation by the Court, is thus no less stringent than § 2 Sherman Act.42 In sum, neither the inclusion of attempted monopolisation under § 2 Sherman Act, nor the different emphasis on the causal link between the conduct and its effects, nor the interpretation of the concept of leveraging would raise any fundamental obstacle to cross-fertilisation with regard to the standard for exclusionary conduct.

3.2.4

What is to be Protected? Market Structure vs Consumers

One might argue that the above differences can be interpreted as a matter of degree in the sense of more or less strict, but ultimately similar, requirements. The question, however, whether § 2 Sherman Act and Article 102 TFEU pursue the same objective is a qualitative one which goes to the heart of the question whether they can rely on the same standard to identify anti-competitive conduct. The above definitions of anti-competitive conduct indicate that § 2 Sherman Act and Article 102 TFEU both protect actual and potential competition, ie they also prevent opportunity losses in the situation where competition may potentially grow. Furthermore, in both jurisdictions, the intent of the firm in

37

540 US 398 (2004), 124 S Ct 872 (2004), fn 4. For an analysis of the case law see Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 6.05. For a more detailed analysis see also below at 7.3.3. 39 See eg O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 210 (‘Leveraging is not an independent ground of abuse’). Accordingly, one has to resort to horizontal and vertical foreclosure cases to find a circumscription of leveraging in the Court’s jurisprudence. In the refusal to supply case Télémarketing, for example, the Court held that ‘an abuse … is committed where, without any objective necessity, an undertaking holding a dominant position on a particular market reserves to itself … an ancillary activity which might be carried out by another undertaking as part of its activities on a neighbouring but separate market, with the possibility of eliminating all competition from such undertaking’ (Case 311/84, Centre belge d’études de marché— Télémarketing (CBEM) v SA Compagnie luxembourgeoise de télédiffusion (CLT) and Information publicité Benelux (IPB) [1985] ECR 3261, para 27). 40 The judgment of the ECJ in Tetra Pak II, which is usually cited in European discussion on leveraging, does not concern the end of the causal chain—the required effect—but its beginning, ie the question whether a firm needs already to be dominant on a market where the abuse takes place. In Tetra, the Court held that conduct on such a non-dominated market may be abusive under ‘special circumstances’, in particular if there are ‘associative links’ between this and another dominated market (see Case C-333/94P, Tetra Pak International SA v Commission [1996] ECR I-5951, paras 27–31). 41 See in more detail below at 8.2.1.3.3. 42 For a different view with regard to predation in a non-dominated market see Elhauge & Geradin (2007), Global Competition Law & Economics, p 441. 38

3.2

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question—except for the scenario of attempted monopolisation under § 2 Sherman Act—is less relevant than its objective behaviour. The debate about potential differences centres on the question of the ultimate goal behind the preservation of competition. US agencies and courts focus on the question whether the conduct ‘produces durable harm to competition, leading to higher prices, reduced output, lower quality, or lower rates of innovation’,43 ie ultimately on consumer harm. It has already been pointed out that, in general, the Directorate General for Competition favours the same objective under its ‘more economic approach’ for all instruments of EU competition policy and, in recent years, also for Article 102 TFEU.44 The language of Article 102 lit. b TFEU— ‘limiting production, markets or technical development to the prejudice of consumers’— with all its elements is amenable to an effects-based reading which focuses on consumer harm. Another question not further addressed in this chapter is whether ‘consumer harm’ can and should mean ‘reduction in consumer welfare’. The ECJ, so far, has avoided the narrow language of consumer welfare and continues to follow a broad approach.45 Despite its wording, the policy behind Article 102 TFEU has been criticised as serving the purpose of preserving current market structures instead of focusing on consumer harm. The key difference and the key to the whole debate is that, particularly in cases of beneficial dynamic competition, preserving the current market structure via antitrust means does not protect consumers, but essentially reduces dynamic efficiency and thus consumer welfare. US antitrust practitioners and scholars have endorsed the above criticism under the slogan that EU competition policy under Article 102 TFEU ‘protects competitors, not competition’, whereas US policy behind § 2 Sherman Act protects dynamic competition and not existing competitors.46 In this regard, it is worth quoting a passage from the opinion of Advocate General Kokott in the British Airways case, summarising older case law: Article 82 EC [now Article 102 TFEU] is not designed only or primarily to protect the immediate interests of individual competitors or consumers, but to protect the structure of the market and thus competition as such (as an institution), which has already been weakened by the presence of the dominant undertaking on the market. Accordingly, Article 82 EC [now Article 102 TFEU] applies not only to conduct which can directly prejudice consumers, but also to conduct which can prejudice them indirectly in that it is detrimental to a state of effective competition for the

43 See ‘The Consumer Reigns: Using Section 2 to Ensure a “Competitive Kingdom”’, speech given by Deborah Platt Majoras, Chairman of the FTC, during the opening session of the hearings on § 2 of the Sherman Act by the FTC and the DoJ, 20 June 2006. For an analysis of the development of economic thinking behind the standard for exclusionary behaviour under § 2 see Kovacic (2007), ‘The Intellectual DNA of Modern US Competition Law for Dominant Firm Conduct: The Chicago/Harvard Double Helix’, 1 Columbia Business Law Review 1. 44 See the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 4: The ‘objective of Article 82 is the protection of competition on the market as a means of enhancing consumer welfare and of ensuring an efficient allocation of resources’. See also Michael Albers, ‘Der “more economic approach” bei Verdrängungsmissbräuchen: Zum Stand der Überlegungen der Europäischen Kommission’, speech delivered in Hamburg, 20006, and the policy statements cited therein in fn 5; available at ec.europa.eu/ competition/antitrust/art82/albers.pdf. 45 See above at 2.3.3.2.1. 46 See the speech ‘Section 2 and Article 82: Cowboys and Gentlemen’ given by J Bruce McDonald, Deputy Assistant Attorney-General of the DoJ’s Antitrust Division, Brussels, 16 June 2005. For an analysis of the discussion see Fox (2003), ‘We Protect Competition, You Protect Competitors’, 26 World Competition 149. Alternatively, the criticism—protecting competitors, not competition—could be read as meaning that the Court and the Commission would not have required a market-wide exclusionary effect in its past decisions under Article 102 TFEU. But see now the Commission Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 59 (‘market distorting foreclosure effect’).

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purposes of Article 3(1)(g) EC. It is thus sufficient to demonstrate that the rebate or bonus scheme of a dominant undertaking is likely to make it difficult or impossible for its competitors to gain access to the market and its business partners to choose between various sources of supply or business partners, unless there is an objective economic justification for it. Where there is such a hindrance to remaining competition, it can be assumed that, indirectly, consumers are also disadvantaged. (emphasis added)47

The reference to effective or undistorted competition as set out in Article 3(1)(g) EC is still valid following the entry into force of the Lisbon Treaty. While Article 3(1)(g) EC has been repealed, the Protocol on the internal market and competition annexed to the TEU and to the TFEU provides that the Member States, considering that the internal market as set out in Article 2 of the Treaty on European Union includes a system ensuring that competition is not distorted, have agreed that: to this end, the Union shall, if necessary, take action under the provisions of the Treaties, including under Article 308 of the Treaty on the Functioning of the European Union. (emphasis added)48

Very similarly to the opinion of AG Kokott in the BA case, the CFI stated in its Microsoft judgment that: … it is settled case-law that Article 82 EC [now Article 102 TFEU] covers not only practices which may prejudice consumers directly but also those which indirectly prejudice them by impairing an effective competitive structure … (emphasis added)49

In its recent judgment in AstraZeneca, the General Court reiterated this position by stating that: … it should be borne in mind that Article [102 TFEU] is aimed both at practices which may cause damage to consumers directly and at those which are detrimental to them through their impact on an effective competition structure. (emphasis added)50

In short, the Court’s current approach is to presume harm to consumers in the case of exclusion of competitors, unless there is an objective economic justification.51 The concept of objective justification as such, based on economic efficiency considerations, is well established in the Court’s jurisprudence.52 The condition of ‘no objective justification’ thus provides for the necessary element to balance benefits to consumers flowing from the conduct against structural damage (as loss to consumer welfare). Thus the criticism—that the policy underlying Article 102 TFEU so far has been concerned with protecting competitors instead of consumers—only has merit if it is directed against (i) an unduly restrictive

47 Opinion of AG Kokott in Case C-95/04 P, British Airways plc v Commission [2007] ECR-I 2331, paras 86–89. For an economic study of the British Airways case, the Commission’s decision and the CFI’s judgment see Office of Fair Trading (2005), ‘Selective Price Cuts and Fidelity Rebates’, Discussion Paper 804, Report prepared by RBB Economics, Annex B, pp 226–49. 48 Pursuant to Art 51 TFEU, the Protocols and Annexes to the Treaties shall form an integral part thereof and thus count as primary law. 49 Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 664. 50 Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr, para 353. 51 For a different interpretation by the Bundeskartellamt see ‘A Bundeskartellamt/Competition Law Forum Debate on Reform of Article 82: A “Dialectic” on Competing Approaches’ (2006) 2 European Competition Journal 211, at 216–17. The German Competition Authority referred to AG Kokott’s Opinion as support for its own structural ‘freedom of competition’ approach. 52 See eg Case T-219/99, British Airways v Commission [2003] ECR II-5917, paras 279–80, 293; Case T-203/01, Michelin v Commission [2003] ECR II-4071, para 59 (‘economically justified countervailing advantage’). For an analysis see Loewenthal (2005), ‘The Defence of “Objective Justification” in the Application of Article 82 EC’, 28 World Competition 455, and Albors-Llorens (2007), ‘The Role of Objective Justification and Efficiencies in the Application of Article 82 EC’, 44(6) Common Market Law Review 1727.

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application of the concept of objective justification and (ii) an automatic presumption that consumer harm follows an impairment of the market structure. How the concept of objective justification is applied, and how it should be applied, will be addressed in more detail below.53 What is relevant here is that, in practice, US courts are usually more demanding in terms of having concrete proof of consumer harm. In the EU, such proof may be easier on the basis of the ‘special responsibility’54 of a dominant firm not to further impair the degree of competition and the presumption of consumer harm following the impairment of the competitive structure. On a conceptual level, however, Article 102 TFEU on its current interpretation also ultimately aims at preventing harm to consumers. 3.2.5

Enforcement

What has been identified as perhaps the biggest difference between § 2 Sherman Act and Article 102 TFEU is their respective enforcement mechanisms.55 Whereas Article 102 TFEU is mainly enforced through the European Commission (and national competition authorities), public enforcement in the US is complemented by intense private enforcement due to, amongst other things, the incentives arising from the possibility of treble damages.56 Under the assumption that the relatively low incentive for private litigation under EU law is not offset by an increased number of complaints lodged with the Commission (and national competition authorities), the greater incentive to initiate private litigation in the US reduces the probability of unlitigated anti-competitive behaviour, but at the same time enhances the number and thus the potential overall costs of false positives. The net effect in terms of error costs as compared with the European model of stronger public enforcement is not obvious.57 Therefore, the different enforcement models do not a priori prevent the search for a common substantive standard.58

3.3

ANALYSIS OF POTENTIAL STANDARDS

The above positive analysis has shown that the functional question—how to define anticompetitive conduct—is the same in both jurisdictions, that both jurisdictions suffer from

53 This includes the questions (1) whether the legal analysis should be structured so as to include efficiencies as benefits to consumers only as a defence at the ultimate stage, (2) how the burden of proof should be allocated, and (3) what time horizon for the prognosis of costs and benefits of the strategy is to be applied. See below at 3.3.3.3. 54 See eg Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr, para 671. 55 See Elhauge & Geradin (2007), Global Competition Law and Economics, p 234. 56 For an analysis of private enforcement of Art 102 TFEU and an overview of private enforcement of US antitrust law see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 739–52. For current efforts to strengthen private enforcement of Art 101 and 102 TFEU see the Commission’s White Paper on Damages actions for breach of the EC antitrust rules, COM(2008)165 final, and the accompanying Commission Staff Working Paper, SEC(2008)404. 57 From a normative point of view, these two effects of more intense private enforcement should have an impact on the substantive standard under § 2 Sherman Act only if the relative costs of false positives and negatives differ. However, there is no conclusive result with regard to the relative sizes of the two types of error. See in more detail below at 3.3.2. 58 But see Gerber (2010), ‘Convergence in the Treatment of Dominant Firm Conduct: The United States, the European Union, and the Institutional Embeddedness of Economics’, 76 Antitrust Law Journal 951, highlighting in particular the different role of economists and economics in US and EU procedures.

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the same normatively meaningless substantive criteria, and that neither the wording of the provisions nor their institutional embeddedness prevent cross-fertilisation with regard to the standard for identifying exclusionary conduct or even the search for a common standard. Before discussing the main candidates for such a standard59 that have emerged in the debate amongst scholars and practitioners (3.3.3), it is essential to clarify two questions: First, what should a standard provide and what should be left for conduct-specific rules (3.3.1)? Second, using a cost-error approach to judge the different standards, what are the costs of false positives and false negatives under § 2 Sherman Act and Article 102 TFEU (3.3.2)?

3.3.1

The Relationship between the Standard and Conduct-Specific Rules

In the context of § 2 Sherman Act and Article 102 TFEU as well as generally in the context of antitrust, standards and conduct-specific rules coexist. Standards provide the first interpretive layer to a legal term such as ‘monopolisation’ or ‘abuse’, while conduct-specific rules are developed by courts or already provided for by the legislator in the case of recurring behaviour as a more specific second interpretive layer. The latter either provide a ‘safe harbour’ for firms (per se legality) or prohibit specific conduct (per se illegality).60 Contrary to its labelling, a ‘rule of reason’ as specifically used under US antitrust law may also constitute a standard, depending on its degree of specificity.61 Thus antitrust has already answered the usual question raised in the normative ‘economics of rules’ literature of ‘standards vs rules’ (in the sense of exclusivity) by instead establishing the coexistence of both. This literature usually assumes that standards entail lower initial specification costs, but greater enforcement and compliance costs than rules.62 As regards the choice between standards and rules, it follows that the relative advantage of rules lies in situations in which there will be frequent application and adjudication of the rule.63 Under § 2 Sherman Act and Article 102 TFEU, the cost advantages of both are combined since a standard as the fall-back default is provided for in case there is new or less frequent conduct for which no conduct-specific rule (yet) exists. The cost framework provided for by the ‘economics of rules’ literature will be helpful again, however, when switching from the binary choice between a standard and rules to the question of optimal differentiation of legal provisions on a continuous scale. The standard insight here is that a provision is optimally differentiated if the marginal reduction of the sum of error costs (as the marginal benefit of differentiation) equals the marginal costs of differentiation.64 This is not readily implementable policy advice. 59 For comparative discussions of the potential substantive tests see Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244, and the 2005 OECD Report Competition on the Merits, DAF/COMP(2005)27. 60 One example of a per se illegality rule under Art 102 TFEU is its provision on tying (lit d). 61 For a discussion of the advantages and disadvantages of per se rules and the rule of reason under US antitrust law see Easterbrook (1992), ‘Ignorance and Antitrust’ in Jorde & Teece (eds), Antitrust, Innovation, and Competitiveness, pp 119–36; Evans & Padilla (2005), ‘Excessive Prices: Using Economics to Define Administrable Legal Rules’, 1 Journal of Competition Law and Economics 97; Mahoney & Sanchirico (2005), ‘General and Specific Rules’, 161 Journal of Institutional and Theoretical Economics 329. 62 See Ehrlich & Posner (1974), ‘An Economic Analysis of Legal Rulemaking’, 3 Journal of Legal Studies 257. Compliance costs should include not only the immediate costs to firms of interpreting the standards, but also the losses arising from legal uncertainty, ie in particular potential chilling effects on innovation. 63 Kaplow (1992), ‘Rules Versus Standards: An Economic Analysis’, 42 Duke Law Journal 557. 64 See, for competition rules, Christiansen & Kerber (2006), ‘Competition Policy with Optimally Differentiated Rules Instead of Per se Rules vs Rule of Reason?’, 2 Journal of Competition Law and Economics 215, and the literature

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But such a costs framework helps us to determine the parameters for the choice of the degree of differentiation with regard to the rules. This will be relevant when answering the question of what rule(s) to adopt against refusals to license IP at the second interpretive level. In this context, (again) a terminological clarification is warranted: some commentators have framed the European debate on Article 102 TFEU under the labels of (old) ‘form-based’ versus (new) ‘effects-based’ approaches.65 These antagonistic labels are to some extent misleading: all antitrust rules, including ‘form-based’ conduct-specific rules, should be designed in the light of the effects of the conduct they address, ie they should determine conduct which clearly and unambiguously has positive (in the case of per se legality rules) or negative (in the case of per se illegality rules) effects for consumers. The question is instead one of differentiation of rules and discretion for competition authorities and courts.66 Since these conduct-specific rules mitigate to some extent the costs that arise due to legal uncertainty, the standard, on the first interpretive layer, may be relatively undifferentiated. It must, however, meet two requirements: First, it must be applicable to every type of conduct, including new types of conduct, in order to provide a fall-back option. Second, it must provide for coherence across conduct-specific rules, ie in turn, every conduct-specific rule must fit in with the standard.67 3.3.2

The Cost-Error Approach as Heuristic

Using a cost-error approach,68 there are three major costs associated with the application of § 2 Sherman Act and Article 102 TFEU: (public and private) costs of enforcement,69 ex post error costs, and ex ante error costs. Ex post error costs are those costs that result from the prescriptive effect of a false decision by a competition authority or a false judg-

cited there. For a general model see Kaplow (1992), ‘A Model of the Optimal Complexity of Rules’, NBER Working Paper No 3958. The costs of differentiation have been emphasised by courts when arguing in favour of bright-line standards and rules. See eg the opinion of then Judge Stephen Breyer in Barry Wright Corp v ITT Grinnell Corp, 724 F2d 227 (1st Cir 1983), at 234, in the context of predatory pricing: ‘[U]nlike economics, law is an administrative system the effects of which depend upon the content of rules and precedents only as they are applied by judges and juries in courts and by lawyers advising their clients. Rules that seek to embody every economic complexity and qualification may well, through the vagaries of administration, prove counter-productive, undercutting the very economic ends they seek to serve … [W]e must be concerned lest a rule or precedent that authorizes a search for a particular type of undesirable pricing behavior end up by discouraging legitimate price competition.’ 65 See eg the 2005 Report of the European Advisory Group on Competition Policy, An Economic Approach to Article 82, p 5. 66 See above at 2.3.3. For a critical view on discretionary case-by-case competition policy see Vanberg (2009), ‘Wettbewerbsfreiheit und ökonomische Effizienz: Die ordnungsökonomische Perspektive’ in Vanberg (ed), Evolution und freiheitlicher Wettbewerb, pp 107–26. 67 But see the DoJ’s 2008 Report Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act, pp 46–47, which argues that none of the existing tests works well in all cases and instead encourages the development of conduct-specific tests and safe harbours. See also Popofsky (2006), ‘Defining Exclusionary Conduct: Section 2, the Rule of Reason, and the Unifying Principle Underlying Antitrust Rules’, 73 Antitrust Law Journal 435, arguing for different standards for different types of conduct. 68 See, in the context of antitrust rules, Easterbrook (1992), ‘Ignorance and Antitrust’ in Jorde & Teece (eds), Antitrust, Innovation, and Competitiveness, pp 119–36; Beckner & Salop (1999), ‘Decision Theory and Antitrust Rules’, 67 Antitrust Law Journal 41; Evans & Padilla (2005), ‘Excessive Prices: Using Economics to Define Administrable Legal Rules’, 1 Journal of Competition Law and Economics 97. This literature usually focuses on the goal of minimising the sum of these costs. This may entail trade-offs since, for example, a more differentiated (rule-like) provision may be less costly to set up and comply with, but may lead to higher error costs. 69 Private costs of enforcement may also comprise costs of compliance.

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ment by a court regarding the behaviour of an addressee of § 2 Sherman Act or Article 102 TFEU. ‘False’ in this context means not being in accordance with the ‘optimal’ standard that distinguishes between legal competitive and illegal anti-competitive behaviour. Ex ante error costs are those that result from the ‘signal effect’ of a false antitrust intervention on the strategies to be planned by firms which may find themselves in the same situation as the addressee of the false intervention. The focus here will be on error costs since, in the antitrust literature, there have been claims that the error costs of false positives are greater than the losses due to false negatives.70 The costs of false positives have been emphasised by the US agencies71 as well as by the US Supreme Court in its Trinko judgment in the—now classic—words of Justice Scalia: Against the slight benefits of antitrust intervention here, we must weigh a realistic assessment of its costs. Under the best of circumstances, applying the requirements of § 2 ‘can be difficult’ because ‘the means of illicit exclusion, like the means of legitimate competition, are myriad.’ United States v Microsoft Corp, 253 F 3d 34, 58 (CADC 2001) (en banc) (per curiam). Mistaken inferences and the resulting false condemnations ‘are especially costly, because they chill the very conduct the antitrust laws are designed to protect.’ Matsushita Elec. Industrial Co v Zenith Radio Corp, 475 US 574, 594 (1986). The cost of false positives counsels against an undue expansion of § 2 liability.72

3.3.2.1

Error Costs of False Negatives

The error costs of false negatives are essentially those losses that result from anti-competitive conduct. As a matter of theoretical clarity, anti-competitive strategies can be divided into two main types according to the variables of the competitive ‘game’:73 (i)

those that change the payoff functions of competitors (‘structural strategies’, eg a refusal to supply) by raising their costs (variable, fixed, or both) or by lowering their demand (ie, technically, changing their demand functions), and (ii) those that reduce rivals’ profits without changing a parameter of their payoff function by lowering the price and stealing customers away (‘output strategies’, eg predatory pricing). In the short term, these strategies have different effects on output, demand and costs.74 What is more important, however, is the long-term effect. Both structural and output strategies may force competitors either to exit the market, or, if they render their competitors’ profits negative, to commit to a lower scale of production. This potential structural effect on the market is what the definition of exclusionary abuse by the ECJ in Hoffman-La Roche75 aimed at addressing. This effect is negative in particular if the rivals that have to

70 Evans & Padilla (2004), ‘Designing Antitrust Rules for Assessing Unilateral Practices: A Neo-Chicago Approach’, CEPR Discussion Paper No 4625. 71 For the DoJ see the remarks of Thomas O Barnett in ‘The Gales of Creative Destruction: The Need for Clear and Objective Standards for Enforcing Section 2 of the Sherman Act’, Washington, 20 June 2006. For the FTC see Deborah Platt Majoras’s speech ‘The Consumer Reigns: Using Section 2 to Ensure a “Competitive Kingdom”’, 20 June 2006. 72 Verizon Communications Inc v Law Offices of Curtis v Trinko, LLP, 540 US 398 (2004), at 414. 73 This typology of strategies has been suggested by and applied in the OFT 2006 economic discussion paper ‘The Cost of Inappropriate Interventions/Non Interventions under Article 82’ (at pp 15–17). 74 For an analysis see Ibid, pp 32–34. 75 See above at 3.1.

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exit or are downsized are equally or even more efficient than the dominant firm (negative cost effect) or if their products are differentiated and/or of better quality (negative demand effect).76 Exclusionary behaviour can also have detrimental effects on other final markets if these markets are linked to the market where the conduct takes place.77 What is often neglected,78 and which must be emphasised, is that the above effects of structural strategies may entail direct dynamic losses in the sense that such strategies may block follow-on innovation by preventing competitors from innovating or marketing improvements. As will be pointed out in more detail below,79 the paradigm example is a refusal to license IP to a firm which needs the licence to produce and/or market a new product. Aside from direct dynamic losses, there are also scenarios where conduct— whether a structural or output strategy—leads to the exit of an innovative rival which, in the future, may have been a source of innovation. This market exit would thus lead to an indirect (or more remote) dynamic loss. 3.3.2.2 Error Costs of False Positives A false positive, in the case of a ‘pure’ prohibition, may lead to opportunity losses by preventing the firm concerned from implementing a strategy which, within a consumer welfare framework, would lead to greater allocative or productive efficiency80 or, in the case of a positive prescription of another behaviour, inefficient price-setting etc. The most important factors, which usually also form the focus of the debate, are the long-run productive inefficiencies (dynamic losses) that such false positives may lead to in the case of structural strategies. In the paradigm example of a refusal to supply, a firm may invest in a process or product innovation. Such innovation may reduce its costs or allow it to offer a new product or service. Similarly, a firm may invest in physical property which allows it to offer a new or better product or service on a downstream market. In these cases, a refusal to supply (the more efficient or higher quality) input leads to higher costs for rivals or lowers their demand as compared with the situation of supply when the input is supplied.81 Such a refusal may, however, be necessary to protect the underlying investment. In such a case, a false positive may decrease the ex ante incentives to invest and thus dynamic efficiency, and thereby impede the dynamic function of competition.

76 OFT 2006 economic discussion paper ‘The Cost of Inappropriate Interventions/Non Interventions under Article 82’, pp 35–37. 77 These links between the markets can be exogenous (through technology or consumers’ preferences) or endogenous (ie through the conduct itself). See Ibid, pp 47–51. Antitrust analysis usually takes these effects on other markets into account only if they lead to monopoly power or strengthen a dominant position (see above at 3.2.1.3). 78 For example, neither Kaplow’s ratio test with regard to the relation of IP and antitrust (‘The Patent-Antitrust Intersection: A Reappraisal’, 97 Harvard Law Review 1813) nor Elhauge’s line of reasoning (in ‘Defining Better Monopolization Standards’) take into account the blocking effect of IP. 79 See in more detail at 4.3–4.8. 80 Allocative efficiencies may arise, for example, in the case of pricing efficiencies through the internalisation of pricing externalities (such as in the case of multi-product firms). Productive efficiencies may flow from the reduction of agency costs (RBB Economics (2006), ‘The Response of RBB Economics to the DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses’, pp 14, 38). 81 See the 2006 OFT economic discussion paper ‘The Cost of Inappropriate Interventions/Non Interventions under Article 82’, pp 17–18, 21.

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Another source of dynamic loss due to false positives put forward in the literature is that such errors lessen the incentive to strive for dominance, since a dominant position or, under § 2 Sherman Act, at least a market position with significant market power, would bring firms into the realm of antitrust intervention. This effect would be particularly costly in dynamic markets in which firms compete through innovation.82 Such an effect, however, may be minimal since the benefits of market power are usually much greater than the costs of potential intervention, at least in the case of antitrust.83 3.3.2.3 Relative Size of Error Costs As has been pointed out, there is theoretical and empirical consensus that, in the long run, the dynamic function of competition is more important than its static allocative and productive dimensions.84 The emphasis of Schumpeterian competition, coupled with the Hayekian notion of imperfect knowledge of the public authorities, in particular in dynamic markets,85 is one of the core elements of evolutionary competition theory.86 In the area of monopolisation, Chicago antitrust scholars87 and the US antitrust authorities under the Bush administration88 used this line of argument to underpin their view that false positives are more costly than false negatives. In order to analyse whether this line of reasoning is correct, or whether it is merely an expression of a belief in a ‘do not turn upon a winner-culture’,89 in minimalist antitrust or generally in minimalist regulatory intervention in markets, the different arguments have to be looked at separately. According to one hypothesis, the negative effect on welfare of the prohibition of efficient conduct is more persistent than the negative effect of abusive conduct. The argument put forward is that markets are self-correcting whereas rules are ‘sticky’.90 In short, ‘mistakes of law are not subject to competitive pressures’.91 Accordingly, the position that false positives are more costly than false negatives has also been labelled the ‘market correction approach’.92 This conjecture, however, is not conclusive. Whereas 82

Ibid, pp 90–91. This may be in different in cases of ‘heavy’ sector-specific regulation. 84 See above at 1.1. 85 See eg Drexl (2010), ‘Real Knowledge is to Know the Extent of One’s Own Ignorance: On the Consumer Harm Approach in Innovation Related Competition Cases’, 76 Antitrust Law Journal 677. See also Gauß (2009), Die Anwendung des kartellrechtlichen Missbrauchsverbots nach Art 82 EG (Art 102 AEUV) in innovativen Märkten. 86 See eg Mantzavinos (2006), ‘The Institutional-Evolutionary Antitrust Model’, 22 European Journal of Law and Economics 273, and Mantzavinos (2005), ‘Das institutionenökonomisch-evolutionäre Wettbewerbsleitbild’, 225 Jahrbücher für Nationalökonomie und Statistik 205. 87 Easterbrook (1984), ‘The Limits of Antitrust’, 63 Texas Law Review 1. For a critical view on the ‘quest to avoid false positives’ see Gavil (2004), ‘Exclusionary Distribution Strategies by Dominant Firms: Striking a Better Balance’, 72 Antitrust Law Journal 3. 88 See eg the speech ‘The Best Approach to Enforcement against Single-Firm Conduct: Caution’ given by Gerald F Masoudi, then Deputy Assistant Attorney-General of the DoJ’s Antitrust Division, Washington, 17 November 2006. 89 See the famous passage by Judge Learned Hand in United States v Aluminium Co of America, 148 F2d 416, 430 (2d Cir 1945): ‘The successful competitor, having been urged to compete, must not be turned upon when he wins.’ 90 See Easterbrook (1984), ‘The Limits of Antitrust’, 63 Texas Law Review 1. For a summary of this argument see the 2006 OFT economic discussion paper ‘The Cost of Inappropriate Interventions/Non Interventions under Article 82’, pp 79–80. 91 Easterbrook (1987), ‘Comparative Advantage and Antitrust Law’, 75 California Law Review 983, at 986. 92 McGowan (2005), ‘Between Logic and Experience: Error Costs and United States v Microsoft Corp’, Berkeley Technology Law Journal 1189, at 1189–94. 83

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markets do tend to erode market power in the long run, there is no evidence that courts are slower to reverse ‘bad’ precedents in a common-law adjudication or give up a ‘bad’ interpretation of law in a civil-law adjudication than markets are to erode market power.93 Moreover, particularly in the light of globalisation, there is increasing market pressure on public entities and thus indirectly on courts—through the threat of corrective legislation— not to interpret laws in a way which would run counter to the interests of investors. The second conjecture advanced in this context is that the cost of monopoly power—the deadweight loss which affects only a portion of demand—is likely to be lower than the cost of falsely condemned efficient conduct which may affect the entire demand, eg by lowering the production cost of every unit.94 Dominant firms may employ strategies, however, which both directly and indirectly lead to losses of dynamic efficiency. Thus both false positives and false negatives may entail dynamic losses with the argument cutting both ways. Since there is no theoretical or empirical evidence regarding the relative size of these costs, one cannot generally conclude that false positives are more costly than false negatives. Therefore, Williamson and others have suggested that categorical presumptions about error costs should not be resorted to; instead error cost analyses should be carried out on a case-by-case basis, thus integrating such analyses into the legal process, considering the risk and the magnitude of errors.95 This suggestion can be implemented on two levels: First, when designing conduct-specific per se (legality and illegality) rules (which, particularly in relation to recurring strategies, may provide for the necessary ex ante legal certainty), the risk and magnitude of errors of a decision concerning a specific conduct should be tradedoff. A per se illegality rule, for example, needs to pass the test that the expected net costs of false positives based on the rule should not exceed the expected net costs of false negatives based on the rule. Second, and this should guide the following discussion, as regards the general standard that one has recourse to in the absence of conduct-specific rules, there cannot be a general presumption regarding the relative size of error costs.

3.3.3

The Conduct Element—Suggested Standards

In the extensive transatlantic debate on reform of the interpretation of § 2 Sherman Act and Article 102 TFEU, three main candidates have emerged as potential standards for determining exclusionary behaviour: the profit sacrifice test and its variant, the no economic sense test (3.3.3.1), the as-efficient competitor test (3.3.3.2), and the consumer harm test (3.3.3.3).96

93

Ibid, at 1191–94. Easterbrook (1984), ‘The Limits of Antitrust’, 63 Texas Law Review 1, at 15–16. 95 Williamson (1987), ‘Delimiting Antitrust’, 76 Georgetown Law Journal 271. In the same vein see Salop & Romaine (1999), ‘Preserving Monopoly: Economic Analysis, Legal Standards, and Microsoft’, 7 George Mason Law Review 617. This view has been labelled the ‘integration approach’ (see McGowan (2005), ‘Between Logic and Experience: Error Costs and United States v Microsoft Corp’, Berkeley Technology Law Journal 1185, at 1195–97). 96 For comparative discussions of these tests see, amongst others, Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244; Temple Lang & O’Donoghue (2005), ‘The Concept of an Exclusionary Abuse under Article 82 EC’, GCLC Research Papers on Article 82 EC, pp 38–64, at pp 43–48; O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 184–94; Hylton (2009), ‘The Law and Economics of Monopolization Standards’, Boston University School of Law Working Paper No 08–18; Rousseva (2010), Rethinking Exclusionary Abuses in EU Competition Law, pp 327–52. 94

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3.3.3.1

Profit Sacrifice Test and ‘No Economic Sense’ Test

The profit sacrifice test was originally developed by Ordover and Willig in the context of predation. They defined exclusionary behaviour as a: response to a rival that sacrifices part of the profit that could be earned under competitive circumstances were a rival to remain viable, in order to induce exit and gain consequent additional monopoly profits.97

The sacrifice test thus asks whether the dominant firm’s conduct in question would be profitable or make business sense even if it did not exclude competitors and thereby create or preserve market power.98 Whereas its inventors seem to regard the sacrifice test only as a ‘tool for assessing wilfulness’ and as part of the ‘wilfulness inquiry’,99 others advance it as a general objective standard.100 The test conceptually rests upon the notion that anticompetitive strategy in stage one maintains or leads to a distorted market structure, and the firm applying the strategy maintains or increases its market power. The conduct in stage one is usually thought of as entailing some form of short-run sacrifice on the part of the firm concerned, which it intends to recoup at stage two.101 This two-stage concept of monopolisation or abuse is particularly apt to explain predatory pricing and has been applied by the courts in such cases.102 This test, however, has rightly been criticised as conceptually flawed: First, it is difficult to determine in relation to which strategy the conduct should constitute a sacrifice.103 Second, and most importantly, the test does not provide for sufficient conditions. For example, an investment in R&D always entails a short-term profit sacrifice, leading to innovation, which then may drive rivals out of the market.104 Since the test captures beneficial Schumpeterian competition, it is over-inclusive.105 Third, the test is also under-inclusive, since a profit sacrifice is not a necessary condition for anti-competitive conduct,106 as with cases involving horizontal practices or strategies that raise rivals’ costs. Similarly, in monopoly maintenance cases, no sacrifice is necessary as compared to the strategy pursued so far.107

97 Ordover & Willig (1981), ‘An Economic Definition of Predation: Pricing and Product Innovation’, 91 Yale Law Journal 8, at 9–10. 98 See Vickers (2005), ‘Abuse of Market Power’, 115 Economics Journal 244. 99 See the Brief of Amici Curiae economics professors Baumol, Ordover, Warren-Boulton and Willig in the case Verizon v Trinko, 305 F3d 89 (2d Cir 2002). 100 See eg Melamed (2005), ‘Exclusionary Conduct under the Antitrust Laws: Balancing, Sacrifice, and Refusals to Deal’, 20 Berkeley Technology Law Journal 1247; and Melamed (2006), ‘Exclusive Dealing Agreements and Other Exclusionary Conduct—Are there Unifying Principles?’, 73 Antitrust Law Journal 375. For an explanation and analysis of the test see OECD (2005), Competition on the Merits, pp 24–27. 101 The sacrifice test’s conceptual idea thus rests upon the notion of predation. For an application of the sacrifice test to predation see de la Mano & Durand (2005), ‘A Three-Step Structured Rule of Reason to Assess Predation under Article 82’, Discussion Paper, Office of the Chief Economist, DG Competition. 102 In the US the recoupment test was used by the Supreme Court in Brooke Group Ltd v Brown & Williamson Tobacco Corp, 509 US 209, at 224 (1993). 103 Vickers (2005), ‘Abuse of Market Power’, 115 Economics Journal 244, at 254–55. 104 See Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253. 105 See Salop (2006), ‘Exclusionary Conduct, Effect on Consumers, and the Flawed Profit-Sacrifice Standard’, 73 Antitrust Law Journal 311. 106 Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 280–92. 107 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 186–87. As O’Donoghue and Padilla point out (at p 186), some anti-competitive strategies may be even cheaper than competitive ones, such as filing a false or overbroad patent application rather than filing a properly defined one.

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To remedy these shortcomings, there have been attempts to define ‘sacrifice’, by emphasising its desired effect, as behaviour that would be irrational without its exclusionary effect. This idea has been put forward by the DoJ108 in various monopolisation cases. In the Trinko case, the DoJ pointed out that: [c]onduct is “exclusionary” or “predatory” in antitrust jurisprudence if the conduct would not make economic sense for the defendant but for its elimination or softening of competition … the refusal is predatory or exclusionary, i.e., … the refusal represents a sacrifice of profit or goodwill that makes sense only because it has the effect of injuring competition. (emphasis added)109

This test is referred to as the ‘no economic sense’ standard110 or the ‘but for’ test.111 In reaction to the Trinko judgment, the DoJ stated that it intended to assert the sacrifice standard with renewed confidence in the future.112 This variant of the sacrifice test improves the profit sacrifice test to the extent that it does not characterise as illegal every departure from short-run profit maximisation.113 The ‘no economic sense’ standard, however, remains conceptually misguided:114 First, it is circular since it refers back to the starting question of what—in the words of the DoJ—‘elimination or lessening of competition’ means.115 Second, it still does not provide for sufficient conditions since firms often invest in leapfrog innovation to capture the whole market, thus eliminating less efficient rivals. Hence, the ‘no economic sense’ test does not result in any improvement to the existing standards under § 2 Sherman Act and Article 102 TFEU, as outlined at the beginning of this chapter.116 3.3.3.2 The As-Efficient Competitor Test Some scholars have tried to provide a general test by focusing on the question of which rivals the firm in question should be prevented from excluding. With regard to § 2 Sherman Act, Posner proposes the following test: [T]he plaintiff must first prove that the defendant has monopoly power and second that the challenged practice is likely in the circumstances to exclude from the defendant’s market an equally or

108 In the Microsoft case see the Brief for Appellees United States and the State Plaintiffs at 48, United States v Microsoft Corp, 253 F3d 34 (DC Cir 2001) (Nos 00-5212, 00-5213); in the American Airlines predatory pricing case see Brief for Appellant United States at 25, 29–31, United States v AMR Corp, 335 F3d 1109 (10th Cir 2003) (No 01-3202). For an analysis of this case and the test suggested by the DoJ see Edlin & Farrell (2003), ‘The American Airlines Case: A Chance to Clarify Predation Policy’ in Kwoka & White (eds), The Antitrust Revolution. See also the joint DoJ/FTC Amicus Brief in Weyerhaeuser Co v Ross-Simmons Hardwood Lumber Co. 109 Joint DoJ/FTC Amicus Brief in Verizon v Trinko. 110 One of its main proponents is Werden ((2006), ‘Identifying Exclusionary Conduct under Section 2: The “No Economic Sense” Test’, 73 Antitrust Law Journal 413). 111 See Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244, at 256. For an explanation of the test see OECD (2005), Competition on the Merits, pp 27–29. 112 See the speech ‘The Struggle For Standards’ by J Bruce McDonald, at that time Deputy Assistant AttorneyGeneral of the DoJ’s Antitrust Division, presented at the 2004 American Bar Association Section of Antitrust Law, Spring Meeting. 113 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 188. 114 See, in particular, Salop (2006), ‘Exclusionary Conduct, Effect on Consumers, and the Flawed ProfitSacrifice Standard’, 73 Antitrust Law Journal 311. 115 Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244, at 253–54. 116 See above at 3.1.

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more efficient competitor. The defendant can rebut by proving that although it is a monopolist and the challenged practice exclusionary, the practice is, on balance, efficient. (emphasis added)117

The Supreme Court’s judgment in Weyerhaeuser has been interpreted as implicitly endorsing this ‘equally efficient competitor’ test.118 In its Guidance Paper on its enforcement priorities in applying Article 82 EC (now Article 102 TFEU), the European Commission refers to the as-efficient or equally efficient competitor test as a benchmark, stating that it will normally only intervene where the conduct concerned has already been or is capable of hampering competition from competitors which are considered to be as efficient as the dominant undertaking.119

Elhauge has suggested the following variant of this test: The proper monopolization standard should instead focus on whether the alleged exclusionary conduct succeeds in furthering monopoly power (1) only if the monopolist has improved its own efficiency or (2) by impairing rival efficiency whether or not it enhances monopolist efficiency. … [T]his standard … would permit the former conduct and prohibit the latter …120

In Elhauge’s view, the first category should be per se legal, and the second per se illegal without any rule of reason balancing of the harmful and beneficial effects of the behaviour.121 In comparison to the other standards mentioned so far, the equally efficient competitor test moves one step further by introducing the yardstick of relative efficiency of the firms in the market. It is thus not designed in the light of the objective of preserving an existing market structure. Instead, it has the benefit of distinguishing between ‘good’ and ‘bad’ losses of competition. With regard to Article 102 TFEU, it has been argued that judgments of the CJEU have imposed duties on dominant firms which are not limited to equally efficient competitors.122 Although correct as such, this argument is not decisive in a normative policy discussion since the Commission and the Court could interpret Article 102 TFEU more strictly. A second argument advanced against the test is that it focuses solely on productive efficiency. Indeed, there may be circumstances where the (potential) entry of less efficient competitors increases consumer welfare, since the gain in allocative efficiency due to lower prices may more than offset the loss in productive efficiency due to higher costs.123 Furthermore, the test focuses on productive efficiency at the time the conduct takes place. New entrants may

117 Posner (2001), Antitrust Law, pp 194–95. See also Areeda & Turner (1975), ‘Predatory Pricing and Related Practices under Section 2 of the Sherman Act’, 88 Harvard Law Review 697, at 709–11. For an explanation of the test see OECD (2005), Competition on the Merits, pp 29–31. 118 See Lambert (2007), ‘Weyerhaeuser and the Search for Antitrust’s Holy Grail’, 2006–7 Cato Supreme Court Review 277. The judgment (Weyerhaeuser Co v Ross-Simmons Hardwood Lumber Co, 127 S Ct 1069 (2007)) centred on the question whether the rules governing predatory pricing should apply similarly in predatory bidding cases. 119 Commission Communication, ‘Guidance on the Commission’s Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’, para 23. For an overview see Motta (2009), ‘The European Commission’s Guidance Communication on Article 82’, 30 European Competition Law Review 593. 120 Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 253. 121 Ibid, at 315–16. 122 Temple Lang & O’Donoghue (2005), ‘The Concept of an Exclusionary Abuse under Article 82 EC’, GCLC Research Paper, pp 38–64, at p 45. 123 Eg Salop (2006), ‘Exclusionary Conduct, Effect on Consumers, and the Flawed Profit-Sacrifice Standard’, 73 Antitrust Law Journal 311, at 328–29.

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be less efficient at that time than the incumbent, but may become equally or more efficient in the future, thus adding productive efficiency. Although the European Commission’s Guidance Paper endorses the as-efficient competitor test as its general benchmark for price-based exclusionary conduct, it also acknowledges that: … in certain circumstances a less efficient competitor may also exert a constraint which should be taken into account when considering whether particular price-based conduct leads to anticompetitive foreclosure. The Commission will take a dynamic view of that constraint, given that in the absence of an abusive practice such a competitor may benefit from demand-related advantages, such as network and learning effects, which will tend to enhance its efficiency.124

In light of the objective of protecting consumers, both the original and Elhauge’s variant of the as-efficient competitor test are thus under-inclusive. In particular Elhauge has counterargued that balancing the improvements of productive efficiency against the inefficiency resulting from the loss of competition would cause legal uncertainty, would be too costly to litigate and would thus deter investment in innovation.125 In his view, the benefit of avoiding such balancing provided for by his per se rule variant of the as-efficient competitor test outweighs in particular its under-inclusiveness which he deems necessary. Avoiding an explicit balancing exercise, however, comes at too heavy a price in Elhauge’s variant of the test. Although he designed the test in respect of refusals to deal, the under-inclusiveness is particularly obvious for this type of conduct. Applying his variant of the test, Elhauge suggests that: … a defendant that has increased its own efficiency by investing in its intellectual or physical property should not have a duty to share that property with rivals, but has no privilege to discriminate by offering worse terms to rivals or those who deal with rivals. Such discrimination on the basis of rivalry is not necessary to support optimal ex ante investment incentives, and its success may thus depend not on increasing the value of the property and the efficiency of the monopolist but rather on selectively impairing the efficiency of rivals.126

In his view, a refusal to deal should thus be deemed illegal only if it discriminates between competitors. Such a test would be heavily under-inclusive if a refusal to deal were to block downstream innovation, thus impeding dynamic efficiency.127 Furthermore, his test asks whether the effect on dominance occurs only if the dominant firm improves its efficiency, and, if not, whether the effect is caused by the conduct’s effect on rivals’ efficiency.128 Answering these questions does not require any explicit balancing. But the first question—although formulated as a binary causality inquiry—still requires an investigation into whether the effect on dominance is solely attributable to improved efficiency. Finding answers to this question may be a daunting prospect. On the other hand, 124 Guidance Paper, para 24. The DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses had referred to the as-efficient competitor test as its sole benchmark (at paras 63, 66, 67, 111, 154). Generally, the Guidance Paper takes more attenuated substantive stances as compared to the Discussion Paper. Furthermore, the Commission has retracted the value of the Guidance Paper as comprising substantive guidelines by classifying it as constituting mere ‘enforcement priorities’. However, the Commission has bound itself by the Paper with regard to its discretion in opening proceedings (see Bulst (2010) in Bunte (ed), Langen/Bunte—Kommentar zum deutschen und europäischen Kartellrecht, Art 82, paras 26–27). 125 Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, in particular at 317. 126 Ibid, in particular at 330. 127 In the context of refusals to deal, see in more detail below at 4.3–4.8. 128 For a concise explanation of Elhauge’s test see OECD (2005), Competition on the Merits, pp 33–36.

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if one answers the question easily in the negative without a complex economic inquiry, the test may turn out to be over-inclusive. Thus the benefit of increasing legal certainty by not demanding explicit balancing is smaller than claimed by Elhauge. 3.3.3.3

Consumer Harm Test: Balancing Costs and Benefits

The above tests, in light of the goal of preventing consumer harm, are necessarily over- and/ or under-inclusive, since they attempt to cut short the question whether conduct causes net harm to consumers to (putatively) enhance operationality and legal certainty. Asking a wrong ‘short-cut’ question at the most abstract level of interpretation of ‘monopolisation’ or ‘abuse’, however, would be the wrong way to increase legal certainty. Assuming that the objective of § 2 Sherman Act and Article 102 TFEU is to prevent consumer harm129 the standard thus has to focus on the conduct’s potentially negative net effect on consumers.130 ‘Consumer harm’ can therefore only be determined by balancing the positive and negative effects of potentially incriminating conduct. Accordingly, conduct would not be deemed to be exclusionary unless it could be shown to have, on balance, the effect of raising price, restricting output or (maybe) reducing innovation. In this sense, as Fox has pointed out, there is no exclusion without later exploitation.131 Since the consumer harm criterion and the cost-benefit balancing test as its analytical foundation are directly derived from the assumed objective—to prevent consumer harm— this standard does not provide a heuristic (in the sense of a short-cut) like the aforementioned tests. Only such a consumer harm test asks the correct theoretical question and is capable of potentially taking into account all relevant cost and benefits of behaviour into the analysis. This standard thus also has the greatest potential of fully integrating advances in economic theory and econometric techniques.132

129 For a discussion of the differences between a strict consumer welfare approach and a more open conception of consumer harm see above at 2.3.3.2. 130 See, amongst others, Salop (2006), ‘Exclusionary Conduct, Effect on Consumers, and the Flawed ProfitSacrifice Standard’, 73 Antitrust Law Journal 311; Salop & Romaine (1999), ‘Preserving Monopoly: Economic Analysis, Legal Standards, and Microsoft’, 7 George Mason Law Review 617. See also Carl Shapiro’s testimony before the Antitrust Modernization Commission, 29 September 2005, with regard to exclusionary conduct: ‘The ultimate goal of this area of the law is to prevent firms with significant economic power over their customers from using that power to disrupt or undermine the competitive process and thereby harm those customers. Using more traditional language, the law attempts to prevent firms with substantial market power from employing tactics that exclude rivals without generating benefits to customers, thereby fortifying that power or extending it in time to the detriment of customers. This basic principle implies that we should ultimately be looking at the effects of challenged conduct on customers. Conduct can only be branded as anti-competitive if it is expected to harm customers.’ For an analysis of the goals of US antitrust and EC competition law see above, 2.3.3.1 and 2.3.3.2. 131 Fox (2002), ‘What is Harm to Competition? Exclusionary Practices and Anti-Competitive Effect’, 70 Antitrust Law Journal 371. 132 In its—since withdrawn—2008 Single-Firm Conduct Report (at pp 45–46), the DoJ came to the conclusion that no single test works well in all cases and therefore encouraged the development of conduct-specific tests and safe harbours. However, the DoJ endorsed the disproportionality test as the fallback standard, ie if no conduct-specific test has been developed. The disproportionality test is a truncated version of the consumer harm standard. Under this test, conduct is anti-competitive under s 2 when it results in ‘harm to competition’ that is ‘disproportionate to consumer benefits (by providing a superior product, for example) and to the economic benefits to the defendant (aside from benefits that accrue from diminished competition)’ (Brief for the United States & the Federal Trade Commission as Amici Curiae Supporting Petitioner, at p 14, in the Trinko case). Accordingly, conduct which potentially has both pro- and anti-competitive effects is anti-competitive if the likely anti-competitive harm substantially outweighs the likely pro-competitive benefits.

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3.3.3.3.1 Simple Balancing vs Proportionality Inquiry The consumer harm test comes in two variants. The first ‘simply’ assesses whether the benefits (or efficiencies) brought about by the conduct outweigh the harm.133 The US Court of Appeals, drawing on the case law on monopolisation, outlined such a test in its Microsoft judgment: First, to be condemned as exclusionary, a monopolist’s act must have an ‘anti-competitive effect’. … Second, the plaintiff, on whom the burden of proof of course rests … must demonstrate that the monopolist’s conduct indeed has the requisite anti-competitive effect. … Third, if a plaintiff successfully establishes a prima facie case under § 2 by demonstrating anti-competitive effect, then the monopolist may proffer a ‘procompetitive justification’ for its conduct. … If the monopolist asserts procompetitive justification—a nonpretextual claim that its conduct is indeed a form of competition on the merits because it involves, for example, greater efficiency or enhanced consumer appeal—then the burden shifts back to the plaintiff to rebut that claim. … Fourth, if the monopolist’s procompetitive justification stands unrebutted, then the plaintiff must demonstrate that the anti-competitive harm of the conduct outweighs the procompetitive benefit. In cases arising under § 1 of the Sherman Act, the courts routinely apply a similar balancing approach under the rubric of the ‘rule of reason’.134

The second variant demands a proportionality inquiry. According to the classic formulation of Areeda and Hovenkamp, an act counts as exclusionary under § 2 Sherman Act if it (1) is ‘reasonably capable of creating, enlarging, or prolonging monopoly power by impairing the opportunities of rivals’, and (2) ‘either does not benefit consumers at all, or is unnecessary for the particular consumer benefits that the act produces,or produces harms disproportionate to the resulting benefits’.135 Similarly, the Directorate General for Competition, in its Discussion Paper, had suggested the following test to identify anticompetitive behaviour: First, the conduct in question ‘must have … the capability, by its nature, to foreclose competitors from the market’. Second, ‘in the specific market context, a likely market distorting foreclosure effect must be established’ (emphasis added).136 Finally, the dominant company is not able to provide an objective justification (in the two variants of an objective necessity defence or a meeting competition defence) or an efficiency defence. The Commission’s Guidance Paper does not set out the basic test as concisely as the DG Competition Staff Discussion Paper, but the latter is reflected in the former’s structure.137 With regard to the efficiency defence, the Guidance Paper transfers the conditions

133 See Gavil (2004), ‘Exclusionary Distribution Strategies by Dominant Firms: Striking a Better Balance’, 72 Antitrust Law Journal 3. 134 United States v Microsoft, 253 F3d 34, 59 (DC Cir 2001). One of its opponents has described the balancing test as follows: ‘Calculate the magnitude of the benefits—increased consumer welfare from lower prices or improved quality, and perhaps increased total welfare from cost savings—and calculate the amount of welfare loss attributable to the exclusion of rivals—reduced consumer surplus or perhaps the deadweight loss attributable to market power maintained or created by the conduct. If the latter is greater than the former, the conduct is anti-competitive.’ See Melamed (2005), ‘Exclusionary Conduct under the Antitrust Laws: Balancing, Sacrifice, and Refusals to Deal’, 20 Berkeley Technology Law Journal 1247. 135 Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 6.04a; similarly Vickers (2005), ‘Abuse of Market Power’, 115 Economic Journal 244. 136 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 58. See also the speech ‘Preliminary Thoughts on Policy Review of Article 82’ given by Neelie Kroes, Fordham Corporate Law Institute, New York, 23 September 2005. 137 Guidance Paper on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty, paras 19–21, 28–31.

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of Article 101(3) TFEU to Article 102 TFEU. Accordingly, for this defence, the dominant company must demonstrate that (1) ‘the efficiencies have been, or are likely to be, realised as a result of the conduct’; (2) ‘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’; (3) ‘the likely efficiencies brought about by the conduct outweigh any likely negative effects on competition and consumer welfare in the affected markets’; (4) ‘the conduct does not eliminate effective competition, by removing all or most existing sources of actual or potential competition’.138 Thus it is fair to conclude that, as its basic standard, the Commission has endorsed the second variant of the consumer harm test. Assuming that the objective of § 2 Sherman Act and Article 102 TFEU is to prevent consumer harm, any proportionality inquiry that goes beyond balancing harm against benefits to consumers is problematic. Additionally, imposing more stringent proportionality conditions increases the complexity of the test and thus legal uncertainty. Specifically with regard to the efficiency defence advanced by the Commission, the fourth condition—the no-elimination-of-competition requirement—is problematic. The reason is that a dominant company with a market position approaching that of monopoly would never be able to justify its conduct, even if its behaviour would generate efficiencies which would outweigh the loss of residual competition.139 The Guidance Paper argues that: [r]ivalry between undertakings is an essential driver of economic efficiency, including dynamic efficiencies in the form of innovation. In its absence the dominant undertaking will lack adequate incentives to continue to create and pass on efficiency gains. Where there is no residual competition and no foreseeable threat of entry, the protection of rivalry and the competitive process outweighs possible efficiency gains. In the Commission’s view, exclusionary conduct which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains.140

This argument, however, rests on the problematic general assumption that even temporary monopolistic market structures lead to reductions in innovation.141 The Staff Discussion Paper argued that an efficiency defence equal to Article 101(3) TFEU would have the benefit of providing for consistency between Articles 101 and 102 TFEU (and the Merger Regulation).142 It is true that nowadays Article 101(1) is interpreted as requiring either a restriction of competition by object or the showing of a negative effect on competition, while Article 101(3) is interpreted as capturing the positive effects of the bilateral measure concerned.143 In this context, however, consistency is no benefit as such. A bilateral measure by one or more dominant firms which falls under Article 101(1) TFEU, but which meets the narrow conditions of Article 101(3) TFEU, would always pass a ‘simple’ balancing test.

138 139 140 141 142 143

Guidance Paper, para 30. See also the Discussion Paper, paras 8, 84–92. See O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 233–34. Guidance Paper, para 30. See similarly para 91 of the Discussion Paper. For a critique of this argument see above at 2.4.1.3. See para 91 of the Discussion Paper. See the Commission’s Guidelines on the application of Article 81(3) of the Treaty, OJ 2004 C101/97.

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An efficiency defence whose requirements differ from Article 101(3) TFEU thus does not necessarily add complexity. On the contrary, an ‘Article 102(3) TFEU’ would import the restrictive conditions of Article 101(3) TFEU into Article 102 TFEU.144 3.3.3.3.2 Ex Ante and Ex Post Costs of Balancing Some commentators have argued that, ex post, agencies and in particular courts could not cope with a consumer harm test since neither the costs nor the benefits of a specific act can be quantified with a sufficient degree of precision.145 On this view, a balancing test could lead to a ‘battle of experts’ and thus incur high ex post costs for agencies, courts and firms. Secondly and even more importantly, it has been argued that a consumer harm balancing test, due to its openness, would impose ex ante legal certainty and thus result in excessive caution on the part of dominant firms.146 Conduct-specific rules, however, mitigate these problems to a large extent by providing for more explicit guidance on specific behaviour. Only in the absence of conduct-specific rules does full balancing become necessary. In this situation, in order to limit the above costs and to avoid the situation of agencies and courts having to act as ‘central planners’, the test must clearly define what constitutes harm to competition. This would entail demanding that the conduct in question has a significant actual or likely foreclosure effect. This, in turn, would require that the conduct by its nature must be capable of foreclosing rivals and that it actually or likely has such an effect on a significant share of the market. One necessary condition for the latter to happen is that the foreclosed market has sufficiently high barriers to entry and expansion such that rivals cannot overcome foreclosure.147 With regard to both the foreclosure effect and efficiencies, a—sufficiently long—time horizon for the prognosis should be specified. Such clarification would reduce uncertainty with regard to what counts as competitive loss and what counts as a potentially off-setting benefit. Finally, the argument against the balancing step as such—that often, despite the advances in econometric techniques, neither the costs nor the benefits of a specific act can yet be quantified numerically with a sufficient degree of precision—is valid. The balancing in many cases thus necessarily boils down to identifying and substantiating costs and benefits, ie determining their nature and likely size order, without quantifying them.148 However, to guard against false positives, the allocation of the burden of proof may act as a safeguard.

144 For a similar critique see Fox (2006), ‘Comments on the Discussion Paper of DG Competition on the Application of Article 82 of the Treaty to Exclusionary Acts’. 145 McGowan (2005), ‘Between Logic and Experience: Error Costs and United States v Microsoft Corp’, Berkeley Technology Law Journal 1189, at 1195–97. 146 See eg Melamed (2005), ‘Exclusionary Conduct under the Antitrust Laws: Balancing, Sacrifice, and Refusals to Deal’, 20 Berkeley Technology Law Journal 1249; similarly see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 232–33. 147 In the same vein see Elhauge (2006), ‘Comments on DG Competition Discussion Paper on Exclusionary Abuses’, p 4. 148 For a typology of efficiency gains in the context of Art 101(3) EC see Copenhagen Economics (2006), ‘Practical Methods to Assess Efficiency Gains in the Context of Article 81(3) of the EC Treaty’, pp 56–60, with within-firm efficiency gains and innovation benefits being relevant for unilateral conduct. The Report (at pp 61–74 and pp 75–88) also contains overviews of methods to substantiate and to quantify efficiency gains.

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3.3.3.3.3 Burden of Proof One could raise the question whether framing the benefits of conduct as ‘defence’ or ‘justification’ is reasonable since these labels imply the notion of an exception to a general rule that behaviour with foreclosure effects is anti-competitive. The notions of ‘defence’ or ‘justification’, however, have to be understood as common legal terminology which denominates an argument raised by the defendant in opposition to the plaintiff ’s claim. In this sense, it is also reasonable to place the initial burden of proving efficiencies as such on the defendant, as the party with both better knowledge of the underlying facts and an interest in producing evidence thereon. However, the ultimate burden of proving that the efficiencies outweigh the anti-competitive effects should be placed on the competition authority or a private plaintiff to prevent excessive ex ante caution on the part of firms. The structure of the burden of proof would then look like this: the competition authority or the plaintiff carries it with regard to anti-competitive effects, the defendant the initial burden with regard to the efficiencies, and again the competition authority or the plaintiff with regard to the balancing step as such. This structure should also be mirrored in the conduct-specific rules. This is now reflected under both US and EU law: according to the test used by the US Court of Appeals in its Microsoft judgment, the plaintiff must demonstrate that the anticompetitive harm of the conduct outweighs the pro-competitive benefit. EU law has been less conclusive as regards the allocation of the burden of proof with regard to an efficiency defence. Article 2 of Regulation 1/2003, which places the burden of proving the benefit of the conditions of Article 101(3) TFEU on the defendant, does not apply to Article 102 TFEU. As regards the burden of proof under Articles 101 and 102 TFEU, Recital 5 of the Regulation states that: [i]t should be for the party or the authority alleging an infringement of Article 81(1) [now Article 101 TFEU] and Article 82 of the Treaty [now Article 102 TFEU] to prove the existence thereof to the required legal standard. It should be for the undertaking or association of undertakings invoking the benefit of a defence against a finding of an infringement to demonstrate to the required legal standard that the conditions for applying such defence are satisfied.

In its Microsoft judgment the CFI clarified that: … it is for the dominant undertaking concerned … 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 undertakings cannot prevail and, accordingly, that the justification cannot be accepted. (emphasis added)149

This allocation of the burden of proof is now reflected in the Commission’s Guidance Paper.150

149

Case T-201/04 Microsoft v Commission, Judgment of 17 September 2004, para 688. According to the Discussion Paper, which had been released before the CFI’s Microsoft judgment, the dominant firm should have carried the ultimate burden of proving that the efficiencies outweigh the anti-competitive effects. This suggestion has been subject to criticism (see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 233; RBB Economics (2006), ‘The Response of RBB Economics to the DG Competition Discussion Paper on the Application of Article 82 of the Treaty to Exclusionary Abuses’, pp 13–15). 150

3.4

3.4

CONCLUSION

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CONCLUSION

This chapter has argued that there is no significant obstacle to cross-fertilisation as regards the substantive standard for determining exclusionary conduct under § 2 Sherman Act and Article 102 TFEU. Assuming that the overall objective of § 2 Sherman Act and Article 102 TFEU is to prevent consumer harm, the most suitable standard is the consumer harm test, which balances the harm against the efficiencies resulting from conduct. Such a consumer harm test in anti-monopolisation and abuse of dominance law corresponds to the general move towards a ‘standardisation’ of antitrust laws in light of the overall goal of preventing consumer harm, and thus fits in with the paradigm shift in EU law towards effects-based thinking. The balancing test as the consumer harm standard provides both for a fall-back test if no conduct-specific rule exists, and for a framework for the design of such rules. Conductspecific rules thus have to clearly identify net consumer harm. However, while such a balancing standard theoretically allows all relevant effects of conduct to be taken into account, competition authorities and courts have limited capabilities to obtain and process information on past and future effects. At the same time, the openness of such a standard raises legal uncertainty for market actors. To limit the knowledge problem and legal uncertainty, conduct-specific rules, such as on refusals to deal based on IP, may have to focus on clearly identifiable and likely economic relationships and effects, while suppressing less identifiable and uncertain parameters. This applies in particular to conduct that has an effect on dynamic competition.

4 Refusals to Deal which May Impede Follow-On Innovation When innovation is cumulative, the most important benefit of the innovation may be the boost it gives to later innovators. The boost can take at least three forms. If the next innovation could not be invented without the first, then the social value of the first innovation includes at least part of the incremental social value provided by the second. If the first innovation merely reduces the cost of achieving the second, then the cost reduction is part of the social value provided by the first. And if the first innovation accelerates development of the second, then the social value includes the value of getting the second innovation sooner. The problem introduced for incentive mechanisms is how to make sure that earlier innovators are compensated for their contributions, while ensuring that later innovators also have an incentive to invest. Suzanne Scotchmer1 Imitation invariably inhibits innovation in a static world; in a dynamic world, imitators can provide benefit to both the original innovator and to society as a whole. Patents preserve innovation incentives in a static world; in a dynamic world, firms may have plenty of incentive to innovate without patents and patents may constrict complementary innovation. … The ideal patent policy limits ‘knock-off ’ imitation, but allows developers who make similar, but potentially valuable complementary contributions. James Bessen & Eric Maskin2

According to both common economic wisdom3 and current US and EU antitrust law,4 a refusal to deal may lead to harm to competition and to consumers only if it has a (likely) foreclosure effect. Input foreclosure (as opposed to customer foreclosure) is traditionally defined—in the words of Rey and Tirole—as the situation where a firm (1) dominates one market or segment5 for a bottleneck product, and (2) uses this market power in the bottleneck segment to restrict output in another—potentially competitive—segment, in particular by discouraging the entry or encouraging the exit of rivals.6 Identifying a foreclosure effect is central to distinguishing merely exploitative pricing on the input market from exclusionary refusals. In its Article 82 paper, the European Commission stated that 1

Scotchmer (2004), Innovation and Incentives, p 127. Bessen & Maskin (2000), ‘Sequential Innovation, Patents, and Imitation’, MIT Department of Economics, Working Paper No 00-01. 3 See eg Rey and Tirole (2003), ‘A Primer on Foreclosure’. 4 See in more detail below at 7.2 and 8.2. 5 In the following chapters, the term ‘segment’ as opposed to ‘market’ will be used. This term will indicate that, from the point of view of economic foreclosure theory, it is not necessary to have two separate relevant markets for harm to occur. 6 Rey and Tirole (2003), ‘A Primer on Foreclosure’, p 8. For a description of input foreclosure as theory of harm under merger control see the European Commission’s Non-Horizontal Merger Guidelines, paras 31–57. 2

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[a] refusal to supply may be classified as an exclusionary abuse. The dominant company prevents the requesting or terminated party from getting access to an input. As a result, this undertaking is either driven out of the market, marginalised or prevented from entering the market. For a refusal to supply to be abusive, it must, however, have a likely anticompetitive effect on the market which is detrimental to consumer welfare.7

The loss of (potential) competition due to the exit or marginalisation of a competitor or due to the prevention of entry on a downstream or adjacent market8 may lead to consumer harm if it enables the dominant firm to raise prices or—particularly in the case of a refusal to deal based on IP—to slow innovation. Limitations on refusals to supply (as on any conduct), however, whether by antitrust or other types of rules, may have costs of their own, even if such rules identify and thus impose limits only on those refusals that are not purely exploitative and which harm consumers. These costs include, first, the risk of eliminating ex ante incentives to invest for first-movers,9 in particular due to uncertainty,10 and, second, the risk of eliminating the incentives for potential rivals to enter the dominated market11 and thus create inter-systems competition.12 Antitrust rules should thus limit refusals to supply only if they can ensure that they (1) do not eliminate ex ante incentives to innovate for first movers—in particular via the price liability threshold and the remedy, and (2) do not lower the incentives for rivals to enter the bottleneck segment, ie if market forces cannot erode the bottleneck power. If a refusal to deal is based on IP rights, however, a potential foreclosure effect on the respective product market will be inherent in the exercise and the underlying goal of the IP rights.13 The application of an antitrust rule such as an unmodified essential facilities doctrine—which may serve as a substitute for industry-specific regulation in the scenario of an incontestable bottleneck segment—would thus run counter to the incentive function underlying the respective IP right. Thus an essential facilities rule would have to respect the incentive function of IP as an additional third condition. This chapter first reviews the traditional typology of refusals to deal and their potential effect and the underlying theories of potential harm to competition to assess the heuristic value of these theories for the analysis of refusals to deal based on IP (4.1). In a second

7 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 210. 8 The loss of competition may also result from the fact that subsequent entry may become more daunting due to the need for two-level entry. See on this problem the US Non-Horizontal Merger Guidelines, at 4.211. 9 This point has already been made generally as regards antitrust limitations on the exercise of IP rights (in particular at 2.6) and on exclusionary conduct (at 3.3.2.2). 10 See Gilbert & Shapiro (1996), ‘An Economic Analysis of Unilateral Refusals to License Intellectual Property’, 93 Proceedings of the National Academy of Sciences 12749, at 12753–54: ‘In general, the effects of compulsory licensing may act to increase or decrease economic welfare in both the short and the long run, depending on specific parameter values and the dynamics of competition. It is this indeterminacy that makes compulsory licensing a potentially very costly public policy instrument.’ 11 As Shapiro ((2005)‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, 29 September 2005, available at faculty.haas.berkeley.edu/shapiro/amcexclusion.pdf), p 11, has put it, ‘antitrust limitations on exclusionary conduct are most effective when they ensure that dominant firms cannot block competitive forces from operating to erode their monopoly power over time. To the extent that antitrust rules slow down the natural market forces that erode monopoly power, they are counterproductive.’ 12 See similarly the Commission’s Guidance on its ‘Enforcement Priorities in Applying Article 82 EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings’, para 74. 13 See above at 2.4–2.6.

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step, the chapter analyses the extent to which the cumulativeness of innovation changes the traditional view on refusals to deal based on IP (4.2). It then suggests a specific classification for such refusals (4.3) and develops rules for the different scenarios in the sense of an economic framework, which takes into account the incentive function of IP (4.4–4.8).

4.1

THE TRADITIONAL TYPOLOGY OF REFUSALS TO DEAL

Irrespective of the type of input product (tangible good or IP), antitrust practice and literature have established different categories of refusals to deal. Although the terminology is not used consistently, one may distinguish, along the lines suggested by Shapiro,14 between different factual patterns according to: (i) the relationship between the products and thus markets affected (4.1.1); (ii) whether the refusal is unilateral or concerted (4.1.2); (iii) the conditions under which the dominant firm(s) refuses to supply (4.1.3 and 4.1.4); (iv) whether a supply relationship has existed or not (4.1.5); and (v) whether the refusal to deal is (only) a corollary to other anti-competitive behaviour (4.1.6).

4.1.1

Vertical Complementary and Horizontal Refusals to Deal

Refusals to supply an input will usually have an effect on downstream markets (4.1.1.1). Aside from this classic potential vertical foreclosure effect, such refusals may also have repercussions on adjacent markets (4.1.1.2) or directly on rivals on the market for the respective input market itself (4.1.1.3). 4.1.1.1

Refusal to Deal Leading to Vertical Foreclosure

The classic scenario of a refusal to deal involves a vertically integrated firm, which consists of an upstream division producing an input and a downstream division producing and selling a final product. To compete on the downstream market, a non-integrated firm requires the upstream input. In this situation, the integrated firm either refuses to supply the input at all (‘naked’ refusal) or demands a high price, or makes an otherwise conditional offer (‘constructive’ refusal) such that the downstream firm will not be able to stay in or enter the downstream market. The traditional pre-Chicago concern about such vertical foreclosure was that the upstream monopolist would restrict downstream competition by limiting access to its upstream good or service with the intention of extending its market power from the monopolised segment to the complementary downstream segment. Criticising this vertical leverage theory, the

14 Shapiro (2005), ‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, 29 September 2005, available at faculty.haas.berkeley.edu/shapiro/amcexclusion.pdf.

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Chicago School pointed out that (1) there is only one monopoly profit to be reaped and that (2) the upstream monopolist could already obtain this monopoly profit by charging the monopoly price on its input from the downstream firm.15 The Chicago School also drew the conclusions that (3) the upstream monopolist would thus have no incentive to distort downstream competition and (4) would engage in practices like vertical integration and exclusive dealing not to increase his profit stream, but necessarily only for efficiency reasons. According to this ‘one/single monopoly profit’ (SMP) theory, a refusal to supply could not increase the integrated firm’s market power in the downstream market. Generally, on this view, power in one market cannot profitably be leveraged in other markets. In the IP context, vertical integration means that the IP holder produces the product himself. The equivalent to exclusive dealing is an exclusive licensing agreement with a downstream firm. In the Chicago view, vertical integration and exclusive dealing must therefore be efficiency-enhancing in all cases.16 However, conclusions (3) and (4) in particular have been challenged theoretically by new industrial economics insights.17 According to the one basic variant of new industrial economics models,18 which goes back to Hart and Tirole,19 the upstream monopolist faces a commitment problem: in the IP context, once the IP holder signs the first licensing contract for the monopoly fee, he will be tempted ex post to issue a second licensee at a lower price, if he can secretly deal. Anticipating this, the first licensee will not be willing ex ante to pay the monopoly tariff. The same holds in a setting with parallel negotiations, if the monopolist can privately renegotiate the contracts. On this view, vertical integration and exclusive licensing are ways to restore the upstream monopolist’s monopoly power instead of extending it, as pre-Chicago economists thought. In this perspective, a refusal to license is a corollary of vertical integration or exclusive dealing. At least in the context of potential liability for refusals to deal under antitrust law, however, the heuristic value of these models is limited for a number of reasons: First, although verbally acknowledging the need for incentives to innovate, most of the models in the mould of Hart and Tirole only focus on the (alleged) commitment problem and public static welfare losses associated with restoring market power through foreclosure. These models, however, usually do not capture the potential dynamic (ie long-term or intertemporal) harm that is caused by blocked follow-on innovation, nor do they account for the incentive function of IP, ie the dynamic benefits generated as a result of vertical integration and exclusive dealing based on IP rights including the rights that may lead to foreclosure of competitors. Second, experimental results suggest that the commitment effect, on its own at

15

See eg Bork (1993), The Antitrust Paradox, p 229. For an overview of the efficiencies that vertical integration and exclusive dealing may create see Rey & Tirole (2003), ‘A Primer on Foreclosure’, pp 69–74. These efficiencies are recognised in merger policy and by antitrust laws dealing with exclusive dealing agreements (both § 1 and § 2 of the Sherman Act and Arts 101 and 102 TFEU). 17 The theoretical literature on both horizontal and vertical foreclosure is legion. For an overview see Rey & Tirole (2003), ‘A Primer on Foreclosure’. In addition, there are some recent experimental studies. Empirical research, however, is still poor. For an overview see Ergas & Ralph (1998), ‘New Models of Foreclosure: Should Antitrust Authorities be Concerned?’, SSRN Research Paper. For a general critique of the Chicago School and its influence on US antitrust jurisprudence see Fox (2008), ‘The Efficiency Paradox’ in Pitofsky (ed), How the Chicago School Overshot the Mark, pp 77–88. 18 The second basic variant goes back to Bolton and Whinston and focuses on the bargaining power of the parties. See Bolton & Whinston (1993), ‘Incomplete Contracts, Vertical Integration, and Supply Assurance’, 60 Review of Economic Studies 121. 19 Hart & Tirole (1990), ‘Vertical Integration and Market Foreclosure’, Brookings Papers on Economic Activity (Microeconomics) 205. See also Rey & Tirole (2003), ‘A Primer on Foreclosure’. 16

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least, is not sufficient to explain the existence of vertical integration and exclusive dealing20 and thus refusals to deal as their corollary. Another strand in the industrial organisation literature has focused on the extremely limiting conditions under which the Chicago SMP theory would hold. The SMP theory and the single profit result break down if (1) there is only some (actual or potential) competition in the input market, or (2) the integrated firm and the firm seeking supply compete (actually or potentially) on a related market, or (3) the integrated firm is not able to discriminate as to price.21 Therefore, vertical integration, exclusive dealing and thus refusals to deal may be explained to some extent by the incentive of firms to extend market power.22 In its Microsoft decision, the European Commission explicitly dismissed the ‘one monopoly profit’ theory because some of the above assumptions were not met on the client and server operating systems markets.23 Thus there may be scenarios in which a refusal to deal, to the detriment of consumers, will: (i) (ii)

increase the refusing firm’s market power on the downstream market, protect the refusing firm’s market power on the upstream market by eliminating competition in the downstream market and thus making entry on the upstream market less attractive, or (iii) eliminate competition on the downstream market, constituting a threat to the upstream market product. As with the literature focusing on the commitment effect, however, this strand of industrial organisation theory usually gives only a static snapshot of refusal to deal situations and neglects the more important dynamic costs and benefits24 of such refusals in the context of IP. The analytical value of these industrial organisation models is therefore particularly limited in innovative and dynamic markets and in the context of IP. 4.1.1.2

Refusal to Supply a Complementary Product

In the case of horizontal foreclosure, a firm which is present in two final markets A and B has substantial market power in market A, but faces (actual or potential) competition in the (potentially) competitive segment B.25 In this situation, such a firm may attempt to leverage its market power from A to B by tying or bundling A and B. Tying means that it

20 Martin et al (2001), ‘Vertical Foreclosure in Experimental Markets’, 32 RAND Journal of Economics 466. For an analysis of experimental research on abuse of a dominant position generally see van Damme et al (2006), ‘Abuse of a Dominant Position: Cases and Experiments’, TILEC Discussion Paper 2006-20. 21 Salop (2005), ‘Avoiding Error in the Antitrust Analysis of Unilateral Refusals to Deal’, statement to the Antitrust Modernization Commission, p 3. For a similar critical analysis of the limiting conditions of the SMP theory with regard to horizontal leveraging see Elhauge (2009), ‘Tying, Bundled Discounts, and the Death of the Single Monopoly Profit Theory’, Harvard John M Olin Discussion Paper No 629. See also Elhauge (2010), ‘The Failed Resurrection of the Single Monopoly Profit Theory’, Harvard Olin Center Discussion Paper 2/10. 22 For a summary of the models focusing on the above relaxation of the Chicago assumptions see, in the context of vertical mergers, Church (2004), The Impact of Vertical and Conglomerate Mergers on Competition, Report for the Directorate General for Competition, pp 26–94. 23 Commission Decision of 24 March 2004, notified under document no C(2004)900, Case COMP/ C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, in particular paras 767–69. 24 The literature usually recognises that a refusal to deal (both in context of tangible products and IP) may be necessary to preserve the private incentive to invest and may generate dynamic (and static) efficiencies. The models, however, usually do not account for these efficiencies. 25 See Rey & Tirole (2003), ‘A Primer on Foreclosure’, p 45.

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makes the sale of B (the tying product)—contractually or technically—conditional upon the purchase of A (the tied product). Only the tied product A can be bought separately. Bundling refers to situations where a package of two (or more) products is offered. Pure bundling (or forced tying respectively) refers to a situation where a package of A and B is offered and only the bundle is available on the market. Mixed bundling occurs if the bundle AB and the components are available, but the bundle is sold at a commercial advantage, in particular at a discount as compared to the sum of the components’ prices. Similar to the above development in economic thinking with regard to vertical foreclosure, the Chicago School argued that tying and bundling arise only for efficiency reasons and cannot be anti-competitive. The argument is that the tying firm will be able to extract its profit through its pricing in the monopoly segment A rather than through extending its market power to the adjacent market B.26 If A and B are complements, the monopolist, in the Chicago view, will even have an interest in competition in market B, since this will make its product A more attractive.27 Post-Chicago industrial economics has found several anti-competitive rationales for tying and bundling both if the products are relatively independent and if they are complements.28 The main theory is based on the idea of entry deterrence in the tied market.29 A refusal to supply (eg to supply spare parts) may complement the abovementioned strategies, especially if final customers are willing to buy an integrated package AB (eg spare parts plus the repair service). If another firm produces its own version of B, but seeks to buy A from the tying firm, a refusal to supply by the latter may prevent competition in the package market. The latter conduct has been dubbed ‘complementary refusal to deal’, differentiating it from a vertical refusal to deal.30 In such a situation, the exclusionary effects on competitors of the refusal to supply and the tying or bundling strategy vis-à-vis the customer may reinforce each other. Although both practices may thus feed into an overall foreclosure strategy, they should be dealt with separately: the complementary refusal should be subject to the same rule as in other refusal to deal scenarios, while a (leveraging) rule on tying or bundling should address potential horizontal foreclosure effects. 4.1.1.3

Horizontal Refusal to Deal as a Distinct Scenario?

A third category, suggested by Shapiro,31 comprises ‘horizontal refusals to deal’, which may occur in horizontal relationships in markets with network effects. Here, a refusal by the

26 For such argument see the recent opinion of Judge Easterbrook in Schor v Abbott Laboratories, No 05–3344 (7th Cir 2006). 27 Bork (1993), The Antitrust Paradox, in particular pp 372–81. 28 For an overview and analysis of these rationales see Rey & Tirole (2003), ‘A Primer on Foreclosure’, pp 47–61. For a comparative analysis of the approaches tying under EU competition and US antitrust law see Schmidt (2009), Competition Law, Innovation, and Antitrust: An Analysis of Tying and Technological Integration. 29 See Whinston (1990), ‘Tying, Foreclosure, and Exclusion’, 80 American Economic Review 837. Whinston’s anti-competitive explanation of tying is based on the idea that tying two products makes the tying firm more aggressive in the tied product market B and thus may discourage competitors from entry. For an extension of Whinston’s idea see Carlton & Waldman (1998), ‘The Strategic Use of Tying to Preserve and Create Market Power in Evolving Industries’, NBER Working Paper 6831. For a dynamic model see Choi & Stefanadis (2001), ‘Tying, Investment, and the Dynamic Leverage Theory’, 32 RAND Journal of Economics 52. 30 Shapiro (2005), ‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, pp 7–9. This scenario where the refusal to supply a competitor complements tying or bundling vis-à-vis the final customer has to be distinguished from a conditional refusal, ie a refusal vis-à-vis a competitor (see also below at 4.1.3). 31 Shapiro (2005), ‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, 29 September 2005, pp 9–10.

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owner of a larger network to interconnect with a smaller network, due to direct network effects, may drive the smaller network out of the market concerned. A refusal to make systems software compatible with other systems software may also fall into such a category. As with the above category of refusals to supply complementary products, this scenario may be reframed as having a vertical foreclosure effect: interoperability information of or the service of providing access to network or system A may constitute an essential input for the integrated network or system provider B. Thus an antitrust essential facilities rule may be sufficient to address horizontal refusals. Like purely vertical and complementary refusals in network industries, however, sector-specific regulation such as mandatory interconnection rules are necessary if the use of antitrust rules is likely to be insufficient.32

4.1.2

Concerted Refusals to Deal

A second major differentiation with regard to refusals to deal can be made between unilateral and concerted refusals. In the latter case, two or more firms together refuse to deal with another firm. In this situation, horizontal coordination may serve as instrument to build up market power vis-à-vis other firms. In addition to the question of foreclosure, a concerted refusal to deal raises the second question of whether behavioural coordination, under § 1 Sherman Act and Article 101 TFEU, is a justified means, ie whether it constitutes a per se illegal restriction of competition or a restriction by object respectively, or if not, whether it generates sufficient efficiencies to outweigh the costs incurred as a result of the loss of competition. This latter analysis will not be addressed further in this book.33 With regard to the first question of foreclosure effects, a concerted refusal to deal is analytically no different from the other types of refusals.

4.1.3

‘Naked’ vs ‘Constructive’ and Conditional vs Unconditional Refusals

Several distinctions have been made between different factual patterns of refusals to deal with regard to the conditions of such refusal: A ‘naked’ refusal has been defined as a refusal even to negotiate about supply, whereas a ‘constructive’ refusal involves charging ‘too high’ a price or demanding other unfavourable, anti-competitive non-price-based conditions.34 The category of constructive refusals highlights the need for a clear-cut liability price cap.35 Another distinction has been suggested between unconditional and conditional refusals.36 The latter are understood here as refusals which depend on conditions other than

32 One example of such a sector-specific obligation to interconnect networks can be found in the European telecommunications framework in Art 5(1) lit a of the 2002 Access Directive. 33 For a legal analysis under § 1 Sherman Act see Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 22.02. 34 See eg the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, paras 61, 62, 73. Another distinction would be between price-based and non-priced based conduct. Constructive refusals could thus fall in either category (see the Discussion Paper, para 61–68, 73). 35 For an analysis of potential price caps to determine both liability and the remedy see below at 5.1. 36 See eg Shapiro (2005), ‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, 29 September 2005, pp 10–11.

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price and thus as a sub-group of constructive refusals. Conditional refusals to deal are usually part of tying and bundling strategies vis-à-vis competitors.37 They have to be differentiated from complementary refusals, which complement tying and bundling strategies vis-à-vis final customers.38 In the case of conditional refusals, it is important to distinguish between two types of potential effects: (i) those that may arise on the downstream market, and (ii) those that may arise on other adjacent markets due to leveraging. Relevant exclusionary effects of tying and bundling usually arise on other adjacent markets (such as the market of the tied product). In this case, the tying or bundling strategy should be subject to a general leveraging test or more specific rules on tying and bundling. In the case of defensive leveraging or where the product is indispensable, however, the refusal may have exclusionary effects on the downstream market and may (‘vertically’) block follow-on innovation. Similarly, the exclusionary effects of a constructive refusal may be confined to the downstream market, if the refusal does not involve a non-price based condition whose underlying intention is to leverage market power into other adjacent markets. In the latter cases, the distinctions between naked and constructive and between unconditional and conditional refusals to supply are of no heuristic value.

4.1.4

Discriminatory Conditions of Supply

A specific way of looking at refusals to deal would be to ask whether such a refusal is discriminatory. In the context of supply of an input product, ‘discrimination’ may be said to occur (i)

if the dominant firm is vertically integrated and treats a competitor differently from its downstream division by not supplying the downstream competitor at all or by supplying this rival on worse terms (such as a higher price);39 or (ii) if the dominant firm is not active on the downstream market, but treats a customer differently from others by not supplying this customer at all (eg in the case of exclusive dealing) or by supplying him on worse terms.40 If discrimination is feasible and sustainable over time,41 it may have exploitative and/or exclusionary effects. In contrast to the above categorisation (naked/constructive, unconditional/ conditional), discrimination has been addressed as a distinct category of anti-competitive conduct. Under US law, aside from § 2 Sherman Act, § 2(a) of the Robinson-Patman Act applies to price discrimination. Under EU competition law, Article 102(a) TFEU may capture exploitative discriminatory pricing, while Article 102(b) TFEU is interpreted as capturing

37

See also below at 4.1.6. See above at 4.1.1.2. 39 In particular in US parlance, this first scenario of discrimination vis-à-vis competitors is sometimes referred to as leading to primary-line injury. 40 The adverse effects of such discrimination between customers, with the dominant firm not being present on the relevant market in which the discrimination allegedly produces the adverse effects, are sometimes referred to as secondary-line injury. 41 Discrimination usually requires three conditions to be sustainable: (1) market power, (2) information about customers’ willingness to pay and the ability to segment the market accordingly, and (3) the ability to discourage arbitrage, eg through contractual devices. See Motta (2004), Competition Policy: Theory and Practice, p 492. In the case of licensing negotiations by a dominant firm, all three conditions may be met. 38

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exclusionary discrimination of rivals and Article 102(c) TFEU as capturing discrimination between customers.42 From a normative perspective, however, antitrust should ignore purely exploitative behaviour and focus only on the exclusionary effects of discriminatory strategies.43 More importantly, both in general and specifically with regard to refusals to license IP, discrimination as a distinct category of exclusionary anti-competitive conduct is also dubious. Generally, competition policy is increasingly and correctly focusing on the exclusionary effects of firms’ strategies instead of their form. Since the effects of discrimination are ambiguous and often positive in sum, and since, in turn, rules against discrimination may have negative competitive effects,44 discrimination as an independent category of anticompetitive behaviour is vanishing.45 With regard to dominant firms’ discriminatory refusals to supply, Elhauge has argued on the basis of an as-efficient competitor test that such discrimination should be illegal per se since it ‘is not necessary to support optimal ex ante investment incentives, and its success may thus depend … on selectively impairing the efficiency of rivals’.46 Contrary to Elhauge’s view, discrimination as such, in particular between (potential) licensees of IP, should not be regarded as anti-competitive: First, price discrimination may be necessary for the seller if it has declining average total costs, which may be impossible to cover without discriminating.47 This may typically be the case for IP, which is often based on high fixed cost investment. Second, an anti-discrimination rule as proposed by Elhauge could be detrimental to buyers or licensees since it requires the seller or licensor to price uniformly. This may price specific buyers or licensees out of the market and thus deter entry. Thus discrimination as such should not be a category of competitive harm on its own. What may be of analytical value in the case of discrimination, however, is the price and, more generally, the conditions under which the dominant firm offers the product or the licence in question to either its downstream division or its (exclusive) licensee. This price may serve, under specific circumstances, as an indicator for determining both liability and the remedy.48

42 See O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 552–53. For an analysis of discrimination under Article 102 TFEU see Gerard (2005), ‘Price Discrimination under Article 82(c) EC: Clearing up the Ambiguities’, GCLC Research Papers on Article 82 EC, pp 105–33. 43 See above at 3.2.1.1. 44 For a short summary of the development of economic thinking on price discrimination and antidiscrimination rules, and for an analysis of positive effects of discrimination on entry, see Haucap & Wey (2004), ‘Input Price Discrimination (Bans), Entry and Welfare’, DIW Working Paper. See also Inderst & Valletti (2007), ‘Price Discrimination in Input Markets’, LSE Working Paper. 45 The Robinson-Patman Act, for example, is largely unenforced by the US antitrust authorities. In its 2007 final Report, the US Antitrust Modernization Commission even recommends that the US Congress should repeal the Act in its entirety (see recommendation 55). Under EU law, discrimination may remain a distinct category to the extent that it captures conduct which interferes with the principle of non-discrimination based on nationality (Art 18 TFEU) and with the integration of the internal market, such as market-partitioning practices. 46 Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, in particular at 330. See above at 3.3.3.2. 47 Posner (2001), Antitrust Law, p 83. 48 For an analysis of the methodologies to determine liability and the royalty as part of a remedy see below at 5.1.

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4.1.5

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Termination of Supply

Another distinction found to be relevant by competition authorities and courts is that between de novo refusals and the termination of supply. The question whether there should be a lower standard of liability in case of a refusal to continue to supply than for a refusal to begin to supply has been a controversial topic. One basic argument in favour of differential treatment is that a buyer may have made specific investments in the case of an established course of dealing, and these investments need to be protected. Such an argument, however, is problematic since the buyer may protect himself contractually instead of relying on antitrust protection. Furthermore, such an asymmetric regime would give the wrong incentive for an upstream monopolist not to start supplying.49 Finally, particularly in dynamic markets, there is often a need to change distribution strategy fast.50 All of these arguments weigh against different standards for ending and beginning supply in general. Another attempt to distinguish between de novo refusals and the termination of a supply relationship would be to reframe the latter in terms of a ‘predatory’ scenario, in which the defendant first starts supplying and then engages in ‘predatory’ behaviour by giving up short-term common profits in order to gain long term monopoly profits on his own. Such a construction would be artificial, since it would take the initial decision to deal as given and then condemn the monopolist’s decision to return to a non-dealing position as predatory. This would be begging the question, which is whether the upstream monopolist should be allowed to foreclose others from the beginning. Accordingly, it should not matter whether non-foreclosure as a comparative benchmark situation existed or not. Thus, a theory of predation should not be applied in such a scenario of a termination of supply. The same argument also runs against inferring a predatory intent from a termination of supply. One scenario that has been widely discussed in this context may arise in markets with network effects.51 In such markets, firms may adopt an ‘open early, closed late’ strategy. In the computer industry, for example, firms controlling platforms may initially welcome suppliers of complementary products to enhance the attractiveness of their platform. Once the platform has become dominant, however, the firm may refuse to interoperate or do so on less favourable terms to increase or protect the position of its own products on the platform.52 Again, firms offering complementary products may to some extent protect themselves contractually against such installed-based opportunism on the part of the firm offering the platform, depending on the market power of the latter and the foreseeability of such a strategy arising. Antitrust concerns may still arise if the effects of such installed-base opportunism are market-wide.53 This scenario, however, does not suggest that there should generally be a lower standard of liability for a termination of supply. Network effects may 49 In the words of Areeda (1989), ‘Essential Facilities: An Epithet in Need of Limiting Principles’, 58 Antitrust Law Journal 841, at 850: ‘… lawyers will advise their clients not to cooperate with a rival; once you start, the Sherman Act may be read as an anti-divorce statute.’ 50 See Hovenkamp et al (2005), ‘Unilateral Refusals to License in the US’ in Lévêque & Shelanski (eds), Antitrust, Patents, and Copyright—EU and US Perspectives, pp 12–55, at p 34. 51 See Shapiro (2005), ‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, 29 September 2005, p 15; O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 461. 52 See also below at 4.6.1. 53 Shapiro (2005), ‘Exclusionary Conduct’, testimony before the Antitrust Modernization Commission, 29 September 2005, p 16.

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be a reason to regard an input product as essential. If the test for a refusal to supply is able to capture these effects, there is thus no need for a distinct rule for a termination of supply. Another question is whether interoperability information as such should be treated differently from other information under antitrust rules.54

4.1.6

Refusal to Deal as an Instrument or as a Corollary of Other Anti-Competitive Conduct

A final specific factual pattern may arise if a refusal to deal is not a ‘stand-alone’ strategy, but serves as (i)

an instrument to force another firm into certain behaviour (as, for example, in the case of conditional refusals to deal55 including tying or mandatory package licensing); (ii) an instrument to prevent another firm from, or punishing it for, undermining this ‘main’ strategy, in particular an exclusivity strategy (eg preventing a potential purchaser from engaging in parallel trade or punishing it for having dealt with a rival despite an exclusivity agreement);56 or (iii) a corollary to profit from other previous or simultaneous conduct, ie the ‘main’ strategy (such as, in the IP context, patent ambush).

The common factor in these three scenarios is that the refusal to deal may be deemed anti-competitive for reasons other than the indispensability of the input withheld and thus outside the scope of an essential facilities rule.57 In addition, in all three scenarios the legality of the refusal may depend on the legality of an ‘overall’ or ‘main’ strategy. In the first scenario—particularly vis-à-vis a conditional refusal—the refusal should be analysed as part of the overall strategy such as bundling, as has already been pointed out.58 In the second scenario of a refusal to deal which serves as preventive instrument or punishment, it is usually the pre-refusal agreement that merits antitrust scrutiny. Similarly, in the third scenario, the refusal is a mere corollary which helps the refusing firm to profit from another ‘main’ strategy, such as patent ambush. It is the legality of this main strategy that should be decisive for the antitrust analysis. If such strategy is illegal under antitrust laws, the subsequent refusal to license may count as a continuing wrong. The US Dell case may illustrate this: a video electronics standard-setting organisation had demanded during a standard-setting process that its members disclose whether they had any IP rights that conflicted with the proposed standard. Dell confirmed that it had no such rights. After the organisation adopted the standard, relying, in part, on Dell’s certification, Dell sought to enforce its patent against firms that planned to follow the standard. The FTC found that there was evidence that the standard-setting organisation would have chosen a different, non-proprietary standard if it had been informed of the patent conflict during the certification process. The FTC also found that Dell had not acted in good faith. 54

See below at 4.6.1. See above at 4.1.3. 56 In the latter case, the refusal to deal also has exploitative character. 57 If the product concerned is also indispensable in the sense of an essential facility, however, the refusal may be illegal also under this perspective. 58 See above at 4.1.3. 55

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Therefore, it issued an order prohibiting Dell from enforcing the patent concerned against any firm for such firm’s use of the standard.59 In this case, the free use of Dell’s patent was ordered as a remedy for previous patent ambush. In such a situation, the subsequent refusal to license may count as a continuing wrong. Under Article 102 TFEU, liability for the (subsequent) refusal itself becomes important in those situations where the firm was not dominant at the time of the first conduct (eg patent ambush), but was dominant by the time it refused to deal. Under the ‘special responsibility’ jurisprudence of the CJEU with regard to dominant firms, one may argue that, if the specific essentiality conditions are not met, a dominant firm is under a duty not to foreclose competition by refusing to deal based on means that have been obtained through fraud (eg a standard whose implementation requires the use of the dominant firm’s patent). Strategies such as fraud during a standard-setting process prepare for later exclusion of competitors by setting rules of the competition game. This raises the very important question in the IP context of whether competition policy can and should have a say in the early stages of the strategic ‘tailoring’ of IP (ie if the innovation ‘moves’ to the technology market) or its acquisition. Both ‘tailoring’ and the acquisition of IP may be used as strategies to build up market power. While § 2 Sherman Act captures anti-competitive conduct that is likely to lead to monopoly power, Article 102 TFEU only prohibits such conduct of already dominant firms.60 Whereas the acquisition of IP may raise competition problems with regard to all types of IP, the problem of strategic ‘tailoring’ mainly concerns patents, since only they require the procedural element of an application and thus offer a wider strategic dimension. Such strategies during the phase when the patent is acquired (as distinguished from the later enforcement)61 to maximise the breadth and length of a patent include:62 —

—

patent clustering (leading to patent clusters or ‘patent thickets’), ie filing for numerous patent applications for the same innovation63 in order to create several patents surrounding the invention and thus several layers of defence; divisional patent applications, ie splitting a patent application into several narrower patent applications;

59 FTC Consent Decree, Re Dell Computer Corp, 121 FTC 616 (1996). For an analysis of the scenario see Gleklen (2002), ‘Antitrust Liability for Unilateral Refusals to License Intellectual Property: Xerox and its Critics’, paper presented at the FTC/DoJ hearings on ‘Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy’. See also DoJ & FTC (2007), Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, pp 43–45. 60 See above at 3.2.1.2. 61 For an overview of patents enforcement and acquisition strategies see Anderman (2008), ‘The Strategic Use of Patent Enforcement and Acquisition Methods and Competition Law’ in Govaere & Ullrich (eds), Intellectual Property, Market Power and the Public Interest, pp 171–90. See also Rubinfeld & Maness (2005), ‘The Strategic Use of Patents: Implications for Antitrust’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyright—EU and US Perspectives, pp 85–102. 62 See Kjølbye (2009), ‘Article 82 EC as Remedy to Patent System Imperfections: Fighting Fire with Fire?’, 32 World Competition 163, at 167–69, who draws on the 2008 DG Competition Staff Working Paper ‘Pharmaceutical Sector Inquiry—Preliminary Report’. The Preliminary Report was followed by a Final Report in 2009. For an analysis see Priddis & Constantine (2011), ‘Pharmaceutical Sector, Intellectual Property Rights and Competition Law in Europe’ in Anderman & Ezrachi (eds), Intellectual Property and Competition Law—New Frontiers, pp 241–75. 63 See the 2008 DG Competition Staff Working Paper ‘Pharmaceutical Sector Inquiry’, para 376. This strategy is also called ‘patent flooding’. For a legal analysis under competition law see Zech (2011), ‘“Defensive Patentstrategien” und technischer Fortschritt im Wettbewerbsrecht—Einsatz von Sperrpatenten als Behinderungsmissbrauch?’, Journal of Competition Law (ZWeR) 312.

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secondary patenting, ie applying for a ‘subsequent’ patent for the same main innovation while adding some degree of innovation, when the main patent is about to expire;64 defensive patenting, ie filing for a patent application not with the aim of developing and bringing to the market the invention, but to block the development and marketing of new competing products, either by invoking the defensive patent or by creating prior art through the publication of the patent application.65

Antitrust can and should only impose limiting rules on these patent strategies if they have a likely anti-competitive effect. There may be scenarios where not only the use and enforcement of patents (eg through a refusal to license) may have such an effect,66 but the application for a patent. Competition policy should not be deferential to IP laws.67 However, even in the case of a likely anti-competitive effect, competition policy should not second guess clear-cut rules on patent procedure as well as the scope of patents in order to avoid legal uncertainty. Patent laws are much better suited to setting out the technical details of a patent application procedure as well as defining the scope and length of protection for an invention. Even more importantly, there is a need for general IP rules against detrimental effects of the above strategies,68 since these strategies not only raise problems in cases involving market power (albeit more serious problems in such cases), but also unnecessarily increase transaction costs for other market actors. Patent laws may, for example, bar defensive patenting through a mandatory rule obliging the patent holder to use the patent. Hence, in principle, anti-monopolisation and abuse of dominance laws should focus on the unilateral or coordinated anti-competitive use of property in cases of market power.69 However, there are and should be exceptions to this principle.70 In the recent European AstraZeneca case, the European Commission found that AstraZeneca (which was found to be already dominant at the time of the abuses) had delayed the market entry of competing generic drugs and thereby violated Article 102 TFEU by engaging in two types of anti-competitive practice. The first consisted of a pattern of misleading representations to patent offices and national courts to acquire or preserve supplementary protection certificates extending protection for a medical substance.71 Secondly, the Commission found that AstraZeneca had engaged in acts involving the launch, withdrawal or requests for deregistration of a pharmaceutical product which were legal under the IP laws concerned and

64

Ibid, para 891. Ibid, paras 958–73. 66 See above at 2.2.2.2. 67 See generally above at 2.4–2.7. 68 See above at 2.5.3 for the general determinants of a comparative cost-benefit analysis of IP and antitrust rules. 69 ‘Unilateral’ use in the above sense would also include ‘imposed’ contractual means to increase the scope and length of a patent. 70 For an analysis of potential exceptions see Straus (2010), ‘Patent Application: Obstacle for Innovation and Abuse of Dominant Position under Article 102 TFEU?’, 1 Journal of Competition Law & Practice 189. 71 See Case COMP/A.37.507/F3, AstraZeneca, in particular paras 626, 741–49. In particular the Commission’s legal reasoning has been confirmed in Case T-321/05, AstraZeneca v Commission, Judgment of 1 July 2010, nyr. For an analysis of the case see Murphy & Liberatore (2009), ‘Abuse of Regulatory Procedures—The AstraZeneca Case’ (Parts 1–3), 30 European Competition Law Review 223, 289 and 314; Bellamy & Child (2008), European Community Law of Competition, at 10.153–10.154; Drexl (2009), ‘Deception in the Patent World—A Case for US Antitrust and EU Competition Law?’ in Prinz zu Waldeck, Pyrmont et al (eds), Patents and Technological Progress in a Globalized World. Liber Amicorum Joseph Straus, pp 137–56; Negrinotti (2008), ‘Abuse of Regulatory Procedures in the Intellectual Property Context: The AstraZeneca Case’ in Govaere & Ullrich (eds), Intellectual Property, Market Power and the Public Interest, pp 143–67. 65

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would not normally be regarded as an abuse. The Commission, however, held that these acts were aimed at preventing or at least delaying the market entry of competing generic drugs as well as stopping parallel trade in AstraZeneca’s drug, thereby artificially partitioning markets.72 Indeed, conduct during a patent application procedure should be deemed illegal under antitrust law when: (i)

the firm concerned knows that it does not have a valid claim when filing and has the intention to engage subsequently in exclusionary acts based on such a patent; or (ii) many different actions in such patent procedures, which may be legal under patent law and separately under antitrust law, are part of an overall exclusionary strategy, but the ‘bundle’ of acts will likely have a relevant anti-competitive effect. In both cases, an (additional) application of competition rules would not introduce unnecessary legal uncertainty, given the underlying intent of the firm concerned. In both scenarios, a subsequent refusal to license based on the patent obtained through such conduct during the application procedure may count as a continuing wrong.

4.2

CUMULATIVE INNOVATION AND BARGAINING RULES

The above analysis has shown that the categories of refusals to deal used by competition authorities and courts may reflect different fact patterns to which different rules have been applied. While the fact patterns differ, however, some of the above distinctions should not be relevant for competition policy purposes, since the competitive effects are largely the same, as has been pointed out. These fact patterns should not be treated differently by competition authorities and courts, unless a statutory provision compels different treatment. Even more importantly in the IP context, the above categories as well as the vertical and horizontal foreclosure models as are currently on offer from industrial organisation economics may usually account for effects on static competition. However, they do not usually account for the fact that a refusal to grant access to information may also impede dynamic competition. The heuristic value of the above categories, particularly for refusals to deal involving IP rights, is thus limited. A dominant firm’s refusal to license IP may cause harm to dynamic competition if it already prevents research into or, at a later point on the time axis, prevents the marketing of follow-on innovation or improvements73 by competitors. This may happen if a (potential) new or improved product is complementary to the existing technology protected by the IP concerned. The main source of complementarity is cumulative innovation, ie the second innovation builds on the previous one.74 Cumulativeness is not confined to technological innovation, but also applies to expressive creativity, with authors and artists drawing, to

72

See Case COMP/A.37.507/F3, AstraZeneca, in particular paras 789 and 792. Improvement will be understood broadly as anything that enhances the options of users. The notion has been introduced by Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989. See above in ch 1 and below at 7.1. 74 See generally Scotchmer (1991), ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law’, 5 Journal of Economic Perspectives 29. 73

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some extent, on prior works.75 With regard to the outcome of the innovation process, two degrees of cumulative innovation can be distinguished:76 (1) Radical cumulative innovation, with many different potential scenarios: (i) A single innovation may lead to second-generation innovation (eg the laser leading to spectroscopy). (ii) A first-generation product—a so-called ‘research tool’77—may facilitate the search for a second-generation innovation (eg a gene target leading to a new drug). (iii) A second-generation product may also require the input of more than one first-generation innovation (eg bioengineered crops requiring different genes as well as research tools which facilitate the insertion of the genes into the germplasm). (2) Incremental cumulation innovation: Innovators may create sequentially better products, each improving on the previous one, with no innovator being secure in thinking that his innovation will be the last. This ‘quality-ladder’ model fits many technologies. The initial innovator may have the ability and the incentive to improve his initial innovation himself. There are, however, many reasons why such innovators may adopt a ‘satisficing’ approach78 or why follow-on innovation by other firms is more efficient (eg if they are more specialised). In these cases, the improver may need a licence, first, to do research, or second, to market the improvement. This depends on the design (in particular the breadth) of the respective IP right and the costs of circumventing a licence. If the improver needs a licence, the first-generation IP holder usually has sufficient incentive to grant that licence in order to obtain a share of the improver’s profits. There may be even an incentive to grant the licence for free at an early stage to increase the use of a technology and later share in higher profits, if the technology becomes dominant.79 If the holder of the initial IP right refuses to license, however, and if designing or inventing around the IP is not feasible, research into subsequent innovation and thus a (potential) innovation market may be foreclosed (see below at 4.4). If the improvement has been developed, the holder of the IP on the first innovation may have the right to prevent the improver from marketing the improvement. In this case, a product market may be foreclosed (below at 4.5). If innovation is cumulative, IP may therefore have a ‘disincentive effect’80 on follow-on innovation.

75 Menell & Scotchmer (2007), ‘Intellectual Property’ in Polinsky & Shavell (eds), Handbook of Law & Economics, vol 2, ch 19, pp 22–23. 76 Scotchmer (2004), Innovation and Incentives, pp 132–35. The examples are also from Scotchmer. See also Carrier (2003), ‘Resolving the Patent-Antitrust Paradox through Tripartite Innovation’, 56 Vanderbilt Law Review 1047, at 1082. 77 In the case of a patented research tool, the embodiment of the invention has the function of producing further innovation. In the context of the biotechnology industry, a research tool has been explained as ‘a technology that is used by pharmaceutical and biotechnology companies to find, refine, or otherwise design and identify a potential product or properties of a potential drug product’ (FTC (2003), ‘To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy’, ch 3, p 18). For an analysis of the effects of research tool patents on (biomedical) innovation see Walsh et al (2003), ‘Effects of Research Tool Patents and Licensing on Biomedical Innovation’ in Cohen & Merrill (eds), Patents in the Knowledge-Based Economy, pp 285–340. For an analysis of the patent and antitrust rules on research tools in the biopharmaceutical sector see Haracoglou (2008), Competition Law and Patents: A Follow-on Innovation Perspective in the Biopharmaceutical Industry. 78 The satisficing concept originates with Simon (1959), ‘Theories of Decision-Making in Economics and Behavioral Science’, 49 American Economic Review 253, at 262–65. For reasons for the sluggishness of large firms in certain innovations see Kamien & Schwartz (1982), Market Structure and Innovation, p 68. 79 For an analysis of such an ‘open early, closed late’ strategy in the context of software markets with network effects and interoperability information see below at 4.6.1. 80 Barnett (2011), ‘Do Patents Matter? Empirical Evidence on the Incentive Thesis’ in Litan (ed), Handbook on Law, Innovation and Growth, pp 178–211, in particular at pp 203–06, also reviewing the empirical research on this ‘disincentive thesis’.

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4.2.1

111

Repercussions of Mandatory Rules on the Incentive to Innovate

In both scenarios of blocking research into and the marketing of an improvement, the design of the IP protecting the initial innovation as well as the design of mandatory rules to overcome potential foreclosure problems—whether under IP or antitrust laws—have important repercussions. Any mandatory rule with a price cap addressing the above problem would affect not only ex post bargaining occurring in the shadow of potential enforcement of such a rule; any such rule would also adjust the ex ante incentives to innovate of both the first-generation innovator and the second-generation improver. To define the relevant variables, the extensive discussion of ‘broad versus narrow patents’ for initial inventions and the division of profits between first- and second-generation innovator can be made fruitful.81 Much of the literature has focused on the problem that both the initial innovator and the improver must each individually have sufficient incentive to engage in innovation, ie they must each at least cover their costs, taking into account the probability of failure. Both the initial innovator and the later improver take their investment decision in the light of the estimated appropriability of their investment and thus their reward. The more narrow the protection for the original innovation and thus the smaller the profits for the initial innovator, the smaller are his incentives to innovate. Particularly in the first scenario cited above involving research tools, sharing in the profits of follow-on innovation via licensing fees may be the only way to cover the high costs of basic research.82 Thus, imposing too low a price cap on the royalty for the original innovation entails the risk of underinvestment by original innovators. On the other hand, imposing too high a price cap may deter an improver from investing in follow-on innovation. This problem of underinvestment of a follow-on innovator may be aggravated if the improver knows about the existing IP protecting the prior innovation before investing in the improvement.83 In this case, his bargaining position before investing in the research is rather weak. After investing in the improvement, however, the improver may be held up by the original innovator. Anticipating such a hold up, the improver may decide not to invest at all. Ex ante licensing as a potential solution to such a hold up84 may not occur due to asymmetric information, in particular regarding the value of the innovation.85 The improver’s decision will be more complex where the issue is more than just deciding whether or not to invest if the initial IP does not protect a single path idea; that is, the initial IP can be invented around. In this case, the improver will compare two profit streams: on

81 For an overview and a formal analysis see Scotchmer (2004), Innovation and Incentives, pp 127–59 and the literature cited there. 82 This potential problem of underinvestment by first-generation creators has been analysed by, eg, Bessen & Maskin (2000), ‘Sequential Innovation, Patents and Imitation’, Working Paper 00-01, MIT Department of Economics. 83 At this stage, again strategic conduct both by the holder of the initial IP and the subsequent improver may be possible. If the initial IP owner does not reveal his IP, this may, in the context of standards, amount to anticompetitive patent ambush. The improver may not want to reveal the information about the improvement to prevent the initial innovator from developing the improvement (see Bessen (2004), ‘Holdup and Patent Licensing of Cumulative Innovations with Private Information’, 82 Economics Letters 321). 84 See eg Gallini & Scotchmer (2002), ‘Intellectual Property: When is it the Best Incentive System?’ in Jaffe et al (eds), Innovation Policy and the Economy, vol 2, pp 51–78; Bessen & Maskin (2000), ‘Sequential Innovation, Patents, and Imitation’, MIT Department of Economics Working Paper No 00-01; Green & Scotchmer (1995), ‘On the Division of Profit in Sequential Innovation’, 26 RAND Journal of Economics 20. 85 See Bessen (2004), ‘Holdup and Patent Licensing of Cumulative Innovations with Private Information’, 82 Economics Letters 321.

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the one hand the profits from marketing the improved product which embodies the initial IP minus the expected royalty, and on the other hand the profit from marketing a completely new product for which he will not need a licence from the initial IP owner. In the latter case, the expected profit from the product will depend on the costs of inventing around the initial IP and on consumers’ preferences for the established product that embodies the initial IP. The latter may be high in the case of network effects or an industry standard.

4.2.2

Cases for IP Reform: Patent Thickets, Holdup, and Royalty Stacking

Aside from bearing in mind the above (intended and unintended) consequences of mandatory rules on incentives to innovate, it is important to clarify that not all situations where bargaining over licensing in a cumulative innovation setting breaks down should be addressed by competition rules. Factors which can render licensing negotiations more difficult include, in particular, (1) transaction costs (by reducing the surplus from the deal), (2) uncertainty, primarily with regard to the scope and valuation of the IP (by obscuring the size of the surplus), and (3) strategic behaviour.86 There are typical scenarios in which one or several of these reasons, in combination with the IP design, may lead to a bargaining breakdown, in particular the scenarios of (i) patent thickets, (ii) holdup, and (iii) royalty stacking. If an improvement builds on multiple innovations or even overlapping patents (‘patent thickets’),87 high transaction costs and heterogenous preferences of the original innovators may outweigh the common expected profit from a bargain (‘tragedy of the anticommons’).88 Such costs may be reduced by means of horizontal coordination of the right-holders (eg in the form of joint ventures, patent pools and cooperative standardsetting). Such solutions to a bargaining breakdown may face antitrust scrutiny.89 In such

86 See Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989, at 1052–61, who also sets out other reasons for bargaining failure. For historical examples of bargaining breakdown see Merges (1994), ‘Intellectual Property and Bargaining Breakdown: The Case of Blocking Patents’, 62 Tennessee Law Review 75, at 84. 87 See Shapiro (2001), ‘Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting’, SSRN Working Paper, available at ssrn.com/abstract=273550; and Rubinfeld & Maness (2005), ‘The Strategic Use of Patents: Implications for Antitrust’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyright—EU and US Perspectives, at pp 88–89, who emphasise the strategic intention underlying patent thickets. 88 Heller (1998), ‘The Tragedy of the Anticommons: Property in the Transition from Marx to Markets’, 111 Harvard Law Review 621; Heller & Eisenberg (1998), ‘Can Patents Deter Innovation? The Anticommons in Biomedical Research’, 280 Science 698, citing as examples the cases of patents on gene fragments and stacking licences. For a generalisation of the problem of the anti-commons see Heller (2008), The Gridlock Economy. See also Merges (2001), ‘Institutions for Intellectual Property Transactions: The Case of Patent Pools’ in Dreyfuss et al (eds), Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society, pp 123–66. For a general discussion of imperfections in the licensing market see Caves et al (1983), ‘The Imperfect Market for Technology Licenses’, 45 Oxford Bulletin of Economics & Statistics 249. 89 For an analysis see Shapiro (2001), ‘Navigating the Patent Thicket: Cross Licenses, Patent Pools, and Standard-Setting’. For example, the analysis of cross-licensing depends upon whether they involve ‘blocking’, ‘complementary’ or ‘competing’ patents. Blocking patents are patents where the product ‘infringes at least one claim of one party’s patent while also infringing at least one claim of another party’s patent’ (Hovenkamp et al (2004), IP and Antitrust, at 34–36). Complementary patents ‘cover technologies that complement each other in that the use of one makes the use of the other more valuable’ (ibid, at 34–37). Competing patents are such where ‘the products they claim are viewed as substitutes in the marketplace’ (ibid). Cross-licensing of blocking and complementary patents may be pro-competitive if it helps to overcome a situation of fragmented multiple

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cases, competition authorities and courts may have to distinguish between coordinated action which facilitates negotiations and thus keeps the path of innovation open on the one hand, and anti-competitive collusion on the other. The problem of patent thickets itself, however, originates in the granting of patents for small inventions which are ‘unlikely to track socially useful bundles of property rights in future commercial products’90 (this is sometimes referred to as ‘granularity’). A potential breakdown of complementary innovation or product markets is thus not a problem to be solved by antitrust, rather it will need to be addressed through patent reform.91 In the above situations, strategic conduct may also be involved: if an improver has made sunk investments into marketing a product without knowing that he will infringe a patent when marketing the product, the patent holder may use an injunction (threat) to negotiate ‘excessively’ high royalties (‘patent holdup’). This problem may be aggravated if the product infringes many patents and thus may bear multiple royalty burdens (‘royalty stacking’).92 To reduce the costs of patent thickets, holdup and royalty stacking, a typical strategy of firms in recent years has been to build up large patent portfolios as threat positions for potential bargaining situations.93 Although rational from these firms’ perspective, such a counter-strategy may be detrimental from a public point of view. In particular, the settlement of IP disputes by means of cross-licensing may raise antitrust problems. Here again, it is the strategies of firms in reaction to patent holdup and royalty stacking that may face antitrust scrutiny. The problem of patent holdup and royalty stacking itself, together with the underlying problem of patent thickets, can be better addressed through patent reform than through competition policy. Antitrust rules can limit the potential for holdup and royalty stacking in two ways: First, potentially together with unfair competition laws, by prohibiting deceptive practices in the context of standard-setting processes involving IP which, at a later stage, would lead to the build-up of market power and allow for holdup situations. Second, and most importantly in this context, antitrust rules may limit the potential for holdup and royalty stacking by imposing constraints on a (temporary tactical) refusal to license which serves as means of obtaining ‘excessive’ royalties. Although holdup and royalty stacking

property entitlements. For an analysis of patent pools see eg Gilbert (2010), ‘Ties that Bind: Policies to Promote (Good) Patent Pools’, 77 Antitrust Law Journal 1. 90 Heller & Eisenberg (1998), ‘Can Patents Deter Innovation? The Anticommons in Biomedical Research’, 280 Science 698. 91 See above at 4.1.6. For a solution to the problem of small complementary patents through an interpretation of the non-obviousness criterion see Ménière (2004), ‘Non-Obviousness and Complementary Innovations’, Working Paper, available at www.cerna.ensmp.fr/Documents/YM-WP-NonObviousness.pdf. 92 For an analysis see Lemley & Shapiro (2007), ‘Patent Holdup and Royalty Stacking’, 85 Texas Law Review 1991 and Farrell et al (2007), ‘Standard Setting, Patents, and Hold-Up’, 74 Antitrust Law Journal 603. For a critique see Sidak (2007), ‘Holdup, Royalty Stacking, and the Presumption of Injunctive Relief for Patent Infringement: A Reply to Lemley and Shapiro’; and Elhauge (2008), ‘Do Patent Holdup and Royalty Stacking Lead to Systematically Excessive Royalties?’ 4 Journal of Competition Law & Economics 535. 93 The pattern underlying firms’ patenting strategies is analysed by Parchomovsky & Wagner (2005), ‘Patent Portfolios’, 154 University of Pennsylvania Law Review 1. Since non-producing entities (so-called ‘trolls’) do not operate in downstream product markets, and thus do not require such cross-licences or other ‘quid pro quos’ and are not subject to reciprocal infringement lawsuits, they are assumed to have an increased ability to hold up vertically integrated licensees with ‘excessive’ royalties. See Shapiro (2006), ‘Injunctions, Hold-Up, and Patent Royalties’, working paper, available at faculty.haas.berkeley.edu/shapiro/royalties.pdf. But see Geradin et al (2008), ‘Elves or Trolls? The Role of Non-Practicing Patent Owners in the Innovation Economy’, Tilburg Law and Economics Discussion Paper 2008-018, who emphasise that limiting the conduct of patent trolls may have a detrimental impact on patent-facilitated competition and welfare-enhancing upstream specialisation.

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strategies are usually not motivated by the intention to foreclose a competitor in the long run, (temporarily) carrying out the threat to refuse to license and to sue for an injunction may indeed have the same competitive effect as a refusal with the intention of foreclosing a (potential) competitor on the product market.94 But any antitrust liability for a refusal to license, in particular the liability price cap, should only be designed to prevent such foreclosure. Stricter antitrust liability for refusals that serve as means within holdup and royalty stacking strategies in order to further limit the potential of such strategies would lead to different definitions of legitimate pricing behaviour. This stricter antitrust liability could even ease the need for patent reform. Therefore, such tactical refusals to license should be subject to the same antitrust test as refusals that are intended to foreclose (potential) competitors. Inefficiencies caused by holdup and royalty stacking beyond the competitive harm should be addressed via judicial re-interpretation or legislative reform of IP laws with regard to the scope of the respective IP and the conditions of injunctive relief.95

4.2.3

Self-Correction of Innovation Regimes?

Given the evolution of various private solutions to potentially over-shooting IP protection for initial innovation such as cross-licensing, constrained enforcement of IP rights and R&D consortia, some scholars—in the tradition of Demsetz and Coase and based on the bottom-up methodology of new institutional economics—have argued in a broader way that innovation regimes have an inherent tendency to correct over-propertisation. Barnett has suggested that these various private solutions share the feature that ‘competing firms partially abandon or otherwise constrain a property regime in order to enter into mutually beneficial arrangements that generate collective gains in the form of reduced transaction costs and associated innovation gains’.96 Alongside the incentive of an initial innovator to share in the profits of and thus increase subsequent innovation,97 Barnett emphasises the private interest of large firms as repeat-players: Assuming that a large firm tends to stand on both sides of IP transactions and litigations with roughly equal frequency, that firm ‘will rationally assign roughly equal weight to each component of the net social product generated by intellectual production—innovation gains and transaction-cost losses attendant to increased propertisation’.98 On this view, the private interest of large firms and their

94 In that sense, the use of IP as a ‘bargaining chip’ may have the same effect as its use as a ‘blocking device’. For this distinction see Harhoff et al (2007), The Strategic Use of Patents and its Implications for Enterprise and Competition Policies, paras 262–63. According to this empirical study, the use of patents as bargaining chips can be observed in electronics industries, which are characterised by complex and constantly changing technologies. Here, firms assemble portfolios of patents which can be (cross-)licensed. Their use as blocking devices dominates in the pharmaceutical and biotechnology sectors where technologies are discrete. 95 See Lemley & Shapiro (2007), ‘Patent Holdup and Royalty Stacking’, 85 Texas Law Review 1991. US patent law seems to be moving in this direction, as will be analysed below at 7.1.1.3. But see the more cautious approach of Denicolò et al (2007), ‘Revisiting Injunctive Relief in High-Tech Industries with Non-Practicing Patent Holders’, SSRN Working Paper. 96 Barnett (2009), ‘Property as Process: How Innovation Markets Select Innovation Regimes’, 119 Yale Law Journal 384, at 431–32. 97 See eg Bar Gill & Parchomovsky (2003), ‘The Value of Giving Away Secrets’, 89 Vanderbilt Law Review 1857. 98 Barnett (2009), ‘Property as Process: How Innovation Markets Select Innovation Regimes’, 119 Yale Law Journal 384, at 433.

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demand for property rights would therefore ‘mimic the social interest in maximising the social product yielded by innovation investment’.99 However, the conclusion that large players will also act in the interests of those players they would not expect to face as a claimant with significant bargaining power appears not to be robust. On the contrary, players with power on markets in the innovation chain are likely to have an incentive to discriminate between those players they expect to face as potentially ‘strong’ claimants and those that are potentially ‘weak’. Hence the conjecture that large innovators have the ability and incentive to undertake actions that avoid or remedy any excessive propertisation and which are therefore in the public interest seems to be over-broad. Second, even more broadly, the positive phenomenon that (partial) ‘selfcorrection’ happens on the market does not allow us to infer the normative conclusion that the current public property regime plus private self-correction is better from a social point of view than ‘public’ reform of property rights.

4.3

A TYPOLOGY OF REFUSALS TO DEAL INVOLVING IP

Building on the above analysis of mandatory rules on cumulative innovation and focusing on the potentially harmful effects of a refusal involving IP rights, six—partially overlapping—basic scenarios may be distinguished: —

a refusal to license to prevent competition by clones (ie products with the same characteristics and performance with regard to these characteristics) on a product market; a refusal to license which blocks research into follow-on innovation and improvements (scenario 1, see below at 4.4), a refusal to license which blocks the marketing of an improvement (‘new product’) (scenario 2, at 4.5); a refusal to give information necessary for interconnection and interoperability (scenario 3, at 4.6); a refusal to license IP which protects a de facto standard (scenario 4, at 4.7); and a refusal to sell products on the basis of IP rights, potentially as a corollary to a tying strategy (scenario 5, at 4.8).

— — — — —

In the first situation—a refusal to license to prevent competition by clones on a product market—antitrust policy should generally be reluctant to reduce the solely static harm on the product market covered by the IP, as has already been argued in chapter two.100 The other five strategies will be analysed in terms of the harm to competition they may cause, and the necessity of and the design of mandatory—competition or other—public rules to prevent such harm. A competition rule, from the policy perspective of a broader institutional cost-benefit analysis, should solve the cost-benefit trade-off better than other private or public rules.101 Some of the costs of a competition rule were analysed in chapter three, in particular, aside from direct enforcement costs, the costs of potential false positives and 99

Ibid, at 424–43. See above at 2.6. 101 This broad requirement can be broken down into three conditions (see above at 2.5.3): First, there must be a need for a public rule to overcome a competition problem, ie market actors cannot solve it adequately. Second, the benefits of the antitrust rule must outweigh its overall costs. Third, such a rule must solve the cost-benefit 100

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negatives.102 In addition, the costs of a (competition) rule depend greatly on the choice of remedy for a refusal to deal, which will be addressed in more detail in chapter five.

4.4

SCENARIO 1: IMPEDING RESEARCH INTO FOLLOW-ON INNOVATION

In the light of the above general considerations on rules on cumulative innovation, the analysis will now focus on potential foreclosure of the different markets in the innovation chain. As has been pointed out, the R&D process for a new invention or improvement may require a license for a patent protecting a prior innovation or knowledge of information protected by a trade secret. In this first scenario, the protected information is usually of a technological nature. Research that would infringe a copyright would thus be an exceptional case, all the more so since exceptions for private or other personal uses may apply. In this scenario, both IP and antitrust rules may be considered solutions to prevent or overcome potential foreclosure of follow on-innovation markets.

4.4.1

IP Solutions

To keep markets for follow-on innovation open, patent laws opt for different solutions.103 The most common is an exemption or defence for research. Under US patent law, courts have developed a common law experimental use exemption through the interpretation of the notion of infringing ‘use’.104 Similarly, the patent laws of European countries such as Germany, France and the UK provide statutory research exemptions which—albeit varying in scope— exempt from infringement experiments directed at the subject matter of the invention.105 A second solution advanced by some commentators is to provide compulsory research licences under patent laws, in particular with regard to research tools.106 A third solution— which does not seem to have been used—would be not to restrict the substantive scope of the initial innovator’s IP right (as under a research exemption), but instead to restrict his civil action remedies, ie to deny the first innovator the right to injunctive relief and thus substitute the IP rule with a liability rule.107 The latter two solutions would still allow the first

trade-off better than other existing IP solutions or potential IP solutions such as judicial interpretation of or legislative changes to IP law. 102

See above at 3.3.2.1 and 3.3.2.2. For an overview and comparative analysis of different current solutions as well as policy proposals see OECD (2006), ‘Research Use of Patented Knowledge: A Review’, Directorate for Science, Technology and Industry Working Paper. For an economic analysis of the effects of a research exemption see Scotchmer (2004), Innovation and Incentives, p 139. The scope of exceptions for research, however, is restricted for WTO member countries by Art 30 of the TRIPS Agreement, according to which restrictions on patent rights must ‘not unreasonably conflict with the normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties’. 104 For an analysis see below at 7.1.1.1. 105 For an analysis see below at 8.1.1. 106 See eg Strandburg (2004), ‘What Does the Public Get? Experimental Use and the Patent Bargain’, Wisconsin Law Review 81, at 143. 107 The distinction between property and liability rules—as a category of positive description—has been suggested by Calabresi & Melamed (1972), ‘Property Rules, Liability Rules and Inalienability: One View of the Cathedral’, 85 Harvard Law Review 1089. See in more detail below at 4.5.3 and 7.1.1.3. 103

4.4

SCENARIO 1

117

innovator to receive royalties for follow-on innovation research activities. A general liability rule, however, would only apply to protected information that the potential infringer could ‘take’, ie which is not secret, and would thus only serve as ‘shield’. A compulsory research licence would also provide a claim for information that may be used—as a ‘sword’—to force an IP owner to reveal secret information, and this would be particularly relevant in trade secret cases.108 It is beyond the scope of this book to discuss which of the aforementioned IP solutions best solves the problem of providing for sufficient ex ante incentives for first-generation innovators, while at the same time minimising the blocking effects on follow-on innovation.109 Nor can the specific conundrum of research tools be addressed here. With regard to research tools, an exemption for ‘experimenting with’ a patented invention would directly cut into the product market for such tools.110 What is relevant here, however, is the question whether a competition rule, in the form of a duty-to-license rule, could substitute or complement the above IP solutions.

4.4.2

Antitrust in Innovation Markets?

Any such competition rule would have to include the condition that a refusal to license (or a refusal to sell a research tool) would foreclose an innovation market, in this case for follow-on innovation. Following the 1995 US Antitrust Guidelines for the Licensing of IP, an innovation market may be defined as the market for R&D directed to specific new products or processes and the close substitutes for that R&D.111 The Guidelines define ‘close substitutes’ as ‘research and development efforts, technologies, and goods that significantly constrain the exercise of market power with respect to the relevant research and development, eg by limiting the ability and incentive of a hypothetical monopolist to retard the pace of research and development’.112 A necessary but not sufficient precondition for delineating an innovation market as a relevant antitrust market is that the capabilities to undertake the relevant R&D ‘can be associated with specialised assets or characteristics of specific firms’.113

108

See above at 2.2.1. For a formal model of the effects of a research exemption on incentives to innovate of both the firstgeneration and the second-generation innovator see Moschini & Yerokhin (2008), ‘Patents, Research Exemption, and the Incentive for Sequential Innovation’, 17 Journal of Economics & Management Strategy 379. 110 Furthermore, the value of research tools usually solely depends on potential follow-on innovation. If several patent holders are trying to capture the value of the (potential) second-generation product, bargaining may break down due to high transaction costs (see Scotchmer (2004), Innovation and Incentives, pp 142–46). For an analysis under US patent law see Strandburg (2006), ‘The Research Exemption to Patent Infringement: The Delicate Balance between Current and Future Technical Progress’ in Yu (ed), Intellectual Property and Information Wealth, p 8. For an analysis under German patent law see Holzapfel (2006), ‘Die patentrechtliche Zulässigkeit von Forschungswerkzeugen’, 1 Gewerblicher Rechtsschutz und Urheberrecht 10. For an analysis in relation to European competition law see Godt (2008), ‘Research Tools—Patents and the Information Market in the Knowledge Based Economy’ in Govaere & Ullrich (eds), Intellectual Property, Market Power and the Public Interest, pp 275–98. 111 US Antitrust Guidelines for the Licensing of Intellectual Property, 3.2.3. See above, ch 1. 112 Ibid. 113 Ibid. For a description of the concept see Tom & Newberg (1998), ‘US Enforcement Approaches to the Antitrust-Intellectual Property Interface’ in Anderson & Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, pp 373–75. 109

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Due to the increasing importance of IP, the concept of innovation markets has been the subject of recent debate.114 This debate centres around questions regarding the extent to which competition authorities and courts both can and should analyse harm to innovation as such, or, further along the time axis, as potential competition for actual products when there is a greater degree of certainty as regards the use of the innovation for new products. The potential points in time during a (follow-on) innovation process that antitrust rules may use as reference or ‘intervention’ points are: (1) the research into (follow-on) innovation, (2) actual competition for potential products (including those using the (follow-on) innovation), (3) potential competition for actual products, and (4) the marketing of the product. According to their Guidelines, the DoJ and the FTC will analyse the impact of licensing arrangements which may adversely affect competition to develop new or improved products or processes either as a separate competitive effect in relevant goods or technology markets, or as a competitive effect in a separate innovation market. A licensing arrangement may have competitive effects on innovation that cannot be adequately addressed through the analysis of goods or technology markets. For example, the arrangement may affect the development of goods that do not yet exist.115

In its Guidelines accompanying the Technology Transfer Block Exemption, the European Commission echoes the US view: the Commission, when analysing the effects of licensing agreements on innovation markets, … will normally confine itself to examining the impact of the agreement on competition within existing product and technology markets. Competition on such markets may be affected by agreements that delay the introduction of improved products or new products that over time will replace existing products. In such cases innovation is a source of potential competition which must be taken into account when assessing the impact of the agreement on product markets and technology markets. In a limited number of cases, however, it may be useful and necessary to also define innovation markets. This is particularly the case where the agreement affects innovation aiming at creating new products and where it is possible at an early stage to identify research and development poles …116

Assuming that the objective of competition policy is indeed to prevent slower or less innovation as such and not only to prevent conduct which leads to inferior technology or products, such a policy is inherently hard to implement. Like the relationship between the current product market structure and incentives to innovate,117 the debate on the question of which structure on the innovation market yields the ‘optimal’ outcome in terms of input for the technology and product markets is far from conclusive—and, due to the nature of innovation, cannot be conclusive. Even given sector-specific data, such ex post information on the

114 See Glader (2006), Innovation Markets and Competition Analysis—EU Competition Law and US Antitrust Law; Europe Economics (2003), The Development of Analytical Tools for Assessing Market Dynamics in the Knowledge Based Economy, Report to the European Commission. For an overview of US merger enforcement practice with regard to innovation markets see Knable Gotts & Rapp (2004), ‘Antitrust Treatment of Mergers Involving Future Goods’, Antitrust 100, who take the sceptical position and argue that merger enforcement should be concentrated on those cases where the new product has reached the stage of potential competition for actual products. 115 1995 US Antitrust Guidelines for the Licensing of Intellectual Property, 3.2.3. 116 Commission Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, OJ 2004 C101/2, para 25. 117 For an analysis see above at 2.4.1.3.

4.5

SCENARIO 2

119

link between innovation market structures and innovation outcome may be misleading if applied to new innovation processes and markets. In addition to this feasibility argument against antitrust innovation market analysis, generally, a relatively broad research exemption coupled with a compulsory research licence to obtain secret information in specific cases is the better solution for the specific scenario of a potential impediment to follow-on innovation from an incentive point of view: An antitrust foreclosure-of-innovation-market type of test may be more narrow than an unconditional research exemption by requiring that there are no substitutes for the first-generation IP. One might argue that this stricter innovation market power test would better preserve the initial innovator’s ex ante incentive to innovate. Except for the scenarios of radical follow-on innovation and research tools, however, the first-generation innovator may still block the marketing of the improvement and thereby share in the profits reaped from the improvement. A relatively broad research exemption in conjunction with the right to block the marketing of follow-on innovation thus fosters dissemination of the original innovation, prevents the foreclosure of follow-on innovation at the research stage, maintains incentives to innovate for the first-generation innovator, and avoids the uncertainties of antitrust innovation market analysis. In this scenario of potential foreclosure of research into follow-on innovation, antitrust liability for a refusal to license is therefore only a second-best solution.

4.5

SCENARIO 2: IMPEDING THE MARKETING OF FOLLOW-ON INNOVATION

If the second-generation innovation has already been created, the improver may need a licence to market his improvement. Whether this is the case depends on the design of the respective IP law and on the innovative step of the improvement. Without anticipating the more detailed legal analysis of different IP laws,118 it is useful to resort to the following distinction between three basic situations which Lemley introduced to analyse the (bargaining) position of an improver:119 (i)

The improvement is only minor (incremental). The improver thus needs a licence from the original innovator, and the improvement is not protected by IP. (ii) The improver needs a licence from the original innovator, but the improvement is sufficient to be protected by IP. This is the classic scenario of ‘blocking patents’. There is no analogous situation of ‘blocking copyrights’.120 (iii) The improvement is sufficiently radical that the improver does not need a licence from the original innovator. Given full information about the fact that there is no need for a licence, no bargaining will occur. In the first two scenarios, bargaining between the original innovator and the improver regarding a licence will lead to a deal if there is a gain from trade and if both can expect a positive profit as a share of this surplus.121 Generally, there will often be an incentive for

118

See below at 7.1 and 8.1. Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989. 120 For a legal analysis under US copyright law see below at 7.1.2. For an analysis under German copyright law see below at 8.1.2. 121 For an economic analysis see Gilbert & Shapiro (1996), ‘An Economic Analysis of Unilateral Refusals to License Intellectual Property’, 93 Proceedings of the National Academy of Sciences of the USA 12749. 119

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the initial innovator to grant a licence to the improver in order to obtain a share of the improver’s profit from marketing its improvement. Where the improvement is only minor (situation (i)), the improver faces the problem of negotiating while having to withhold his discovery or, more generally, information (‘Arrow’s paradox’122).123 Therefore, in scenario (ii) involving blocking patents,124 the likelihood of such an agreement is greater. There may be various reasons why such a bargaining process over a licence will fail, as has been pointed out above.125 Only in the case of foreclosure of competition, however, should antitrust be considered as a potential solution.

4.5.1

The Potential Case for Antitrust: Foreclosure of Competition by Improved Products

If an improver needs a licence from an IP holder to market an improved (‘new’) product and this product is at least partially or potentially substitutable for the IP holder’s ‘old’ product, the IP holder has at least three basic options: (1) refuse to license, (2) grant a licence such that there is competition between the old and new product,126 or (3) grant a licence and ‘withdraw’ the old product from the market.127 The IP holder has an incentive to refuse to grant a licence if the expected private return from licensing to the producer of the new product (potentially plus the profit from continuing to market the old product) is lower than the return from solely marketing the old product. This calculation depends on how deeply the new product would cut into the return from the old product and, conversely, how much profit the new product can be expected to generate. This, in turn, hinges on the substitutability of the old and new products and on how much value the improved product would add for consumers (in terms of a greater willingness to pay). Functional substitutability between old and new products may be high in cases of ‘only’ incremental innovation, ie a relatively small improvement. The added social value (and also potentially functional substitutability) may be high in cases of improvements which lead to leap-frogging on the product market, ie a complete replacement of the old product through a new generation product. Another factor that the original innovator will take into account in his calculation is the correlation between the value of his IP and the number of follow-on innovations building on this IP. If this correlation is high, the IP holder may prefer to give licences.128

122

See above at 2.4.2. Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989, at 1062. See also Merges (1994), ‘Intellectual Property Rights and Bargaining Breakdown: The Case of Blocking Patents’, 62 Tennessee Law Review 75. 124 Usually, a patent is said to be ‘blocked’ if its production would infringe the claims of an unexpired prior basic patent (Carrier (2003), ‘Resolving the Patent-Antitrust Paradox Through Tripartite Innovation’, 56 Vanderbilt Law Review 1047, at fn 163). 125 At 4.2.2. 126 In this case, the licence would also increase static efficiency. 127 A fourth option not discussed here would be pooling the original IP and the improvement through eg a merger of the two firms. 128 For an analysis of this strategy and narrow patents for original innovations see Bar Gill & Parchomovsky (2003), ‘The Value of Giving Away Secrets’, 89 Vanderbilt Law Review 1857. See also Baumol (2002), The FreeMarket Innovation Machine, pp 73–92, on incentives for voluntary dissemination of proprietary technology. 123

4.5

SCENARIO 2

121

Such situations of (partial) substitution by an improved product may arise not only if the holder of the ‘old’ IP refuses to give a licence for the IP he uses himself. There may also be situations where an entity holds the IP for A and B which would be substitutes on the technology market, and uses or licenses A but does not use or license B. The latter case of ‘technology suppression’129 may only arise under IP laws that do not require the use of the respective innovation, such as US patent law.130 The decisive factor in establishing whether a mandatory rule is necessary is whether there is a difference between the private calculus of the IP holder and the public perspective. Coasean bargaining (over the information as a positive externality) fails if, objectively, the private expected profit for the IP holder from not allowing the improvement to be marketed is higher than the expected profit from sharing in the returns from the new product. In these cases, obtaining the IP by buying the firm holding the IP (ie through merger) is usually an even less feasible option for the firm seeking the licence.131 A duty to deal would potentially enhance welfare in such situations where, from a public perspective, it would be beneficial to have the improved product with added social value on the market.132 If the new product is a (partial) substitute for the old product, competition between the old product and the new product with the improvement will also enhance static competition. As has been pointed out, however, in such situations antitrust should not focus on harm to static competition due to the exercise of IP rights.133 Therefore, such an improvement should not be taken into account within a consumer harm test.

4.5.2

Some Conditions of an Antitrust Rule

An antitrust rule designed to capture the above scenario must identify significant harm to consumers. For such harm to arise, the first requirement must be that there is no substitute for the technology needed by the improver and its initial IP protects a single path, ie the initial IP cannot be invented around. Second, to prevent the risk of inducing competition by clones (ie products with the same characteristics and performance with regard to these characteristics), the improvement must not be insignificant, ie the added social

129 For an economic analysis of the private incentives to suppress technology see Karp & Perloff (1996), ‘The Optimal Suppression of a Low-Cost Technology by a Durable-Good Monopoly’, 27 RAND Journal of Economics 346. See also Gilbert & Newberry (1982), ‘Preemptive Patenting and the Persistence of Monopoly’, 72 American Economic Review 514. 130 For a legal analysis under US patent and antitrust law see Saunders (2002), ‘Patent Nonuse and the Role of Public Interest as a Deterrent to Technology Suppression’, 15 Harvard Journal of Law & Technology 1; Cohen & Burke (1998), ‘An Overview of the Antitrust Analysis of the Suppression of Technology’, 66 Antitrust Law Journal 421; Chin (1998), ‘Unilateral Technology Suppression: Appropriate Antitrust and Patent Law Remedies’, 66 Antitrust Law Journal 441; Areeda & Kaplow (1997), Antitrust Analysis, pp 426–27. Hovenkamp et al ((2004), IP and Antitrust, § 14.4) regard only the acquisition of competing technology with the intention to ‘retire’ it as illegal under antitrust law, not the non-use itself. See also Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 320–21. 131 For an antitrust analysis of mergers whose rationale is to resolve IP disputes see Creighton & Sher (2009), ‘Resolving Patent Disputes through Merger: A Comparison of Three Potential Approaches’, 75 Antitrust Law Journal 657. 132 Another type of situation where an antitrust duty to deal could apply would be where the IP holder ‘irrationally’ refuses to license, when the public would benefit from the marketing of the improved product. For anecdotal evidence see Baumol (2002), The Free-Market Innovation Machine, pp 237–38. 133 See above at 2.6, 2.7 and 4.3.

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value should be above a de minimis threshold. Third, an antitrust rule designed to force a bargain must necessarily specify a maximum licence fee that the holder of the IP for the ‘old’ innovation may charge to the firm seeking the licence to market the product with the new characteristic. Without anticipating the more detailed discussion in chapter five of the approaches suggested for such price caps both as a matter of liability and in relation to remedies, the maximum royalty must guarantee two things: on the one hand it must ensure that the new product can be marketed; and on the other hand it must preserve as much as possible the ex ante incentive of the original innovator, without whose innovation the improvement would not exist. The bargaining problem to be solved is characterised by the incentive of the holder of the initial IP not to license even at the maximum price the potential licensee is willing to pay. Thus the price cap to be set by a rule which is designed to force licensing must necessarily be below the royalty the IP holder would accept, given freedom of contract. On the other hand, to prevent inefficient entry, the licensee has to meet an efficiency threshold.

4.5.3

Comparison to Alternative IP Solutions

Similar to the scenario of blocking research into follow-on innovation,134 IP laws provide or at least potentially provide rules which balance the rights of IP holders against the interests of follow-on innovators (as potentially aligned with the public interest) in marketing improvements. Without anticipating the more detailed legal analysis that will appear later in this work, one ‘internal’ IP solution provided for under, for example, the German Patent Act135 and the French law on improvements on patented inventions136 is a compulsory licence in the form of a dependency licence. Such licences, where they are possible under the respective IP law, are usually granted for reasons of public policy. With regard to the substantive conditions, a dependency licence granted for reasons of public policy would be wider in theory than an antitrust duty to license, since it would apply not only in situations

134

See above at 4.4. See below at 8.1.1.2. 136 Eg Art L613–15 of the French intellectual property code stipulates: ‘Le propriétaire d’un brevet portant sur un perfectionnement à une invention déjà brevetée au profit d’un tiers ne peut exploiter son invention sans l’autorisation du titulaire du brevet antérieur; ledit titulaire ne peut exploiter le perfectionnement breveté sans l’autorisation du titulaire du brevet de perfectionnement. (The owner of a patent concerning an improvement on an invention already patented on behalf of another person may not practice his invention without the consent of the owner of the earlier patent; the latter may not practice the patented improvement without the consent of the owner of the patent of the improvement.) Le tribunal de grande instance peut, le ministère public entendu, accorder, dans l’intérêt public, sur sa demande, qui ne peut être antérieure à l’expiration du délai prévu à l’article L 613–11, une licence au titulaire du brevet de perfectionnement dans la mesure nécessaire à l’exploitation de l’invention qui fait l’objet de ce brevet, et pour autant que l’invention, objet du brevet de perfectionnement, présente à l’égard du brevet antérieur un progrès technique et un intérêt économique importants. … (After hearing the Public Prosecutor, and in the public the First Instance Court may grant to the owner of the patent of improvement, at his request which may not be made before [3 years after patent grant or 4 years after patent application], a license to the extent necessary for working the invention to which that patent relates, in so far as the invention to which the improvement patent relates represents substantial technical progress and economic interest in relation to the prior patent.) Le propriétaire du premier brevet obtient, sur requête présentée au tribunal, la concession d’une licence sur le brevet de perfectionnement … (On a request submitted to the Court, the owner of the earlier patent shall be granted a license under the patent of improvement.)’ Loi 92–597, as of 1 July 1992; English translation by WIPO. 135

4.5

SCENARIO 2

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of foreclosure of competition.137 Furthermore, one could assume that relatively vague notion of ‘public policy’ may be subject to a stronger ex post misuse than an antitrust rule with more clear-cut conditions. In practice, however, such mandatory licences have been applied for only rarely and granted in even fewer cases.138 A more fundamental solution to all situations where, from the public point of view, the use of the technology or the marketing of a product is preferable to non-use or non-marketing, could be to replace the current prevailing property rule with a liability rule. In the face of potential strategic behaviour on the part of IP owners, some scholars have indeed advanced such an approach,139 in particular with regard to pharmaceutical patents.140 Under the current property rules, the IP holder and a potential licensee bargain over a (positive) externality. Under a liability rule, IP owners would be denied the right to injunctive relief for IP infringements and relegated to damages under specific circumstances.141 Follow-on innovators who need a licence could thus decide whether to infringe and pay damages or whether to bargain with the holder of the IP on the original innovation in the shadow of potential damages. Comparing an antitrust duty to deal with a dependency licence and a liability rule, all rules are similar in that, ultimately, the royalty would have to be determined by a third party, usually a public agency or court. Thus all rules are subject to the costs (including error costs) arising from a non-negotiated royalty. There are two major differences, however, which suggest that an antitrust duty to deal should complement IP rules: First, a general liability rule in the traditional meaning (similar to the patent or copyright misuse defence) can only serve as ‘shield’. By contrast, an antitrust duty to deal, like a compulsory licensing regime under IP laws, allows a public authority or court to force the IP owner to deal and thus to reveal secret information.142 Second, as compared with the situation of blocking research,143 the foreclosure of product markets is more amenable to standard antitrust analysis. Competition authorities and, to a lesser extent, courts are usually better equipped than other public institutions to analyse such competition problems, such as the

137 See on this question Barton (1997), ‘Patents and Antitrust: A Rethinking in Light of Patent Breadth and Sequential Innovation’, 65 Antitrust Law Journal 449. 138 For an overview under the German Patent Act see Rogge (2006) in Benkard (ed), Patentgesetz, § 24, para 4. 139 See eg Lemley & Weiser (2007), ‘Should Property or Liability Rules Govern Information?’, 85 Texas Law Review 783, suggesting a ‘case-specific liability rule’. But see Epstein (1997), ‘A Clear View of the Cathedral: The Dominance of Property Rules’, 106 Yale Law Journal 2091, favouring property over liability rules. 140 Reichman & Lewis (2005), ‘Using Liability Rules to Stimulate Innovation in Developing Countries: Application to Traditional Knowledge’ in Maskus & Reichman (eds), International Public Goods and Technology Transfer in a Globalized Intellectual Property Regime, pp 337–66. 141 The law and economics literature on ‘property versus liability rules’ subsequent to Calabresi and Melamed has analysed the costs of liability rules as those of (i) non-consensual taking, (ii) litigation and (iii) judicially assigned prices. See eg Kaplow & Shavell (1996), ‘Property Rules versus Liability Rules: An Economic Analysis’, 109 Harvard Law Review 713, and the literature cited by Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at fn 152. According to Ayres and Talley ((1995), ‘Solomonic Bargaining: Dividing a Legal Entitlement to Facilitate Coasean Trade’, 104 Yale Law Journal 1027, at 1036–72), liability rules have the benefit of forcing the entitlement holder to credibly signal his valuation of the entitlement. The idea is generalised in Ayres (2005), Optional Law: Real Options in the Structure of Legal Entitlements. For a critical reply see Kaplow & Shavell (1995), ‘Do Liability Rules Facilitate Bargaining? A Reply to Ayres and Talley‘, 105 Yale Law Journal 221. The ex ante effects of property and liability rules on investment are analysed by Bebchuk (2001), ‘Property Rights and Liability Rules: The Ex ante View of the Cathedral’, 100 Michigan Law Review 601. 142 See above at 2.2.1 and 4.4.1. 143 See above at 4.4.

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question of the contestability of the upstream input market. They also have more specific expertise in enforcing such rules against anti-competitive behaviour, including rules on pricing. Competition authorities may be prone to ex post bias in the sense of favouring static efficiency while neglecting the consequences for ex ante incentives to innovate. However, such bias may be limited through clear-cut rules in particular on pricing, with regard to both the liability cap and the remedy.144 For these reasons, an antitrust duty to license is the appropriate rule for preventing, or bringing to an end, the anti-competitive foreclosure of product markets in case a holder of an IP blocks the marketing of a (potential) improvement.

4.5.4

Which Antitrust Solution: Leveraging Test or Essential Facilities Rule?

Assuming that one accepts (as at least the CJEU’s jurisprudence and the vast majority of European commentators do) that a refusal to act, rather than an act itself, may constitute an abuse under exceptional circumstances, there are two candidates for a test which may capture the above situation of harm to dynamic competition through a refusal to license IP: the general leveraging test and an essential facilities inquiry. A leveraging test would ask whether the IP holder in question is dominant on the technology and/or product market and leverages his market power to a downstream or adjacent market in an anti-competitive manner.145 Such an inquiry may overlap with an IP misuse doctrine which asks whether an IP holder extends his rights ‘beyond the scope’ of the IP.146 With regard to the essential facilities type ‘new product’ test under the CJEU’s Magill and IMS jurisprudence, some commentators have expressed their preference for a leveraging test,147 raising the criticism that the CJEU’s essential facilities test would pursue ‘more an innovation than a competition policy rationale’148 and would ultimately protect competitors instead of competition.149 Such labels, however, suggest differences which do not exist: Both the leveraging and essential facilities tests have as their object the identification and prevention of foreclosure of an adjacent market, in the case of a refusal to license from the foreclosure of the market to which the IP in question is a complementary input.

144

See more generally above at 2.5.2. See above at 3.2.1.3. For an economic analysis of leveraging see Kaplow (1985), ‘Extension of Monopoly Power through Leverage’, 85 Columbia Law Review 515. For a general economic analysis of the incentives for dominant firms to engage in activities on adjacent competitive markets see Rey et al (2001), ‘The Activities of a Monopoly Firm in Adjacent Markets: Economic Consequences and Implications for Competition Policy’, available at idei.fr/doc/wp/2001/ activities2.pdf. 146 See for a more detailed analysis of patent and copyright misuse under US law below at 7.1.1.2 and 7.1.2.2. 147 Schweitzer (2007), ‘Controlling the Unilateral Exercise of Intellectual Property Rights’, EUI Working Paper, p 16; Geradin (2004), ‘Limiting the Scope of Article 82 EC: What Can the EU Learn from the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS, and Deutsche Telekom?’, 41 Common Market Law Review 1519, at 1532. 148 Schweitzer (2007), ‘Controlling the Unilateral Exercise of Intellectual Property Rights’, EUI Working Paper, p 16. With regard to a potential ‘innovation policy rationale’ of EU competition law see Ullrich (2004), ‘Expansionist Intellectual Property Protection and Reductionist Competition Rules: A TRIPS Perspective’, Journal of International Economic Law 401; Govaere (2008), ‘In Pursuit of an Innovation Policy Rationale: Stakes and Limits under Article 82 TEC’, 31 World Competition 541. 149 Geradin (2004), ‘Limiting the Scope of Article 82 EC: What Can the EU Learn from the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS, and Deutsche Telekom?’, 41 Common Market Law Review 1519, at 1532. 145

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Such foreclosure may cause harm to existing competition or may prevent the growth of competition.150 There are two differences, however, which suggest that an essential facilities type of test is better suited to preserving innovators’ ex ante incentives to innovate: First, the essential facilities doctrine, as understood in both the US and the EU, requires a dominant position on the market of the essential input (ie, in the IP case, the technology market) plus, as part of the essentiality condition, the lack of any possibility to circumvent or substitute the input (‘super-dominant position’).151 Second, the contours of the leveraging doctrine in both jurisdictions are less clear-cut than those of the essential facilities test.152 This implies greater uncertainty than under the essential facilities doctrine. Therefore, the application of an essential facilities doctrine to the scenario of a pure refusal to supply a product protected by IP is preferable to a leveraging test. Such a test will be set out in detail in chapter six.

4.6

SCENARIO 3: REFUSAL TO GIVE INTEROPERABILITY INFORMATION

Aside from the above two general scenarios, interoperability problems on some IT markets and in particular the European Microsoft case have raised the question whether antitrust should treat different types of IP or different types of protected information differently, both with regard to the substantive test and with regard to the remedy. Interoperability here is understood in the way the European Software Directive defines it. According to recitals 10 to 12 of the Directive, … the function of a computer program is to communicate and work together with other components of a computer system and with users and, for this purpose, a logical and, where appropriate, physical interconnection and interaction is required to permit all elements of software and hardware to work with other software and hardware and with users in all the ways in which they are intended to function … the parts of the program which provide for such interconnection and interaction between elements of software and hardware are generally known as ‘interfaces’ … this functional interconnection and interaction is generally known as ‘interoperability’ … such interoperability can be defined as the ability to exchange information and mutually to use the information which has been exchanged. (emphasis added)

In its Discussion Paper on the application of Article 82 EC (now Article 102 TFEU), the Directorate General for Competition indeed suggested that a refusal ‘to supply information in a way that allows it to extend its dominance from one market to another’—ie in particular interoperability information—may constitute a ‘special case’. The Discussion Paper stated that ‘[e]ven if such [interoperability] information may be considered a trade secret it may not be appropriate to apply to such refusals to supply information the same high standards for intervention as those [applying to other protected information]’.153 Without specifying exactly which rule should apply, DG Competition seemed to suggest applying a

150 Both § 2 Sherman Act and Art 102 TFEU pursue the goal not only of maintaining competition, but also of preventing hindrance of its growth. See above at 3.1 and 3.2. 151 For a more detailed analysis of these conditions see below at 6.1.1, 6.1.2 and, in the context of Art 102 TFEU, 8.2.1. 152 For an analysis of the notion of ‘leveraging’ under US and EU law see above at 3.2.1.3. 153 Discussion Paper, para 242.

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leveraging test to interoperability information instead of the essential facilties doctrine.154 Although the Commission, in its final Guidance Paper on its enforcement priorities in applying Article 82, does not suggest such a different test, the policy question remains whether interoperability information should be treated differently. The question of interoperability usually arises in the context of platform and application software. In order to develop an application which runs on and is thus fully interoperable with a particular platform (such as Microsoft’s Windows operating system), the application developer must know how the platform receives and sends information, ie the Application Programming Interfaces (APIs). Depending on their respective business model, platform developers may publish these APIs or license them freely, or keep them proprietary.155 In the latter case, interoperability information is usually—although not always—maintained as trade secrets. Under US law, patents may sometimes protect aspects of computer program interfaces,156 whereas courts have held that copyright protection does not extend to interfaces.157 If other parts of a program are protected by copyright law, however, obtaining the interface information may still only be possible by copying these copyrighted parts. US courts have held that reverse engineering which involves copying copyrighted parts may constitute fair use under certain conditions, in particular if it has the aim of discovering the functional requirements for compatibility.158 In Sega Enterprises v Accolade, the most important judgment concerning reverse engineering, the Ninth Circuit explained the rationale underlying the legality of reverse engineering in such cases, stating that the defendant’s decompilation ‘led to an increase in the number of independently designed video game programs offered for use with the Genesis console. It is precisely this growth in creative expression … that the Copyright Act was intended to promote.’159 The European Software Directive does not rule out copyright protection for interoperability information, but neither does it go as far as obliging IP holders to disclose relevant interface information that is necessary to achieve interoperability. In its Article 6, it merely provides for a limited right to reverse engineer proprietary software to obtain interoperability information, and its Article 9(1) nullifies licence terms which forbid the decompilation of computer programs to achieve interoperability.160 At the same time, the Directive explicitly allows for the application of competition rules.161

154 Discussion Paper, paras 241–42. For a critical analysis see Czapracka (2007), ‘Where Antitrust Ends and IP Begins—On the Roots of the Transatlantic Clashes’, Yale Journal of Law & Technology 44. 155 For an analysis of the incentives underlying this strategic choice see Samuelson & Scotchmer (2002), ‘The Law and Economics of Reverse Engineering’, 111 Yale Law Journal 1575, at 1615–20. 156 See Atari Games Corp v Nintendo of America, Inc, 30 USP Q2d (BNA) 1401 (ND Cal 1993). See above at 2.2.1.4. 157 See eg Computer Associates International v Altai, Inc, 982 F2d 693, at 712 (2d Cir 1992). For an analysis of the case law see Samuelson (2009), ‘Are Patents on Interfaces Impeding Interoperability?’, 93 Minnesota Law Review 1943. 158 For an overview see Samuelson & Scotchmer (2002), ‘The Law and Economics of Reverse Engineering’, 111 Yale Law Journal 1575, at 1615–20. 159 Sega Enterprises Ltd v Accolade, Inc, 977 F2d 1510, at 1523 (9th Cir 1992). 160 See also recitals 23 and 24 of the Directive. 161 Recital 26 states that ‘the provisions of this Directive are without prejudice to the application of the competition rules under Articles 85 and 86 of the Treaty [now Articles 101 and 102 TFEU] if a dominant supplier refuses to make information available which is necessary for interoperability as defined in this Directive’. For an analysis of the relationship between copyright and competition law with regard to software and interoperability aspects see van Rooijen (2010), The Software Interface between Copyright and Competition Law.

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The matter at issue is whether a refusal to supply interoperability information protected by IP requires a stricter antitrust treatment than other types of protected information or works, as the DG Competition Discussion Paper implied, or, more generally, whether interoperability information merits less protection than other types of information or works. There are two potential rationales for less favourable treatment: first, the special characteristics of interoperability information and of underlying markets (4.6.1), and second, their protection through trade secrecy (4.6.2).

4.6.1

Gatekeepers on Markets with Network Effects

Interoperability information and software markets may have characteristics which distinguish them from other protected information and markets:162 First, as has often been noted, software markets may be ‘winner-take-most’ markets. In these markets, the dominant position of a systems provider may result from and be shielded by high switching costs for customers, who may become ‘locked-in’,163 as well as by indirect network effects. Network effects ‘arise where current users of a product gain when additional users adopt it’.164 Direct network effects ‘arise if each user’s payoff from the adoption of a good, and his incentive to adopt it, increase as more others adopt it’, ie if adoption by different users is complementary.165 Indirect network effects arise when wider adoption benefits adopters by changing the behaviour of other actors, ie sellers of that product or sellers or buyers of a related product. In particular, indirect network effects result from the fact that widespread adoption improves the supply of that product or of a complement, ie when a bigger market benefits buyers.166 In operating systems markets, such indirect network effects arise in the form of an ‘applications barrier to entry’.167 In such markets, the dominant firm’s

162 For an overview of the economic parameters that characterise information technology markets see Varian et al (2004), The Economics of Information Technology. 163 Switching costs arise when a consumer makes investments specific to buying from a firm, thereby creating economies of scope between buying different products or products at different dates from that firm. See Farrell & Klemperer (2007), ‘Coordination and Lock-In: Competition with Switching Costs and Network Effects’ in Armstrong & Porter (eds), Handbook of Industrial Organization, vol 3, ch 31, at 1.1. See also Katz & Shapiro (1985), ‘Network Externalities, Competition, and Compatibility’, 75 American Economic Review 424. For an analysis with regard to the Microsoft case see Le (2004), ‘Microsoft Europe and Switching Costs’, 27 World Competition 567. 164 Klemperer (2008), ‘Network Effects’ in Durlauf & Blume (eds), New Palgrave Dictionary of Economics, pp 915–17, at p 915. 165 Ibid. 166 Ibid. Network effects are positive externalities in the sense of real efficiencies of coordination if they are not internalised and not just pecuniary (Farrell & Klemperer (2007), ‘Coordination and Lock-In: Competition with Switching Costs and Network Effects’ in Armstrong & Porter (eds), Handbook of Industrial Organization, vol 3, ch 31, at 3.2.1). From the vast literature on (competition policy vis-à-vis) network effects see Economides (1996), ‘The Economics of Networks’, 14 International Journal of Industrial Organization 673; Katz & Shapiro (1994), ‘Systems Competition and Network Effects’, 8 Journal of Economic Perspectives 93; Evans & Schmalensee (1996), ‘A Guide to the Antitrust Economics of Networks’, 10 Antitrust 36. Rubinfeld (1998), ‘Antitrust Enforcement in Dynamic Network Industries’, 43 Antitrust Bulletin 859; Liebowitz & Margolis (1999), Winners, Losers, and Microsoft: Competition and Antitrust in High Technology. For a collection of literature on the economics of networks see www. stern.nyu.edu/networks/site.html. 167 The term was presumably first used by Franklin M Fisher in his testimony in United States v Microsoft (see Direct testimony, filed 14 October 1998, available at www.usdoj.gov/atr/cases/f2000/2057.pdf) and then used by Judge Jackson in his Microsoft judgment.

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position is based on network effects, and IP may serve to provide additional protection of this position.168 Second, these characteristics may suggest an ‘open early, closed late’ strategy169 in the sense of supplying applications developers with interoperability information at the early stages, while lowering interoperability once the systems market has ‘tipped’.170 Thus, third, interoperability information may have a high strategic value, which may be independent of its innovative value. Once the systems program has become a de facto standard, interoperability information may acquire a gatekeeping function.171 Fourth, by denying supply of interoperability information, the dominant firm on the systems market may be able to shut out competitors from adjacent complementary markets whose products depend on interoperability with its dominant product. The ability to foreclose adjacent markets (and thus the question of indispensability of the input within the essential facilities test), amongst other things, depends on the feasibility and lawfulness of reverse engineering. Fifth, the dominant firm on the systems market may go beyond ‘simply’ refusing to supply interoperability information and adopt additional technical or contractual strategies in order to degrade interoperability and thus to leverage its power in adjacent complementary markets. The European Microsoft case may serve as paradigm example, as all the above elements were present: the Commission, successfully, argued that Microsoft leveraged its market power from the primary market for PC operating systems into the secondary, complementary market for work group server operating systems by refusing to supply the necessary interoperability information to rival vendors of work group server operating systems. Specifically, Microsoft had refused to provide the specifications172 for the protocols173 implemented in Windows work group server operating systems which were used by Windows work group servers to deliver certain services to Windows work group networks.174 The Commission, as confirmed by the CFI, came to the conclusion that Microsoft has a dominant position on the client PC operating systems market, due to, amongst other things, the high barrier to entry as a consequence of the indirect network effects at work: The overall utility that a consumer derives from a client PC operating system therefore depends on the applications he can use on it and that he expects to be able to use on it in the future. Conversely, Independent Software Vendors … write applications to the client PC operating systems that are most popular among users.In other words, the more popular an operating system is, the more

168 Church & Ware (1998), ‘Network Industries, Intellectual Property Rights and Competition Policy’ in Anderson & Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, pp 227–85. 169 See above at 4.1.5. 170 For an analysis of the positive feedback mechanism underlying tipping see Farrell & Klemperer (2007), ‘Coordination and Lock-In: Competition with Switching Costs and Network Effects’ in Armstrong & Porter (eds), Handbook of Industrial Organization, vol 3, ch 31, at 3.5.3. For an analysis of the factors relevant for such ‘tipping’ see Katz & Shapiro (1986), ‘Technology Adoption in the Presence of Network Externalities’, 94 Journal of Political Economy 822. 171 See Piraino (2000), ‘Identifying Monopolists’ Illegal Conduct under the Sherman Act’, 75 NYU Law Review 809, at 888–89, quoting a Microsoft manager’s internal email, which stated: ‘[T]o control the APIs is to control the industry.’ 172 A specification is a description of what the software must achieve. It is to be distinguished from implementation, which relates to the actual code running on the computer. 173 In this context, protocols are rules of interconnection and interaction between various instances of Windows Work Group Server Operating Systems and Windows Client PC Operating Systems running on different computers in a Windows Work Group Network. 174 See Case COMP/C-3/27.792 Microsoft, Decision of 24 March 2004, in particular paras 185–90, 560.

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applications will be written to it and the more applications are written to an operating system, the more popular it will be among users.175

Microsoft also disrupted levels of supply with regard to interoperability information over time.176 Reverse engineering of the interoperability information would have proved too costly for competitors. Finally, in addition to the ‘simple’ refusal to supply the APIs, Microsoft used contractual and technical means to reduce interoperability and thus to foreclose competitors from the complementary market for work group server operating systems. One example the Commission gave of this conduct was in the field of security services (eg authentication and authorisation). These services in Windows 2000 were based on a public protocol. In implementing this protocol for Windows 2000, however, Microsoft added proprietary extensions which created interoperability problems. In order avoid these problems, a network that wanted to use Windows 2000 on any of its servers needed to run Windows on all servers.177 As the Microsoft case shows, denying interoperability information—here the interfaces of its Windows PC operating system—may hinder follow-on innovation and thus impede dynamic competition.178 The above characteristics of interoperability information and of software markets and the ensuing strategic options for firms, however, have triggered a discussion as to whether a refusal to supply interoperability information requires different treatment from the application of the standard essential facilities doctrine for IP. The different proposals partially mirror the general policy discussion on the relationship between IP and antitrust.179 4.6.1.1 Approach I: No IP Protection for Interoperability Information Stressing the potential foreclosure effect, several commentators have argued that IP in interfaces may be unnecessary and detrimental if platforms and applications are protected. On this view, IP in interfaces may only allow developers to leverage market power such that competition would be unnecessarily stifled.180 Such an approach, however, is not convincing: First, the argument that IP protection for interfaces may be unnecessary rests on the assumption that such interfaces are developed as a ‘byproduct’ of platforms and applications. But there may be situations where the development of interoperability information

175 Ibid, para 449. See also para 450: ‘This mechanism … more generally applies to platform software, that is to say, software that exhibits APIs that can be used by applications. ISVs will develop to the platform that enables them to reach the highest possible number of users. The higher the number of users of a given platform, the greater the number of ISVs that write to that platform. In turn, there will be a greater number of applications available for the platform, and the utility derived by computer users who deploy this platform will be higher.’ 176 Ibid, paras 578–84. 177 For an analysis of the interoperability issue in the case see Kühn & van Reenen (2009), ‘Interoperability and Market Foreclosure in the European Microsoft Case’ in Lyons (ed), Cases in European Competition Policy: The Economic Analysis, ch 2. 178 For the analysis of the harm see the Microsoft Decision, paras 693–701. 179 See ch 2, in particular at 2.3. For a more detailed review of the discussion see eg Band & Katoh (1995), Interfaces on Trial: Intellectual Property and Interoperability in the Global Software Industry. 180 Samuelson & Scotchmer (2002), ‘The Law and Economics of Reverse Engineering’, 111 Yale Law Journal 1575, at fn 214; see also Church & Ware (1998), ‘Network Industries, Intellectual Property Rights and Competition Policy’ in Anderson & Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, pp 227–85; Lemley & McGowan (1998), ‘Legal Implications of Network Economic Effects’, 86 California Law Review 479.

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is not just a byproduct and/or may be carried out more efficiently by a firm other than the systems developer. In these situations IP protection could be necessary, and its absence could prevent specialisation in interoperability solutions. Second, IP in interfaces may provide for incentives to improve the quality of a system as a whole.181 Third, and most importantly, leveraging only raises the risk of market-wide foreclosure effects in the case of market power. There may be scenarios, however, where, even with network effects, several systems providers compete on the platform market and thus hold a market position which is heavily constrained, or even no market power at all. Therefore, completely denying IP protection for interoperability information would be an over-broad solution to the underlying problem. 4.6.1.2 Approach II: Essential Facilities Rule for Tangible Property Another potential approach would be to apply the stricter European essential facilities doctrine for tangible products to interoperability information, ie to drop the ‘new product’ condition.182 The European Commission’s Discussion Paper on Article 82 EC (now Article 102 TFEU) might be interpreted as suggesting such an approach, which would also attempt to prevent static harm on adjacent markets whose products depend on interoperability with the dominant platform. Out of the many possible modes of competition in such interdependent markets, one may carve out three types: (i) competition on complementary markets, including undifferentiated competition; (ii) competition between products on complementary markets which are differentiated through innovative and ‘new’ features; and (iii) inter-systems competition without competition between different applications for one system. Identifying potential harm to competition depends on which market structure the underlying competition policy favours and which structure is considered feasible and efficient. In the latter sense, as Priest has put it, practices should be evaluated ‘as to whether they are network expanding in single network contexts or competition expanding where competing networks can survive. The ultimate economic question is whether there is a net increase in welfare from expansion of the network versus the reduction in alternative output.’183 Applying the essential facilities rule to tangible products would amount to an attempt to impose or restore the first type of competition, ie competition on complementary (downstream) markets.184

181 Farrell & Katz (1998), ‘The Effects of Antitrust and Intellectual Property Law on Compatibility and Innovation’, 43 Antitrust Bulletin 609. 182 The above characteristics of software markets have led to a discussion of whether these markets need special antitrust scrutiny (see eg Muris (1998), ‘Is Heightened Antitrust Scrutiny Appropriate for Software Markets?’ in Eisenach & Lenard (eds), Competition, Innovation, and the Microsoft Monopoly: Antitrust in the Digital Marketplace, pp 83–92), with rapid technological innovation potentially eroding short-term barriers to entry based on network effects and switching costs. For an analysis of how far the standard antitrust assessment has to be adapted with regard to markets with a high degree of innovation see eg Dreher (2009), ‘Die Kontrolle des Wettbewerbs in Innovationsmärkten’, Journal of Competition Law (ZWeR) 149. 183 Priest (2007), ‘Rethinking Antitrust in an Age of Network Industries’, John M Olin Center for Studies in Law, Economics, and Public Policy, Research Paper No 352, p 41. 184 For an analysis of different modes of competition in the software and internet context see Farrell & Weiser (2003), ‘Modularity, Vertical Integration and Open Access Policies: Towards a Convergence of Antitrust and Regulation in The Internet Age’, 17 Harvard Journal of Law & Technology 85; Weiser (2003), ‘The Internet, Innovation, and Intellectual Property Policy’, 103 Columbia Law Review 534.

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The structure of software markets in particular depends on whether interfaces are open or closed and whether platform owners supply their own applications (‘integrated systems’). Open interfaces tend to lead to compatible and unintegrated systems, whereas closed interfaces often lead to incompatible and integrated systems.185 The economic literature on the efficiency of different market structures, in particular inter-systems competition versus component competition (ie, on software markets, competition between different applications for one system), is (necessarily) inconclusive.186 If one acknowledges that IP protection may be necessary to provide incentives to create and/or improve interoperability information, the same line of reasoning applies that holds for any other information protected by IP, ie a duty to supply information may reduce such incentives. In order to avoid an inconsistent antitrust regime, interoperability information should thus be treated in the same way as any other potentially innovative information, ie a duty to supply should only arise in cases of harm to innovation competition.187 The same argument also runs against a third way of construing a stricter antitrust regime for interoperability information, which would be to impose liability and, in turn, to set the licensing fee as the remedy at a lower level than for other IP in order to stimulate competition.188 4.6.1.3 Approach III: No Distinct Treatment of Interoperability Information For the above reasons, interoperability information should thus be treated no differently from other information: if it meets the conditions for protection by IP law, an antitrust duty to deal should only arise in the case of harm to dynamic competition.189 In addition, conduct which goes beyond ‘simply’ refusing to supply interoperability information and degrades interoperability to foreclose competitors from complementary markets may constitute illegal conduct separately from the refusal. Such leveraging would fall foul of § 2 Sherman Act and Article 102 TFEU if the degrading of interoperability is solely intended to foreclose competitors from complementary markets and cannot be justified by reasoning based on efficiencies.

4.6.2

Protection through Trade Secrecy

Aside from the characteristics of interoperability information and the nature of software markets, the second potential rationale for stricter antitrust treatment of interoperability information is based on trade secrecy protection: The Commission’s statement in its Discussion Paper can be understood as suggesting that trade secrets in general are socially less beneficial and thus ‘weaker’ IP. Accordingly, they should be subject to stricter antitrust

185 Samuelson & Scotchmer (2002), ‘The Law and Economics of Reverse Engineering’, 111 Yale Law Journal 1575, at 1623–24. 186 See eg Farrell et al (1998), ‘The Vertical Organization of Industry: Systems Competition versus Component Competition’, 7 Journal of Economics & Management Strategy 143; Church & Gandal (1992), ‘Integration, Complementary Products, and Variety’, 1 Journal of Economics & Management Strategy 651. 187 See above at 2.5.3 and 2.7. 188 For a more detailed discussion of different liability and royalty levels see ch 5. 189 In the same vein see Czapracka (2007), ‘Where Antitrust Ends and IP Begins—On the Roots of the Transatlantic Clashes’, Yale Journal of Law & Technology 44, at 106.

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treatment.190 Indeed, trade secret laws do not provide a threshold for protection that would be comparable to patent laws. Furthermore, its very existence is based on non-disclosure, ie non-diffusion of the potentially beneficial information, whereas patent law requires disclosure of a protected invention.191 If reverse engineering is too costly, this may lead to interoperability information with low innovative value being protected for a theoretically infinite period of time. Although there may be such cases of trade secrets protecting information with low innovative value, there should be no such general presumption. Firms nowadays opt for trade secrecy for other reasons than to circumvent the inventive step requirement of patent law. In some cases, trade secrecy may be necessary to provide for the ex ante incentive to innovate. Furthermore, when analysing the public costs of trade secrecy, one has to take into account the fact that trade secrecy does not provide the set of exclusive rights that are granted by patent and copyright laws. But even if one acknowledges that the costs of trade secrecy may more than outweigh its benefits in some cases, recalibrating policy levers by means of trade secrecy reform may be preferable to antitrust intervention, as chapter two argued in general. Competition policy should instead focus on conduct which may cause harm to dynamic competition, irrespective of the type of underlying IP.192

4.7

SCENARIO 4: REFUSAL TO LICENSE IP WHICH PROTECTS A STANDARD

Some US193 and European cases,194 in particular the European case of IMS Health, have raised the question whether IP which at least partially covers standards merits specific antitrust rules.195 As with interoperability information, the strategic value of such IP might be higher than its innovative value due to indirect network effects. Standards may be adopted through an institutionalised process (‘de jure’ standards),196 for instance by standardsetting organisations,197 or may emerge on markets as a de facto common denominator.198 In the first case, refusals to license may serve to ‘exploit’ previous unilateral conduct (in

190

See above at 4.6. See above at 2.2.1.2. See also Drexl (2009), ‘Die Verweigerung der Offenlegung von Unternehmensgeheimnissen als Missbrauch marktbeherrschender Stellung’ in Hilty et al (eds), Schutz von Kreativität und Wettbewerb— Festschrift Loewenheim, pp 437–55. 192 See above at 2.5.2. 193 See below at 7.3.1.2. 194 See below at 8.1.1.3 and 8.2. 195 For an economic analysis of patents covering standards see Varian et al (2004), The Economics of Information Technology, pp 80–82. 196 For an analysis of such collaborative standard-setting under US patent and antitrust law see the 2007 DoJ and FTC 2007 Report on Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, ch 2. For an analysis under EU competition law see Barthelmeß & Gauß (2010), ‘Die Lizensierung standardessentieller Patente im Kontext branchenweit vereinbarter Standards unter dem Aspekt des Art 101 AEUV’, 60 Wirtschaft und Wettbewerb 626; Fuchs (2009), ‘Entwicklung und Praktizierung von Industriestandards im Spannungsfeld von Immaterialgüter- und Kartellrecht’ in Lange et al (eds), Geistiges Eigentum und Wettbewerb, pp 147–76. 197 For an overview and analysis of the role of standard-setting organisations in mediating the use of IP rights see Lemley (2002), ‘Intellectual Property Rights and Standard-Setting Organizations’, 90 California Law Review 1889. 198 Under specific circumstances, interoperability with a specific software operating system may be considered as one example of a de facto standard. 191

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particular manipulation) or coordinated conduct which has influenced the standardsetting process in an anti-competitive way. In such cases, the standard concerned may not have been adopted ‘but for’ this previous conduct.199 Here, the remedy may consist of, eg, free licensing. Also without such previous conduct, both de jure and de facto standards may be used in an anti-competitive way to foreclose rivals.200 For example, in the IMS Health case, the holder of an IP right was able to prevent rivals using (in a wide sense) the de facto market standard through the exercise of his IP right. It is not surprising that many of these cases concerned databases which were allegedly protected by copyright law. The anomaly of protection for databases as functional texts, combined with the low threshold for protection and their potentially low innovative value,201 has led to the search for ‘correction’ through, amongst other things, antitrust. In many of those cases raising competition concerns, a rigorous interpretation of the conditions for protection under IP laws in the first step and, if necessary, a general legislative change of these conditions would be preferable to antitrust intervention.202 If there is a need for antitrust rules to be enforced, it is neither necessary nor reasonable to apply stricter antitrust rules to IP which (partially) covers a standard. As with the potential specificities of software markets such as network effects and dominant operating systems, the specific economic parameters of markets with standards in general can be taken into account under the existing antitrust framework. Particularly in the case of a refusal to license IP which covers a standard, the specific features of such a standard can be addressed within an essential facilities rule. For example, potential indirect network effects and switching costs of customers have to be taken into account when assessing whether the standard raises a barrier to entry.

4.8

SCENARIO 5: REFUSAL TO SUPPLY PRODUCTS ON THE BASIS OF IP

The previous sections dealt with the situation where there is a refusal to license. A second basic scenario involving refusals to deal based on IP is where a vertically integrated holder of an IP is present on the product market and refuses to supply an input product to a competitor on a downstream or adjacent market, while the input product is the subject matter of the patent or reproduces a copyrighted work. A refusal to sell products on the basis of IP which protects (parts of) the product typically may foreclose competitors not only from the product market, but also from offering, on downstream or adjacent markets, goods or services which are complementary to the product incorporating the IP. Cases which have arisen both under § 2 Sherman Act and Article 102 TFEU typically involve scenarios where the producer of a durable good also produces spare parts. Based on IP rights, the producer may refuse to supply such parts to independent repairers as well as prevent them from

199

See above at 4.1.6. In the case of de jure standards, standardisation agreements have to comply with the competition rules on horizontal agreements. With regard to Art 101 TFEU see the Commission’s 2010 draft Guidelines on the applicability of Article 101 of the Treaty on the Functioning of the European Union to horizontal cooperation agreements, paras 252–323. 201 See above at 2.2.1.5. 202 See also in the context of the German IMS Health litigation below at 8.1.2.1. 200

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producing or selling such parts, thereby monopolising the service aftermarket.203 Such a refusal may complement bundling or tying strategies of the IP holder vis-à-vis the customer on downstream or adjacent markets (eg only offering the spare part together with the repair service). If such a refusal complements a bundling or tying strategy, the latter should be subject to a specific antitrust test to prevent potential horizontal foreclosure.204 In the standard spare part cases, protection of the parts usually causes harm to static competition.205 Such harm may be reduced in a less costly way through reform of the underlying IP protection than through case-by-case application of competition law. Therefore, the proposal of the European Commission to end design protection for car spare parts and other machinery components through a directive presents a better way to open up competition for such parts than the use of competition policy.206 Outside the spare parts context, again the question arises as to whether a refusal to supply a product based on IP should be subject to a general leveraging test or an essential facilities rule.207 Chapter two argued that competition law should, in principle, accept the choice that IP laws grant to IP holders between reaping their profit from the technology (through licensing) or from the product market (through sale of the invention or distribution of the work). This choice should be based solely on the efficiency of the IP holder in producing and selling the product. In that sense, antitrust should respect the incentive function of IP in the same way for all exclusive IP rights and thus should not discriminate between different exclusive IP rights.208 Applying a stricter test to a refusal to supply a product based on IP than to a refusal to license the respective IP would distort this choice. This argument also holds with regard to the question of which type of essential facilities test should apply to such a scenario: The first candidate is the essential facilities test for IP, which aims at preventing harm to dynamic competition, but respects the incentive function of IP. The second would be the ‘standard’ essential facilities test, which applies to tangible property such as networks209 (ie in the EU the test using the Bronner conditions), which (also) aims at fostering static competition on downstream or adjacent product markets.210 In such cases, applying the essential facilities test for tangible property and thus forcing supply of the product while at the same time not forcing licensing of the underlying IP would distort the IP holder’s choice between licensing and selling the product. Therefore, the same 203 In such cases, the assessment of market power crucially depends on the abstract question of how to define aftermarkets. This is a matter of discussion between, on the one hand, proponents of a narrow aftermarket for the spare parts and service of one brand and, on the other hand, proponents of a theory of wider systems competition. For an analysis of the discussion see MacKie-Mason & Metzler (2004), ‘Links between Markets and Aftermarkets: Kodak (1997)’ in Kwoka & White (eds), The Antitrust Revolution, pp 429–52. 204 For an overview of horizontal foreclosure see Rey & Tirole (2003), ‘A Primer on Foreclosure’, pp 45–61. 205 Whether the producer of the spare parts has market power depends on whether the market for the parts constitutes a separate relevant aftermarket. Such power, however, may be mitigated by interbrand competition on the market for the durable good. 206 See the Commission’s Proposal for a Directive of the European Parliament and of the Council amending Directive 98/71/EC on the legal protection of designs (SEC(2004) 1097). Under the current Directive (Art 7(2)) on the legal protection of designs, only so-called ‘must fit’ spare parts are excluded from protection. The Proposal suggests ending protection for ‘must match’ spare parts (see Art 14 of the current Directive). For an analysis see Blanken (2008), Wettbewerbsrechtliche und immaterialgüterrechtliche Probleme des Zubehör- und Ersatzteilgeschäfts. 207 See similarly above at 4.5.4. 208 See the principle as outlined above at 2.6. 209 In the case of networks, the relevant upstream market is a market for the service of supplying distribution or connection via the network. 210 For a more detailed specification of the essential facilities test for IP see below, ch 6.

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antitrust test should apply to refusals to license and to refusals to sell a product which are based on exclusive IP rights, ie only in cases of harm to dynamic competition.

4.9

CONCLUSION

A unilateral refusal to deal based on IP may cause harm to both static and dynamic competition. The focus here has been on harm to dynamic competition. Such harm may materialise on innovation, technology and product markets. To prevent the foreclosure of research into follow-on innovation or improvements, IP solutions such as research exemptions and compulsory research licences are superior to antitrust rules. The main reason is that innovation market analysis is inherently difficult. A competition rule, however, is preferable to an IP solution to avert harm to dynamic competition as a result of the foreclosure of technology and product markets. To avert such harm and, at the same time, to keep up incentives to invest in initial innovations, an essential facilities type of rule with a (positive) duty to deal in the case of liability is superior to a leveraging test. In order to avoid distorting the IP holder’s decision as to how to make best use of his IP and thus preserve his incentives to innovate as much as possible, the essential facilities test as such should neither distinguish between different types of protected information nor between different types of IP, nor between the exclusive rights of licensing and selling. Such an essential facilities rule would also alter the bargaining game between initial innovators and improvers. An initial innovator who has monopoly power on the technology market would have to bargain in the shadow of potential antitrust liability. If that monopolist’s conduct goes beyond a mere refusal to supply, the additional behaviour may be subject to a conduct-specific or general leveraging test.

5 The Licensing Fee: Determining Liability and the Remedy No Court should impose a duty to deal that it cannot explain or adequately and reasonably supervise. The problem should be deemed irremediable by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency. Phillip E Areeda, as quoted affirmatively by Justice Scalia in the Supreme Court’s Trinko judgment1 There is a remedy for all things but death … Miguel de Cervantes, Don Quixote (1615), Part 2, Book 5, Chapter 10, as quoted by Judge KollarKotelly in the Memorandum Opinion on her Final Decree in the US Microsoft case2

Before being able to specify a rule which addresses the scenarios analysed in chapter four, this chapter must provide a final building block for such a rule: a discussion of how the remedy in duty to license cases should be determined substantively and procedurally. Importantly, in the case of liability for a constructive refusal to license (as opposed to compulsory licensing exclusively as a remedy), the question of how to determine the royalty arises not only with regard to the remedy, but also when determining the legality of a constructive refusal. From a general legal point of view, the questions of liability and the determination of the remedy must be kept strictly separate. With regard to the remedy, competition authorities and courts usually have a margin of discretion. Under § 2 Sherman Act, [a] trial court … has the duty to compel action … that will, so far as practicable, cure the ill effects of the illegal conduct, and assure public freedom from its continuance. Such action is not limited to prohibition of the proven means by which the evil was accomplished, but may range broadly through practices connected with acts actually found to be illegal. Acts entirely proper when viewed alone may be prohibited. (emphasis added)3

Under Article 7(1) of Regulation 1/2003, the European Commission has the power to impose on the undertaking(s) concerned ‘any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end’. According to the jurisprudence of the CJEU, the remedy may have

1 Areeda (1989), ‘Essential Facilities: An Epithet in Need of Limiting Principles’, 58 Antitrust Law Journal 841, at 853; quoted in Verizon v Trinko, 124 S Ct 872, at 882. 2 Memorandum Opinion of 1 November 2002 in State of New York et al v Microsoft Corp, at p 1. The legal documents relevant in the US Microsoft case are available at www.usdoj.gov/atr/cases/ms_index.htm and cyber. law.harvard.edu/msdoj/. 3 United States v Gypsum Co, 340 US 76, at 88–89 (1950). See also Kovacic (1999), ‘Designing Antitrust Remedies for Dominant Firm Misconduct’, 31 Connecticut Law Review 1285.

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as its objective not only ending the infringement, but also preventing its repetition and eliminating its consequences.4 Furthermore, the principle of proportionality means that the burden imposed on undertakings in order to bring an infringement of competition law to an end must not exceed what is appropriate and necessary to attain the objective sought, namely re-establishment of compliance with the rules infringed. (emphasis added)5

In both the US and the EU, the remedy may thus aim at establishing the situation that would exist but for the illegal conduct. This ‘but for’ principle may lead to different access prices for different types of anti-competitive conduct. In the case of patent ambush, for example, the conduct is illegal as such and the standard may not have been chosen but for the deceptive behaviour during the standard-setting. Therefore, the remedy may consist of free licensing. In the case of refusals to deal, the illegality of a constructive refusal starts beyond the maximum legitimate price. This liability price cap depends on the harm the respective rule intends to prevent: The essential facilities doctrine for tangible assets, as currently applied under Article 102 TFEU, has as its objective the prevention of foreclosure which leads to both static and dynamic distortions. The essential facilities test for intellectual property, as suggested here, should aim solely at preventing foreclosure that would harm dynamic competition. Importantly, to establish the situation that would exist but for the illegal conduct, the remedy—including the appropriate access price—may need to go beyond mirroring the illegal conduct.6 Before exploring the relationship between liability and the remedy price further,7 however, the opening assumption for the analysis should be that the remedy in refusal to license cases should consist of a licence against a royalty which should be the same as the liability price cap. As the following analysis of US and EU approaches to refusal to license cases will show,8 the jurisprudence and the literature in both jurisdictions on the question of whether there is and should be liability is relatively well developed. By contrast, analysis of the remedy question remains relatively underdeveloped.9 The current practice of competition authorities and courts is usually to mandate only general prescriptions such as ‘reasonable and non-discriminatory’ access (RAND) or ‘fair, reasonable and non-discriminatory’ (FRAND) terms.10 Given the problem of not having sufficient information to determine the remedy themselves, such practices may be understandable. But from the perspective of ex ante legal certainty, such vague principles are unsatisfactory: If a firm anticipates that it may become dominant on a technology market, the maximum licensing fee as price cap for its potential

4

Case C-62/86, AKZO Chemie BV v Commission [1991] ECR I-3359, para 155. Joined Cases C-241/91 P and C-242/91 P, Raidió Teilifís Éireann and Independent Television Publications Ltd (RTÉ & ITP) v Commission [1995] ECR I-743, para 93. 6 See Hellström et al (2009), ‘Remedies in European Antitrust Law’, 76 Antitrust Law Journal 43, at 59. 7 See below at 5.2. 8 See below, chs 7 and 8. 9 See eg the 2008 DoJ Report Competition and Monopoly: Single-Firm Conduct under Section 2 of the Sherman Act, p 143 (‘Notwithstanding their importance, the study of remedies has been somewhat neglected’) and footnotes 2 and 3 of ch 9 (presenting quotations of panellists from the Sherman Act § 2 Joint Hearing). For exceptions in the literature see eg the articles that arose from the ABA symposium on ‘The End of the Microsoft Antitrust Case?’, printed in (2008) 75(3) Antitrust Law Journal. 10 For an overview of the literature on and an analysis of FRAND terms see Layne-Farrar et al (2007), ‘Pricing Patents for Licensing in Standard Setting Organizations: Making Sense of FRAND Commitments’, 74 Antitrust Law Journal 671. 5

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liability and for the remedy may be relevant for its ex ante investment decision. In order to avoid unnecessarily chilling incentives to innovate, at least, guidance with regard to the royalty is important. Given the problems that arise when antitrust authorities and courts act as price regulators, it is also understandable that they usually mandate the parties to agree on the terms on a voluntary basis first before stepping in themselves. Again, as the ongoing proceedings in the Microsoft case both in the US and in the EU show,11 however, vague guiding principles open up space for strategic manoeuvring by the dominant firm. To prevent circumvention, the decision on the remedy in general should both specify the measure to be taken by the undertaking concerned and impose the objective of the measure.12 Specifically with regard to both the substantive (5.1–5.3) and the procedural (5.4) questions of how to determine the maximum licence fee, certainty is necessary for the actors on the markets.

5.1

THE ROYALTY

The most controversial debate in refusal to license cases centres on the question of the right level of the royalty. The remedy suggested in such cases ranges from royalty-free access to allowing the firm on which the remedy is imposed to charge the maximum price the market can bear. In other regulatory contexts, several basic intermediate approaches to the question of access pricing have been developed, including cost-based pricing, same firm price comparison, market-based pricing, profit comparison, and the efficient component pricing rule (ECPR). All of these approaches merit a brief analysis as to whether they can be likened to refusal to license cases13 and provide the best solution to both the liability and the remedy price question. This solution must, on the one hand, ensure that sufficiently efficient competitors are not foreclosed from the market in relation to which the product in question is an indispensable input. On the other hand, the liability price cap and the remedy should not unnecessarily decrease incentives to innovate and thus approximate efficient competitors’ maximum ability to pay.14

5.1.1

No Royalty

In the EU, royalty-free access has been mandated as a remedy in cases concerning interoperability and compatibility information where disclosure does not touch upon IP.15 In the

11

See below at 7.4.2 and 8.3. Hellström et al (2009), ‘Remedies in European Antitrust Law’, 76 Antitrust Law Journal 43, at 60–61. 13 For a comparative analysis of different approaches to the royalty question in the context of standards embodied in IPRs see Dolmans (2002), ‘Standards for Standards’, 26 Fordham International Law Journal 163. For a comparative analysis of different approaches to the pricing issue with regard to access to both tangible and intellectual property see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 726–31. For a general overview of remedies in monopolisation and abuse of dominance cases see OECD (2007), Remedies and Sanctions in Abuse of Dominance Cases, Report DAF/COMP(2006)19. 14 See above at 4.5.2. 15 See eg Case DG IV/31043, Tetra Pak II, Commission Decision of 24 July 1991, OJ 1992 L72/1, para 176 (decision under Art 86 EEC (now Art 102 TFEU) obliging Tetra Pak to inform its customers of the standards and specifications packaging cartons must meet in order to be used on its machines); Case COMP/M.2861—Siemens/ 12

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US, free licensing has been ordered in the context of divestiture remedies in merger control proceedings.16 So far, however, there has been no decision or judgment under § 2 Sherman Act or Article 102 TFEU which mandates a royalty-free licence on the basis of liability for a refusal to license. This reluctance to adopt such an approach is well justified, since it has the obvious drawback of potentially eliminating incentives to innovate. Royalty-free access is thus appropriate (both as a ‘liability cap’ and as a remedy) only in cases where, in a ‘but for’ world, the licensees would not have needed a licence for the specific IP. This could be the case in fraud scenarios such as patent ambush.17

5.1.2

Cost-Based Pricing

Cost-based pricing has been the dominant methodology used to regulate access to infrastructure and utility networks.18 Most commentators, however, agree that cost-based pricing cannot and should not be applied for IP in the context of antitrust remedies:19 marginal cost pricing would diminish or even abolish ex ante incentives to innovate since the marginal cost of production on technology markets is often zero.20 Historical total fixed and variable costs of development, production and marketing of technology would be difficult to observe and calculate in practice, even more so in an unregulated environment.21 To overcome the practical difficulties involved in calculating actual cost, replacement or reproduction costs have been suggested and used as alternative bases for tangible assets. According to most commentators, however, all cost-based pricing methodologies, including those currently used in regulatory contexts (such as long-run incremental costs (LRIC) in the telecommunications sector22), ignore two fundamental parameters for the value of IP: first, the value of ‘sparks of imagination’, which may represent the essence of the innovation,23 and, second, risk which may be particularly high in sectors relying on expensive R&D.24 The first argument, however, must be relativised: there may be nonmonetary incentives which would not need to be taken into account under a cost-based

Dräger, Commission Decision of 30 April 2003, para 36 of the remedies (merger remedy obliging Siemens to disclose interface information without licence fee). 16 See eg US v Amsted Industries Inc, modified final judgment of 15 July 2008 of the US District Court for the District of Columbia, available at www.usdoj.gov/atr/cases/f235100/235127.htm. 17 However, in the US Rambus case, which concerned patent ambush, the majority of Commissioners rejected royalty-free licensing as part of the remedy. See in more detail below at 7.4.3. 18 For a theoretical treatment of such pricing see Laffont & Tirole (1993), A Theory of Incentives in Procurement and Regulation, ch 1. 19 For an overview of the use of the cost approach as well as the market and the profit approaches to IP in different contexts see OECD (2006), ‘Valuation and Exploitation of Intellectual Property’, STI Working Paper 2006/5, pp 26–29. 20 See above at 2.1.1. 21 Dolmans (2002), ‘Standards for Standards’, 26 Fordham International Law Journal 163, at 201. 22 For an explanation of LRIC and other pricing methodologies used in the telecommunications context see OECD (2004), Access Pricing in Telecommunications. 23 Dolmans (2002), ‘Standards for Standards’, 26 Fordham International Law Journal 163, at 202. For an overview of the general methods of valuation of IP see Smith & Parr (2005), Intellectual Property: Valuation, Exploitation, and Infringement Damages. 24 See eg O’Donoghue & Padilla (2006), The Law & Economics of Article 82 EC, pp 727–28.

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methodology.25 And if monetary incentives are relevant, one might imagine that the costs of labour on the innovation market could be accounted for. What is true, however, is that any pricing methodology must indeed reflect the ex ante risk of an investment in innovation. A cost-based approach that took into account such risk would depend on competition authorities and courts having knowledge regarding the ex ante probability of success in R&D. Such data, however, is usually not available. Due to this lack of data on the risk of failure, a cost-based approach would be in danger of reducing the ex ante incentives of a basic innovator below the necessary minimum threshold.26

5.1.3

Same Firm Price Comparison, Market-Based Pricing, and Profit Comparison

Particularly in exploitative abuse cases under Article 102 TFEU and national competition laws, several methods have been developed and used to ‘mimic’ competitive prices. These methods might be analogised for application in IP cases. The first would be to use as a reference the royalties charged for other IP by the same firm in a competitive technology market. With regard to the question of liability, this same firm price comparison could amount to imposing on the IP holder the burden of justifying significant differences between his offer (in the case of a constructive refusal to deal) and the ‘competitive’ price. This approach, however, cannot be used if the dominant firm charges similar royalties for all of its IP or if the licensing conditions are not comparable. In such a case, an alternative might be to use royalties charged by other IP holders for comparable licences on competitive technology markets (market-based pricing). Both approaches would need to be carried out on a consistent basis, ie involving the same quality and volumes, and account for differences in the IP. A specific problem would be that the IP, by definition in the context of an essential facilities doctrine, is unique. A comparable IP would thus be difficult to find. In its Microsoft decision, the European Commission ordered that Microsoft’s remuneration for the interface documentation that would enable non-Microsoft work group servers to achieve interoperability with Windows PCs and servers ‘should not reflect the “strategic value” stemming from Microsoft’s market power in the client PC operating system market or in the work group server operating system market’.27 More generally, the Commission has suggested that the rates charged for information which is necessary to achieve interoperability with de facto standards should be ‘based on [its] inherent value … rather than [its] value as a gatekeeper’.28 The Commission’s approach constitutes a specific expression of market-based pricing: The ‘inherent’ value of an innovative technology or product can only be measured by markets. Such value would accordingly be the technology’s or product’s price on a reasonably competitive market. Additional ‘strategic’ value would arise due to market power. A third approach would be to use profits to determine whether there is an abuse. This would entail comparing profits of the IP holder in the specific technology market with profits

25

See above at 2.4.1.2. See above at 2.4.1.1. 27 Case COMP/C-3/27.792 Microsoft, Decision of 24 March 2004, para 1008. 28 See the speech by Neelie Kroes, ‘Being Open about Standards’, Open Forum Europe seminar, Brussels, 10 June 2008. 26

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on comparable competitive markets. In practice, such a profit comparison would be the most difficult to implement since it would require knowledge of both costs and prices. All of the above methods—same firm price comparison, market-based pricing and profit comparison—may be adequate if the theory of harm rests on foreclosure which leads to static distortions. As argued in chapter two, however, the legitimate exploitation of IP rights may imply such static distortions.29 In turn, mimicking a competitive technology market would unnecessarily restrict legitimate pricing of a dominant IP holder and would not solve the problem of keeping up ex ante incentives to innovate as much as possible, while allowing dynamic competition on the product market. Such approaches are thus not conceptually suited to determining the liability price cap and the royalty for the remedy in refusal to license cases, if the theory of harm rests on the concept of foreclosure of innovation and improvements, as described in chapter four.

5.1.4

Efficient Component Pricing Rule (ECPR)

Recently, the ECPR, which was developed in the context of bottleneck network pricing,30 has been proposed as a pricing rule for compulsory licensing.31 According to the parity principle underlying the ECPR, competing final-product providers on the downstream product market should be entitled to purchase the bottleneck input at the same price at which the monopoly owner implicitly charges itself for this input. This is the same price it charges to a customer of the final product, minus the incremental cost of the final product’s remaining inputs.32 Such pricing would compensate the firm that is compelled to supply its bottleneck input to a competitor for its opportunity cost of providing this input to the rival.33 This opportunity cost is equal to the expected lost profit from supplying the input to the competitor, which involves the loss in volume of sales of the final product due to the additional competition in the final product market and the loss in margins due to lower prices. In the IP context, this would mean that, if there is one licensee, he should compensate the IP holder for all expected lost profits due to compelled licensing as compared to non-licensing (and thus exclusive use). If there are two licensees, they will each have to pay half of the IP holder’s expected loss of profit when these two firms are active on the downstream product market, etc.34 Such pricing would leave the IP holder indifferent as between non-licensing and licensing (‘principle of indifference’).35

29

See in particular above at 2.6. Originally, the ECPR was developed by Willig (1979), ‘The Theory of Network Access Pricing’ in Trebing (ed), Issues in Public Utility Regulation, Michigan State University Public Utilities Papers. The rule was popularised by Baumol (1983), ‘Some Subtle Pricing Issues in Railroad Regulation’, 10 International Journal of Transport Economics 341. See also Armstrong (2002), ‘The Theory of Access Pricing and Interconnection’ in Cave et al (eds), Handbook of Telecommunication Economics, pp 295–384. 31 In particular by Baumol (2002), The Free-Market Innovation Machine, pp 215–41. In the context of standards embodied in IP see: Swanson & Baumol (2005), ‘Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power’, 73 Antitrust Law Journal 1; Dolmans (2002), ‘Standards for Standards’, 26 Fordham International Law Journal 163, at 204. 32 Baumol (2002), The Free-Market Innovation Machine, pp 219–20. 33 Ibid, pp 225–26. 34 O’Donoghue & Padilla (2006), The Law & Economics of Article 82 EC, pp 728–29. 35 Baumol (2002), The Free-Market Innovation Machine, p 226. 30

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The ECPR has been criticised on a conceptual level, since it focuses on the private opportunity cost of the supplier (instead of social opportunity cost), which may include monopoly profits due to market power on the upstream (technology) market.36 According to these critics, leaving a monopolist indifferent as between not granting and granting access to a bottleneck input indeed would not put a constraint on the monopoly power. In the IP context, however, supra-competitive pricing of the input as such should, in principle, not be constrained by antitrust rules, as was argued in chapter two.37 Hence, this criticism of the ECPR may be correct as such, but does not apply in the IP context. However, two arguments militate against the application of the ECPR (as well as its adaptations, such as the market determined or M-ECPR)38 in the context of refusals to supply based on IP: First, the ECPR intends to allow only those competitors to stay in or enter the downstream product market that are at least as efficient as the incumbent. In the context of potential general standards for § 2 Sherman Act and Article 102 TFEU, the position has been taken that the ‘as-efficient’ threshold is problematic. It prevents productively inefficient, but at the same time allocatively useful, competition through less efficient rivals and thus from price decreases.39 Specifically in the IP context, the foreclosure of improvements and thus new market options may lead to dynamic losses which may outweigh productive inefficiency due to the entry of less efficient producers on the product market. Second, and even more problematic, the ECPR and its variants may lead to the foreclosure of equally or even more efficient competitors in several situations. This would be the case where, for example, the production technology exhibits increasing returns to scale.40 Therefore, even adherents of the as-efficient competitor threshold should reject the ECPR.

5.1.5

Hypothetical Bargaining and Maximum Willingness to Pay

Under US patent law, the so-called Georgia-Pacific factors have been used to determine damages in infringement cases. One of these factors is to reconstruct a hypothetical negotiation between the infringer and the patentee.41 Accordingly, a ‘reasonable’ royalty, in the context of infringement cases, has been defined as an amount or rate ‘which a person, desiring to manufacture and sell a patented article, as a business proposition, would be willing to pay as a royalty and yet be able to make and sell the patented article, in the market, at

36 Economides & White (1995), ‘Access and Interconnection Pricing: How Efficient is the “Efficient Component Pricing Rule”?’, 40 Antitrust Bulletin 557; White (2002), ‘The “Efficient Component Pricing Rule” (ECPR): A Generally Inefficient Solution to the Access Problem’, Working Paper, available at www.stern.nyu.edu/ eco/wkpapers/workingpapers03/03-02White.pdf. Rey and Tirole ((2003), ‘A Primer on Foreclosure’) also show that the ECPR may not preclude foreclosure. In the context of sector-specific regulation, this problem would be mitigated by the possibility of also regulating wholesale prices. 37 See in particular above at 2.6 and 2.7. 38 See Sidak & Spulber (1996), ‘The Tragedy of the Telecommunications: Government Pricing of Unbundled Network Elements under the Telecommunications Act of 1996’, 97 Columbia Law Review 1081. 39 See above at 3.3.3.2. See also Economides & White (1995), ‘Access and Interconnection Pricing: How Efficient is the “Efficient Component Pricing Rule”?’, 40 Antitrust Bulletin 557. 40 Economides (2003), ‘The Tragic Inefficiency of the M-ECPR’ in Shampine (ed), Down to the Wire: Studies in the Diffusion and Regulation of Telecommunications Technologies, pp 142–54, at p 146. 41 Georgia-Pacific Corp v US Plywood Corp, 318 F Supp 1116, at 1120 (SDNY 1970), modified on other grounds, 446 F2d 295 (2d Cir 1971). The other factors focus on (i) royalties for comparable licences, (ii) the profitability of the patented invention, (iii) the potential for lost sales on the part of the patent holder, and (iv) expert opinion.

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a reasonable profit’.42 An infringer’s maximum willingness to pay in such hypothetical negotiations is constrained by his maximum ability to pay and will depend on his profits from the ‘next-best’ alternative project at the time of the hypothetical negotiation.43 However, the Georgia-Pacific factors cannot be applied to determine liability and the remedy in refusal to license IP cases: The counterfactual inquiry asks for the hypothetical royalty that would have been agreed upon at the time the infringement began. Conversely, liability for a refusal to license is based on the idea of ending ongoing or preventing future harm to competition.44 Given the latter goal, the minimum willingness of the potential licensor to accept a deal cannot be a relevant parameter in refusal to deal cases. This is because the IP holder, assuming rationality, precisely refuses to license since accepting a deal is a less profitable strategy than not licensing.45 By definition, any offer of the potential licensee is below the IP holder’s minimum willingness to accept, ie outside the bargaining range. What is helpful in the refusal to license context, however, is the idea underlying the Georgia-Pacific concept, which is to focus on the infringer’s maximum ability to pay.

5.1.6

At-Least Reasonably Efficient Licensee’s Maximum Ability to Pay

As the above discussion makes clear, the liability cap and the royalty in the case of liability have to satisfy two conflicting aims: on the one hand, enabling efficient entry, in particular if the marketing of an improvement would add social value but the original innovator wants to keep the improvement from the product market; and on the other hand, preserving the original innovator’s ex ante incentives as much as possible. If the goal is to enable entry, the starting point should be a potential licensee’s ability to pay. To prevent productive inefficiency, it is important that potential licensees satisfy a certain efficiency requirement. Instead of equal efficiency,46 the threshold should be that of reasonable efficiency. This benchmark has been used in particular in telecommunications regulation and has also been referred to in the DG Competition Discussion Paper on Article 82 EC (now Article 102 TFEU).47 This ensures on the one hand that competitors who are less efficient than the incumbent IP holder are able to market improvements. On the other hand, such a benchmark would prevent productive inefficiency due to unreasonably inefficient rivals on the product market.

42

Panduit Corp v Stahlin Bros Fibre Works, Inc, 575 F2d 1152, at 1158 (6th Cir 1978), citing older judgments. Epstein & Marcus (2003), ‘Economic Analysis of the Reasonable Royalty: Simplification and Extension of the Georgia-Pacific Factors’, 85 Journal of the Patent & Trademark Office Society 555. For an overview of economic analysis techniques in IP litigation see Leonard & Stiroh (eds) (2005), Economic Approaches to Intellectual Property Policy, Litigation, and Management. 44 See the speech given by Makan Delrahim, ‘Forcing Firms to Share the Sandbox: Compulsory Licensing of Intellectual Property Rights and Antitrust’, London, 10 May 2004 (also printed in Delrahim (2004), ‘Forcing Firms to Share the Sandbox: Compulsory Licensing of Intellectual Property Rights and Antitrust’, 15 European Business Law Review 1059). 45 See above at 4.5.1 and Lévêque (2005), ‘Innovation, Leveraging and Essential Facilities: Interoperability Licensing in the EU Microsoft Case’, in Lévêque & Shelanski (eds), Antitrust, Patents and Copyrights—EU and US Perspectives, pp 103–26, at pp 118–20. 46 See above at 5.1.4. 47 See the Discussion Paper, para 220. 43

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If a potential licensee meets the reasonable efficiency threshold, the next step will be to determine his ability to pay. To preserve the original innovator’s ex ante incentives as much as possible, the liability cap and the royalty should approximate a potential licensee’s maximum ability to pay (minus a reasonable profit), given the respective structure of the product market. Pricing based on maximum ability to pay would make a licensee (nearly) indifferent as between entering the downstream market and remaining outside it, and thus would not enhance that licensee’s threat point in a bargaining situation. Accordingly, such a price cap would not act as a fairness rule to prevent rent extraction through the holder of the old technology. It would only ensure potential entry of the new product, thus keeping the original innovator’s incentives to innovate as high as possible. As compared with monopoly pricing, such a price cap would ‘only’ cost the original innovator the difference between the user(s)’ maximum willingness to pay and the greatest willingness to pay for the IP (including its own). Assuming rationality, the latter would be the most efficient user of the IP. Since the licensee could not extract more profit from marketing the new product than its social value, the total social value of the new product minus the production costs would put an upper limit on the ability to pay for the licence.48 This solution should also apply analogously to the scenario of a refusal to supply a product based on IP rights.49 One may object to such an approach on the basis that only the potential licensee has access to information regarding his maximum ability to pay,50 which is difficult to reveal and observe in practice for competition authorities and courts and thus easy to manipulate. This also implies that the liability of firms is dependent on the economic parameters of rivals, rendering liability to some extent unforeseeable.51 If one regards avoidability of liability as the major difference between antitrust and regulation, making liability dependent on a competitor’s maximum ability to pay would thus blur such a boundary and shift the refusal to deal rules into the realm of regulation. Such an objection, however, would generally apply to every system of rules that depends on conditions which are relatively difficult to observe and foresee by the addressees of such rules. This includes every antitrust regime that uses standards and rules that refer to the effects of certain behaviour on rivals.52 According to mechanism design theory,53 revelation of ‘hidden’ information54 is possible in theory if an appropriate revelation mechanism (in theory, for example, a menu of different contracts) is used. This mechanism must leave the agent who has the hidden information, here the potential licensee (or, in general, the buyer), an informational rent (and thus implements a second-best solution). In practice, however, such a revelation mechanism for the firm seeking access would be difficult to design. One way to circumvent the problem would

48 For a model solution under specific assumptions see Scotchmer (2004), Innovation and Incentives, pp 146–52. 49 See above at 4.8. 50 The potential licensee himself faces an uncertainty problem: his maximum ability to pay depends on his expected profit from marketing its product which, in turn, may hinge on the ex ante probability of market success. 51 In this vein see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 316–17. 52 See above at 3.3.1. 53 See in particular Baron & Myerson (1982), ‘Regulating a Monopolist with Unknown Costs’, 50 Econometrica 911. For an introduction to mechanism design see Fudenberg & Tirole (1991), Game Theory, ch 7. Mechanism design theory has heavily influenced (sector-specific) regulation. 54 The notion of ‘hidden information’, developed by agency theory and commonly used in ex post regulatory contexts, does not fit exactly here: only the regulated firm could possibly be regarded as an ‘agent’ of the regulator, not the competitor seeking access.

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be to offer the IP holder a share of the licensee’s (future) revenues or profits. The royalty, as a percentage share, would be tied to the net revenue or net profit from the sale of the respective product, as has become common in licensing practice.55 This would avoid strategic bargaining by the potential licensee, eg with regard to its ex ante probability of failure. At the same time, however, the IP holder would have to share the risk of failure with the licensee. To mitigate the revelation problem, the burden of proof for the liability condition—that the royalty offered by the IP holder exceeds the maximum ability of the potential licensee to pay—could be allocated to the licensee. Such an allocation of the burden of proof would constrain the licensee’s room for strategic manoeuvre during the negotiations with the IP holder.

5.2

THE RELATIONSHIP BETWEEN LIABILITY AND THE REMEDY PRICE

As was indicated in the introduction to this chapter, a remedy—including the appropriate access price—may need to go beyond merely mirroring the illegal conduct to restore the competitive process. For example, in the case of a refusal to deal over a long period of time, consumers may have adapted to, or even been locked in to, the downstream product of the dominant undertaking. In the ‘but for’ world without the illegal refusal, customers might have opted for the new product that would have been offered by the competitors who unsuccessfully attempted to gain access to the necessary input product. As regards a similar scenario of foreclosure which has impeded technological development, it has been suggested that a remedy may even oblige the infringer to pay money to provide active product development support to foreclosed competitors.56 But for scenarios, in particular with regard to dynamic markets, are analytically inherently difficult to determine. For example, it is usually beyond the abilities of competition authorities and courts to assess or even estimate probabilities as to whether a new downstream product would have flourished and the firm might have gained in efficiency by exploiting economies of scale and scope or learning effects, if access to the necessary input had been granted earlier. Furthermore, ‘designing’ and implementing ‘but for’ markets through remedies would be a similarly complex task. As the Court of Appeals in the US Microsoft case put it, neither plaintiffs nor the court can confidently reconstruct a product’s hypothetical technological development in a world absent the defendant’s exclusionary conduct.57

Aside from these practical difficulties, the underlying rationale of the remedies would be inherently backward-looking, asking ‘what would have happened but for the exclusionary conduct?’. Particularly on dynamic markets—as IT and software markets in general and the Microsoft case in particular show—remedies must instead be forward-looking to be effective.58 Therefore, the ultimate objective of a remedy should not be to implement the hypothetical ‘but for’ world. Instead of attempting to design an exact ‘but for’ world, a

55

See Dolmans (2002), ‘Standards for Standards’, 26 Fordham International Law Journal 163. Hellström et al (2009), ‘Remedies in European Antitrust Law’, 76 Antitrust Law Journal 43, at 59. 57 United States v Microsoft Corporation, 253 F3d 34 (DC Cir), at 79. 58 In its Microsoft judgment (United States v Microsoft Corporation, 253 F3d 34, at 49 (DC Cir)), the Court of Appeals acknowledged the problem of ‘how a court goes about restoring competition to a dramatically changed, and constantly changing, marketplace’. 56

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remedy should go to the heart of the problem, ie to restore competition today and tomorrow on the markets affected. As Shapiro59 and others60 have convincingly argued in the context of the Microsoft case, this may mean actively lowering entry barriers to the monopolised markets, without creating unnecessary inefficiencies or unnecessarily decreasing incentives to compete and innovate for the dominant firm. However, irrespective of which of the two concepts—the ‘but for’ or the ‘restore competition today and tomorrow’ approach—one prefers, under both approaches the remedy generally does not have to mirror the liability rule. The remedy may be more demanding than the constraints on the undertaking concerned under the liability rule. Conversely, the remedy does not have to differ from the liability rule. Specifically the pricing principle suggested above for determining liability in the case of constructive refusals to deal based on IP—allowing the entry of at least reasonably efficient competitors on the downstream market—is compatible with both general remedy concepts: This pricing principle does not require competitors who have been denied access to be as efficient as the infringer, who may have benefited from economies of scale or learning effects over time which might not have arisen in the ‘but for’ world. At the same time, it effectively enables entry and competition. Hence, under the above pricing approach, there is, as a default rule, no need to have a different pricing methodology for the liability cap and the remedy.

5.3

NON-DISCRIMINATORY PRICING?

The approach to pricing suggested above—to approximate the maximum ability to pay of each licensee (which has to be at least reasonably efficient)—may, by its nature, lead to differentiated royalties.61 The question of whether price discrimination should be allowed— both within a remedy and, outside the context of a remedy, as general conduct—has been subject to debate. With regard to discrimination as a strategy on the markets, chapter four has already argued that such behaviour may be efficient in many situations.62 The arguments also apply a fortiori to the remedy: The objective of a remedy should be to end and/ or prevent harm in the form of exclusionary effects, not to provide a level playing field as such. The marginalisation of rivals and thus the exclusionary effect of a constructive refusal to supply depend on the rivals’ ability to pay for the input and therefore also on their efficiency. If a rival who is seeking supply is relatively more efficient than others, its marginalisation is likely only if the dominant firm sets a higher price. At the same time, differentiated pricing would maintain incentives to innovate as much as possible. It may be argued that, as a matter of implementation and administrability, differentiated pricing would be more complex and thus costly than equal terms for all potential licensees. As has already been suggested in the context of the revelation problem,63 however, the IP holder may obtain a share of the licensees’ (future) profits. A share of the profits,

59

Shapiro (2009), ‘Microsoft: A Remedial Failure’, 75 Antitrust Law Journal 739, in particular at 753. Brief of Professor Timothy Bresnahan, Professor Richard Gilbert, Professor George Hay, Dr Bruce Owen, Professor Daniel Rubinfeld and Professor Lawrence White as Amici Curiae at 21, New York v Microsoft Corp, No 98-1233 (DDC, filed 13 June 2002). 61 At 5.1.6. 62 See above at 4.1.4. 63 See above at 5.1.6. 60

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which would be equal for all licensees, would both account for individual profits and thus abilities to pay and at the same time avoid the complexities that would arise if licences had to be agreed on individually. 5.4

THE PROCEDURE: BARGAINING, DETERMINING THE PRICE, MONITORING, AND ENFORCEMENT

In addition to the substantive problem of determining the liability and the remedy price cap, the duty to supply under antitrust laws raises difficult procedural questions in terms of how to implement the remedy. Even before a firm has been found liable for a refusal to deal, it may bargain with an interested party ‘in the shadow’ of potential enforcement of antitrust rules. Once the firm has been found liable, the competition authority or court usually faces serious hidden information and hidden action problems, with both the liable firm and the potential licensee or buyer acting in their strategic interest, depending on the concrete substantive approach to pricing and on the remedial guidelines. These implementation problems suggest that any antitrust rule on refusals to deal should be relatively narrow. If liability has been found, however, competition authorities and courts should give precise guidance on both the pricing and the procedural steps that must be taken to limit the direct and indirect costs of strategic manoeuvring by the parties. Four phases of implementation may be distinguished: First, the parties should be given a short period to bargain on an agreement under the oversight of the competition authority or court. Second, if this bargaining fails, the competition authority or the court itself should assess the relevant information and in particular determine the price and the other conditions of an agreement instead of merely providing general guidelines. The ability to determine the price and the costs of doing so depend largely on the abstract approach to the pricing question as discussed above, ie the substantive approach should help mitigate the procedural costs of setting the price. Such an agreement should allow for adaptation in particular of the price if any relevant circumstance changes. It should also contain a sunset provision64 in order to end the supply on a specified date or under specified circumstances. Third, the competition authority or court must monitor compliance with the agreement. Fourth, if the addressee of the decision or the defendant does not comply with the agreement, enforcement (through various instruments such as penalty payments) should be swift and tough. Importantly, in order to prevent additional principal agency problems in the second, third and fourth phases, competition authorities and courts should abstain from delegating decisional or supervisory tasks. 5.5

CONCLUSION

An antitrust remedy should be timely,65 forward-looking, targeted, proportionate and precisely specified. In the case of a behavioural remedy such as a licence, it should, in principle,

64 See ‘Forcing Firms to Share the Sandbox: Compulsory Licensing of Intellectual Property Rights and Antitrust’, speech delivered by Makan Delrahim, London, 10 May 2004. 65 On the problem of a remedy’s timeliness see Barnett (2009), ‘What to Do After Catching the Tiger by the Tail’, 76 Antitrust Law Journal 31.

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also be temporary. A remedy is targeted if it is appropriate to end and/or prevent the harm which the underlying substantive provision is intended to inhibit. As was argued in chapters two and four, in cases of refusal to supply based on IP, competition rules should in particular prevent harm to dynamic competition. Accordingly, the remedy should prevent the foreclosure of such competition. At the same time, it should respect as much as possible the incentive function of IP rights for initial innovators. Firms seeking access should therefore be at least reasonably efficient, and the royalty (or the price for the product in the case of a refusal to supply a product based on IP) should approximate the maximum ability to pay of each of such firms (minus a reasonable profit).

6 An Essential Facilities Test It is less a doctrine than an epithet indicating some exceptions to the right to keep one’s creation to oneself, but not telling us what those exceptions are. Phillip E Areeda1 All property regimes have their limits. Real property has implied easements, nuisance, adverse possession, and other limitations on the unfettered use of one’s property. Since medieval times, common carriers and other businesses affected with the public interest must provide nondiscriminatory access to all. Intellectual property has temporal limits, public-disclosure requirements, exceptions for trademarks that have become generic, copyright immunity for fair use, dichotomies between ideas and expression, and doctrines of misuse. Antitrust has the essential facilities doctrine. With careful definitions and rigorous application, it should be celebrated and not attacked. Spencer Weber Waller2

Putting together the building blocks from the previous chapters, in particular — — — —

the principle that competition policy should not accept harm to dynamic competition arising from conduct based on IP (chapter two), the need for consistency of conduct-specific rules under § 2 Sherman Act and Article 102 TFEU with a consumer harm standard (chapter three), the need to address refusals to deal that would prevent the marketing of new market options through an antitrust rule (chapter four), and the need for a clear pricing rule for both the liability question and the remedy, which should enable competition, but at the same time maintain incentives to innovate as much as possible (chapter five),

this chapter sets out an essential facilities type of test, which will serve two purposes: first, as a proposed solution to the ongoing debate regarding the approach that antitrust should take towards refusals to supply, and, second, as a benchmark for the positive analysis of the current state of the law in the US (chapter seven) and the EU (chapter eight). As has been argued with regard to both tangible and intellectual property, any antitrust restriction on the respective exclusivity right should not render the underlying investment unprofitable from an ex ante perspective. At the same time, there are different costs and benefits of tangible and intellectual property and of antitrust restrictions of the exclusive rights as defined by the respective type of property. These differences can usually be accounted for within the

1

Areeda (1989), ‘Essential Facilities: An Epithet in Need of Limiting Principles’, 58 Antitrust Law Journal 841. Waller (2008), ‘Areeda, Epithets, and Essential Facilities’, Wisconsin Law Review 359, at 385–86. With a similar critical reference to Areeda see Bavasso (2002), ‘Essential Facilities in EC Law: The Rise of an “Epithet” and the Consolidation of a Doctrine in the Communications Sector’ in Eeckhout (ed), 21 Yearbook of European Law, pp 63–106. 2

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same analytical antitrust framework.3 As was argued above, however, if conduct is covered by an IP right, competition policy should focus not on the static distortions inherent in the mere exploitation of the respective exclusivity right, but on preventing harm to dynamic competition. This difference must be reflected in different rules for conduct involving tangible and intellectual property. Accordingly, the essential facilities test put forward here differentiates between tangible and intellectual property with regard to the competitive harm required. Any competition standard or rule should meet three cumulative conditions: First, it should identify harm to competition which, second, outweighs the efficiencies generated by the unilateral or bilateral measure concerned. Third, compliance with as well as public and private enforcement of the standard or rule should have a positive net effect on competition. Given these requirements, a firm should be liable for a refusal to supply a product or information4 if (1) the competitive harm from foreclosure is significant and non-transitory (the ‘competitive harm’ condition, see below at 6.1), and (2) the firm that would be forced to supply would also have taken its decision to invest in (or acquire) the (intellectual) property given the obligation to supply (ie there is no ‘ex ante investment’ defence, at 6.2) (3) supply is feasible at a reasonable cost (ie there is no ‘ex post efficiency’ defence, at 6.3).

6.1

CONDITION 1: HARM TO COMPETITION

The major condition of an essential facilities type of test should be that non-supply of the good, service or information would lead to the foreclosure of competition on downstream or adjacent markets: in the case of tangible property the foreclosure of static or dynamic competition, and in the case of intellectual property the foreclosure of dynamic competition. This requirement can be broken down into four sub-conditions: (1) the property right concerned covers the refusal to supply,5 (2) the upstream firm that could supply the input has monopoly power or a dominant position on the relevant market for its production (6.1.1), (3) the input cannot be obtained otherwise, in particular duplication of the input would not be feasible (6.1.2), (4) the refusal eliminates or prevents effective competition on the adjacent market (6.1.3).

6.1.1

Dominant Position

It is sometimes suggested by US commentators that, under the essential facilities doctrine, the firm that refuses to supply must be a monopolist in the narrow sense of having a 3 4 5

See above at 2.6. The supply of information could also be regarded and analysed as a service. See above at 2.2.2.4.

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100 per cent market share.6 Such a suggestion may be based on the classic version of the doctrine as outlined in the MCI case7 according to which (1) the facility must be controlled by a monopolist and (2) the rival must not able practically or reasonably to duplicate the facility. Similarly, in the context of Article 102 TFEU, the notion of ‘super-dominance’ has been used.8 However, this terminology is misleading: Although de facto unlikely, there might be scenarios where there is another firm on the upstream market which, legally, refuses to supply. If the refusal of the dominant firm significantly harms competition on the market concerned which is related to the input market,9 it should be liable for its refusal, irrespective of its degree of dominance. The market power assessment should instead serve to clearly establish the addressee(s) of an obligation not to cause harm through a refusal to supply. Under the essential facilities test as advanced here, the market power condition thus neither serves merely as a binary screening device, nor is it part of a sliding scale assessment10 within the framework of an effects-based approach that would emphasise the relationship between, and thus analyse together, the degree of market power and the harm caused. The market power inquiry translates into the usual two-step analysis of determining, first, the relevant market (6.1.1.1), and, second, the firm’s power on this market (6.1.1.2). In IP-related cases, this analysis will generally apply to product, technology and/or innovation markets. The latter, however, would not have to be delineated by an essential facilities rule as advanced here.11 6.1.1.1 Determining the Relevant Market In the first step, the relevant market for the upstream product must be delineated by analysing demand and short-term supply substitutability. In refusal to license cases, the starting point for the substitutability analysis is to ascertain the right or information the potential licensee specifically needs to obtain (eg the right to use a patented invention or interoperability information kept as a trade secret). Starting with the hypothesis that access to such a right or information may constitute the relevant service, the SSNIP test12 can be applied to assess demand-side substitutability, if competitive prices are available and the

6 See Werden (1987), ‘The Law and Economics of the Essential Facilities Doctrine’, 32 St Louis University Law Journal 433, at 455. 7 See in more detail below at 7.3.1. 8 See eg the speech delivered by Neelie Kroes, ‘Industrial Policy and Competition Law & Policy’, New York, 14 September 2006. 9 See below at 6.1.3. 10 Such a sliding scale assessment might reduce legal certainty. See, with regard to the general standard under Art 102 TFEU, the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 59. The usual assumption is that the higher the degree of market power, the more likely it is generally that the conduct, if abusive, causes consumer harm. For some caveats to this assumption see Niels & Jenkins (2005), ‘Reform of Article 82: Where the Link Between Dominance and Effects Breaks Down’, 26 European Competition Law Review 605. For an analysis of the discussion of effects-based versus form-based approaches to Art 102 TFEU see above at 3.3.1. 11 See above at 4.4. 12 See the Commission Notice on the definition of the relevant market for the purposes of Community competition law, OJ 1997 C372/5, paras 15–19.

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firms concerned do not enjoy market power.13 The test may also be useful in leveraging cases for delineating the market on which the firm in question is not yet dominant or, similarly, under § 2 Sherman Act, in attempted monopolisation cases. The SSNIP test, however, is subject to the well-known ‘cellophane fallacy’14 and thus, at least in its classic form, is not applicable if the prevailing price is set by a firm already enjoying market power, as in many monopolisation and all abuse of dominance cases. Although the Commission’s Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements still refer to an unmodified SSNIP test,15 the fallacy problem is now acknowledged in both the US and the EU.16 6.1.1.1.1

Tests that Avoid the Cellophane Fallacy

Several modifications and alternative approaches have been suggested to account for the cellophane fallacy problem:17First, one may attempt to infer the relevant market indirectly from market power, ie the existence of market power would suggest a relatively narrow market. Profit data have also been used as an indicator of market power. Such an approach, however, immediately runs into problems in the case of multi-product firms, where costs and profits have to be allocated to different products.18 Second, one might dispense with the market definition and directly determine whether the firm in question has monopoly power or a dominant position. Such a market definition res ipsa loquitur has been suggested for unilateral effects merger cases.19 § 2 Sherman Act and Article 102 TFEU might be interpreted in such a way as not to require a concrete market definition, but only proof of monopoly power and a dominant position respectively. For abuse cases, Nelson and White have proposed asking whether the preservation of the allegedly foreclosed competitor would have led (or lead) to a small but significant

13 Such as in merger cases, if the firms do not have market power before the merger. See the 1992 US Horizontal Merger Guidelines in its updated 1997 version, at 1 (replaced by the new 2010 Horizontal Merger Guidelines), and the Commentary on the Horizontal Merger Guidelines, issued, 27 March 2006, at 1. See similarly the Commission Notice on the definition of the relevant market for the purposes of Community competition law, OJ 1997 C372/5, para 19. 14 The term is comes from the case US v EI du Pont de Nemours & Co, 351 US 377 (1956), which involved cellophane production. For an explanation of the problem see Nelson & White (2003), ‘Market Definition and the Identification of Market Power in Monopolization Cases: A Critique and a Proposal’, NYU CLB Working Paper 03/22; Motta (2004), Competition Policy, p 105. 15 At para 22. 16 See the US Horizontal Merger Guidelines at 1.11 (replaced by the 2010 Horizontal Merger Guidelines), and the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, paras 13–15, citing the relevant cases. 17 For an overview see White (2005), ‘Market Definition in Monopolization Cases: A Paradigm is Missing’, NYU Law and Economics Research Paper 05-27. 18 Ibid. Sometimes accounting rates of return have been used as profit data. However, it is usually not possible to infer reliable information from them regarding relative economic profitability or, a fortiori, regarding the presence or absence of monopoly profits. See Fisher & McGowan (1983), ‘On the Misuse of Accounting Rates of Return to Infer Monopoly Profits’, 73 American Economic Review 82; Office of Fair Trading (2002), Innovation and Competition Policy: Part I—Conceptual Issues, Report prepared by Charles River Associates, 5.121–5.125. See also Bain (1941), ‘The Profit Rate as a Measure of Monopoly Power’, 55 Quarterly Journal of Economics 291. 19 See the speech given by Jonathan B Baker, ‘Product Differentiation through Space and Time: Some Antitrust Policy Issues’, available at www.ftc.gov/speeches/other/bakst.htm. See also Kaplow (2010), ‘Why (Ever) Define Markets?’, 124 Harvard Law Review 437 for an even more general proposal to dispense with the market definition.

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153

nontransitory decrease in price (SSNDP) on the part of the allegedly dominant firm.20 Such a test would take the sliding scale argument to its extreme and would even skip the market power question, asking directly for the potential anti-competitive effects of exclusionary conduct. Aside from the positive legal question whether US and EU competition provisions would indeed allow the market definition to be left open, dispensing with it might not be desirable from a normative point of view, at least in refusal to supply cases: The indispensability requirement21 essentially asks for substitutes for the relevant product which would be available in the mid-term.22 On the other hand, this inquiry may be subsumed into the ultimate question of what factors may constrain market power.23 A third approach would be to infer the competitive price from cross-section data on prices by the firm in question and on corresponding structural characteristics (in particular concentration) or by using comparable markets.24 The SSNIP test could then be applied on the basis of the computed competitive price. Such price data, however, are often not available, in particular in licensing cases.25 Fourth, one could go back to the initial question of functional substitutability and examine the characteristics and intended use of the products concerned and assess, through market investigation, whether they are capable of satisfying the consumer need.26 In IP cases, particularly in refusal to license situations, this approach might work well with product and large technology markets. In the case of small technology markets, however, the potential licensees as customers may be the downstream competitors of the licensor on the product market. In a market investigation, these competitors often have an incentive to provide information to competition authorities in a strategic manner. Despite each presenting their own practical difficulties, the last two approaches are the most reasonable routes to avoiding the cellophane fallacy. 6.1.1.1.2

Potential Markets

In refusal to supply situations, an additional specific problem may arise whereby the input product in question may not have been independently marketed before, for example because it has only ever been used as component in the production of a final product. In refusal to license cases, the technology market may be a hypothetical one, if the holder of the licence has not yet issued a licence or has already ended a previous licensing agreement. It is debatable whether it should be sufficient in this scenario that such a potential market may be delineated.27

20 Nelson & White (2003), ‘Market Definition and the Identification of Market Power in Monopolization Cases: A Critique and a Proposal’, NYU CLB Working Paper 03/22. 21 See in more detail below at 6.1.2. 22 For a similar argument in the context of merger control see Käseberg (2005), ‘Unilaterale Effekte im Rahmen der Fusionskontrolle’, 10 Wirtschaft und Wettbewerb 998, at 1001. 23 In this vein see Kaplow (2010), ‘Why (Ever) Define Markets?’, 124 Harvard Law Review 437. 24 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, paras 16, 19. 25 See above at 5.1.3. 26 See the Discussion Paper, para 18. 27 In its ruling in IMS, the ECJ held that it is sufficient under Art 102 TFEU to identify a ‘potential’ or ‘hypothetical’ upstream market (Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, para 44). For a more detailed legal analysis under Art 102 TFEU see below at 8.2.1.3.1. For an analysis under § 2 Sherman Act see below at 7.3.1.

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The concept of potential or hypothetical markets has been criticised by commentators for various reasons. Some argue that the concept entails the danger that competition law, beyond the liberalisation of historical (network) monopolies, will ‘pursue regulatory aspirations instead of protecting a competitive environment in the longer run’.28 Others emphasise that technological information or works protected by IP are often just used as inputs and making them subject to a duty to share would ‘create a huge disincentive for dominant firms to invest in new production processes’.29 Finally, it has been suggested that a ‘production chain cannot be divided into series of severable stages at the request of any competitor’.30 The latter two arguments are correct as such, but miss the point: The problem of incentives to invest should be subject to the ex ante efficiency condition (see below, 6.2). And if supply with the input would only be possible at unreasonable costs, the dominant firm would have an ex post efficiency justification (see below, 6.3). The essential facilities doctrine is precisely about sharing the advantages of vertical integration. Therefore, it should be enough that the input is ‘capable of being sold or licensed’.31 6.1.1.2 Assessment of Market Power Market power depends on the constraints the technology or product faces from (1) actual or (2) potential competition (demand and supply substitutability) and (3) countervailing buyer power. Actual competition depends in turn on barriers to expansion, and potential competition on barriers to entry. In some situations, no substitute is likely to be available at all, even in the mid-term (eg through a technological leap). In cases involving such IP, the protected invention or work has been referred to as ‘single path’.32 In the majority of cases, a substitute is available or can be made available, but at a significant cost due to structural, strategic or other than property-related legal barriers to entry. Such structural barriers may consist of high fixed costs and large economies of scale in production33 (‘natural monopolies’) or in consumption (network effects, eg through compatibility in the software sector). Another scenario would be that of an industry standard as an entry barrier.34 In refusal to supply cases involving IP rights, two fundamental insights are relevant for the market power assessment: First, in abstracto, IP, despite its incentive function, does count as a barrier to entry (6.1.1.2.1). Second, the (intellectual) property right, however, does not automatically confer market power as such. Instead, it is usually structural, strategic or other legal barriers to entry that, potentially together with the (intellectual) property right concerned, lead to market power (6.1.1.2.2).

28 Schweitzer (2007), ‘Controlling the Unilateral Exercise of Intellectual Property Rights’, EUI Working Paper, p 15, referring also to Mestmäcker (2006), Wirtschaft und Verfassung in der Europäischen Union, pp 779–80. 29 Geradin (2004), ‘Limiting the Scope of Article 82 EC: What Can the EU Learn From the US Supreme Court’s Judgment in Trinko, in the Wake of Microsoft, IMS, and Deutsche Telekom?’, 41 Common Market Law Review 1519, at 1530. 30 See O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 439. 31 Ibid. 32 These cases come closest to a situation where indispensability is said to arise directly from the (intellectual) property right as legal barrier to entry. Even here, however, the source of indispensability is non-substitutability. 33 High fixed costs and economies of scale lead to cost subadditivity, ie one firm is able to produce the output at a lower cost than two or more. 34 These scenarios may overlap, eg if network effects ‘feed’ into a de facto standard.

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6.1.1.2.1 IP as a Barrier to Entry and Expansion Proposals for defining ‘barrier to entry’ are legion, ranging from the rather broad Bainian Harvard school view,35 through the more narrow concepts of Stigler36 and Fisher,37 to von Weizsäcker,38 each reflecting a specific underlying view of competition and competition policy.39 Based on narrow definitions which include a social welfare criterion, economists sometimes question the barrier to entry character of IP, arguing that IP is intented to enhance dynamic efficiency.40 Applying Fisher’s definition, IP will only constitute a barrier to entry to the extent that it over-shoots from a social point of view, whereas under the definitions of, for example, Bain and Stigler, IP qualifies as barrier to entry per se.41 One could dismiss the above view that doubts the barrier to entry character of IP as wrong from the outset using the argument that IP constitutes a legal barrier to entry and it is thus not necessary to apply the definitions intended to determine structural barriers. But those arguing for a welfare criterion in the definition of barriers to entry make a more fundamental point by asking at what point antitrust analysis should take into account the socially desirable effects of ‘barriers’. For antitrust purposes, competition authorities and courts in both the US and the EU have mainly used the Bainian definition of barrier to entry,42 while at the same time embracing dynamic ex ante thinking, taking into account the dynamic incentive function of IP in later stages of the analysis. Methodologically, this approach is correct, since a barrier to entry definition should and cannot be the lens through which one can reach an ‘acquittal’ in the context of § 2 Sherman Act and Article

35 Bain ((1954), ‘Economies of Scale, Concentration, and the Condition of Entry in Twenty Manufacturing Industries, 44 American Economic Review 15) described barriers to entry as ‘the extent to which, in the long run, established firms can elevate their selling prices above the minimal average costs of production and distribution … without inducing potential entrants to enter the industry’. See also Bain (1956), Barriers to New Competition. Similarly, although focusing on first-mover advantages, se Gilbert (1989), ‘Mobility Barriers and the Value of Incumbency’ in Schmalensee & Willig (eds), Handbook of Industrial Organization, vol I, p 530 (‘… a rent that is derived from incumbency’). For a critical view see Demsetz (1982), ‘Barriers to Entry’, 72 American Economic Review 47, at 48; Carlton (2004), ‘Why Barriers to Entry are Barriers to Understanding’, 94 American Economic Review 466, at 467. 36 Stigler (1968), The Organization of Industry, p 67: ‘[A] cost of producing (at some or every rate of output) which must be borne by a firm which seeks to enter the industry but is not borne by firms already in the industry.’ Similarly, see Baumol & Willig (1981), ‘Fixed Costs, Sunk Costs, Entry Barriers and Sustainability of Monopoly’, 96 Quarterly Journal of Economics 405, at 408. For a critical view see Schmalensee (2004), ‘Sunk Costs and Antitrust Barriers to Entry’, 94 American Economic Review 471, at 473. 37 Fisher (1979), ‘Diagnosing Monopoly’, 19 Quarterly Review of Economics and Business 7, at 23: ‘… anything that prevents entry when entry would be socially beneficial.’ 38 Von Weizsäcker (1980), ‘A Welfare Analysis of Barriers to Entry’, 11 Bell Journal of Economics 399, at 400: ‘A barrier to entry is a cost of producing which must be borne by a firm which seeks to enter an industry but is not borne by firms already in the industry and which implies a distortion in the allocation of resources from the social point of view.’ See also von Weizsäcker (1980), Barriers to Entry, and (2004), ‘Marktzutrittsschranken’, reprint by the Max Planck Institute for Research on Collective Goods 2004/10. 39 For an overview see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 117–19. 40 Weizsäcker (2004), ‘Marktzutrittsschranken’, reprint by the Max Planck Institute for Research on Collective Goods 2004/10. 41 Applying Stigler’s definition, IP would constitute a barrier due to the costs of inventing around or licensing for the entrant (see Carlton & Perloff (2005), Modern Industrial Organization, p 77). 42 Hovenkamp (1999), Federal Antitrust Policy: The Law of Competition and its Practice, pp 39–40. See eg the European Commission’s Horizontal Merger Guidelines, para 70: ‘Barriers to entry are specific features of the market, which give incumbent firms advantages over potential competitors.’

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102 TFEU:43 Answering the question whether a firm has monopoly power or a dominant position just means determining whether that firm has been or is able to exert market power, since a firm with desirable market power may also abuse its position. To be able to balance the potential losses caused by exclusionary behaviour against the efficiencies arising from investment in IP as a barrier to entry, one cannot stop with step 1 (market power); one necessarily needs to proceed to step 2 (harm). Therefore, the definition of ‘barrier to entry’ should be as broad as possible, with the focus being on the questions of whether and when entry is likely, since entry will reduce the anti-competitive (foreclosure) effects in question. This seems to be the emerging solution to the debate: for example, Posner proposes the very broad definitional question of whether something delays new entry.44 Werden suggests the term ‘conditions of entry’45 to unfetter the barrier to entry analysis from an ultimate, normative character. Similarly, the European Commission’s Discussion Paper on Article 82 EC (now Article 102 TFEU) has defined barriers to entry as ‘factors that make entry impossible or unprofitable while permitting established undertakings to charge prices above competitive level’.46 IP per se should thus be taken into account as a barrier to entry, not just its potentially ‘over-shooting’ effects.47 6.1.1.2.2 Market Power in IP Cases The term ‘monopoly rights’ is still sometimes used synonymously with the exclusivity rights that IP confers. Intellectual property, however, like other forms of property, does not automatically confer market power.48 Property rights are finite in the sense that they only entail the power to exclude others with respect to specific assets, inventions or works. An input is not unsubstitutable because it is illegal to ‘take’ or imitate it or, conversely, because it is legal to refuse its supply. Even a broad invention protected by a patent may have a functional, non-infringing substitute on the market.49 Intellectual property ‘only’ increases the costs of using the protected invention as an input, since it allows its holder to block the usually cheap option of using an already existing invention and of imitation. Technology markets are defined by the US Antitrust Guidelines for the Licensing of IP as ‘the technologies or goods that are close enough substitutes significantly to constrain the

43 The Stiglerian definition, however, may be appropriate in regulatory contexts if there is no additional step in the assessment where the desirability of the respective barrier to entry could be taken into consideration (see, eg, in the context of European telecommunications law, Kirchner & Käseberg (2008), § 9 in Scheurle & Mayen (eds), Telekommunikationsgesetz, paras 41–42). 44 Posner (2001), Antitrust Law, p 74. Similarly, see Carlton (2004), ‘Why Barriers to Entry are Barriers to Understanding’, 94 American Economic Review, Papers and Proceedings 466, at 469, suggesting that ‘[r]ather than focusing on whether an “entry barrier” exists according to some definition, analysts should explain how the industry will behave over the next several years’. 45 Werden (2001), ‘Network Effects and Conditions of Entry: Lessons from the Microsoft Case’, 69 Antitrust Law Journal 87. For a summary of the discussion see the 2005 OECD Report Barriers to Entry, DAF/COMP(2005)42. 46 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 38. The later Guidance Paper does not provide for a definition. 47 For the oppositive view see Heinemann (2008), ‘The Contestability of IP-Protected Markets’ in Drexl (ed), Research Handbook on Intellectual Property and Competition Law, pp 54–79, at pp 57–58. 48 See eg Landes & Posner (2003), The Economic Structure of Intellectual Property Law, p 374; Hovenkamp et al (2004), IP and Antitrust, § 4.2b. 49 For an analysis see Drexl (2008), ‘The Relationship Between the Legal Exclusivity and Economic Market Power: Links and Limits’ in Govaere & Ullrich (eds), Intellectual Property, Market Power and the Public Interest, pp 13–33; and Patterson (2008): ‘Intellectual Property and Sources of Market Power’ in Ibid, pp 35–58.

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157

exercise of market power with respect to the intellectual property that is licensed’.50 With regard to such technology markets, empirical data on a survey of licensors compiled for an OECD report showed that in only 27 per cent of cases did no close substitutes for the IP right concerned exist.51 With regard to product markets, usually the actual product space covered by an IP right is smaller than a relevant market.52 Thus the situation of economic market power due to an IP right is more likely the exception, not the rule.53 Market power is commonly defined, with reference to the Lerner index, as the ability to maintain prices above, or output below, competitive levels, ie the power to profit by charging more than a marginal cost for a significant period of time.54 Aside from the general weaknesses of such a static snapshot approach, in the context of IP this definition has to be adapted, since the most significant costs of developing IP are fixed and partly sunk at the time the IP is developed.55 The correct way to measure whether an IP right leads to a return above costs would be to compare all development costs with all profits generated by the IP, taking into account the risk that the innovation will fail.56 Due to a lack of the relevant data, however, it is often impossible to carry out such calculations. In these cases, actual and potential competition have to be assessed on the basis of a relative comparison between the alleged dominant’s firm technology or product and its substitutes.57 In the case of a refusal to continue to license, previous technology-specific investments, as sunk costs, may increase the switching costs and thus the market power of the firm that ended the licensing scheme.

6.1.2

No Circumvention or Substitution within a Reasonable Period of Time

Substantial market power as described above should only be a necessary, not a sufficient, condition for an essential facilities rule. If barriers to entry are likely to be eroded and market power is only temporary, inter-systems competition will be feasible and a duty to deal may undermine the incentives for rivals to create such competition. ‘Essentiality’ or ‘indispensability’ of a good or service should thus mean more than substantial market power due to high barriers to entry. Accordingly, a product should only be considered essential or indispensable, respectively, if a firm that seeks the product’s supply and wants to be present on a market can neither circumvent its use nor substitute it as input, either through self-production (‘duplication’ of the facility) or by using another source in the long

50 US Antitrust Guidelines for the Licensing of Intellectual Property, 3.2.2 (see above at 1.1). See also Newberg (2000), ‘Antitrust for the Economy of Ideas: The Logic of Technology Markets’, 14 Harvard Journal of Law & Technology 83. 51 OECD (1989), Competition Policy and Intellectual Property Rights, p 329. 52 Anderson & Gallini (1998), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, p 3. 53 But see Katz (2007), ‘Making Sense of Nonsense: Intellectual Property, Antitrust, and Market Power’, 49 Arizona Law Review 837, arguing that IP rights often do confer market power in the antitrust sense. 54 See eg the US Antitrust Guidelines for the Licensing of Intellectual Property, 2.2. For an analysis see Landes & Posner (1981), ‘Market Power in Antitrust Cases’, 94 Harvard Law Review 937. 55 Hovenkamp et al (2004), IP and Antitrust, § 4.1c, at 4–5; Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 376–77. See above at 2.1.1. 56 Ibid. 57 Hovenkamp et al (2004), IP and Antitrust, § 4.1c.

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term. Such a requirement eliminates the risk that an obligation to supply undermines the incentives of downstream competitors to invest in the input market.58 Such a definition of essentiality adds two further requirements to ‘mere’ significant market power: First, circumvention as the more fundamental strategy to avoid the use of the input concerned—in the sense of implementing another production function—must not be feasible at reasonable cost. In the case of intellectual property and software, reverse engineering, if legal, might constitute such a circumvention strategy. Second, the upstream market must not tend towards competition in the medium term, ie the barriers to entry and expansion must be non-transitory in the sense that they are unlikely to be eroded and countervailing buyer power must be unlikely to emerge. This makes the market power assessment—in particular its ‘no potential competition’ element—more stringent. This definition of the bottleneck would align the essential facilities test to the first two of the three criteria used under EU telecommunications law to determine whether sectorspecific regulation, as opposed to general competition law, should apply.59 Under merger control (with regard to potential competition) and under sector-specific regulation (like the EU telecommunications framework), the upstream market must not be likely to tend towards competition within a period of two years.60 This time horizon would also be suitable for the ‘no circumvention/substitution’ condition under an essential facilities rule.

6.1.3

Elimination or Prevention of Effective Competition on the Adjacent Market

As was argued at the beginning of this chapter, an essential facilities test should differentiate between refusals to supply based on IP and other refusals to supply with regard to the type of competition protected and, in turn, the harm it intends to prevent. In the case of IP, it is dynamic competition presented by new market options on the adjacent (usually a downstream) market concerned or other markets that antitrust should protect. Such new market options include new innovative products and follow-on innovation. In the case of non-IP essential inputs, both static and dynamic competition should be protected. With regard to both types of competition, an essential facilities test has to define the degree of foreclosure that triggers liability for a refusal to deal, and thus, as the mirror side, the degree of competition to be protected. As a matter of de facto limits, the subject of protection by antitrust can only be a feasible degree of competition, given the current and likely future economic parameters of the markets concerned. Antitrust should not follow regulatory ambitions by reaching beyond preventing harm to competition, instead attempting to

58 See, in the context of the Commission’s Guidance Paper, Peeperkorn & Viertiö (2009), ‘Implementing an Effects-Based Approach to Article 82’, 1 Competition Policy Newsletter 1, at 5. 59 See in the same vein Schweitzer (2007), ‘Controlling the Unilateral Exercise of Intellectual Property Rights’, EUI Working Paper, pp 28–29. For an analysis of the three criteria test (as transposed into German law) see Kirchner & Käseberg (2008) in Scheurle & Mayen (eds), Telekommunikationsgesetz, § 10, paras 39–52. 60 See the 1992 US Horizontal Merger Guidelines, 3.2 (replaced by the 2010 Horizontal Merger Guidelines), and the EU Guidelines on the assessment of horizontal mergers, para 74. See similarly the three-criteria test set out in recital 9 of the Commission Recommendation of 11 February 2003 on relevant product and service markets within the electronic communications sector susceptible to ex ante regulation in accordance with Directive 2002/21/EC of the European Parliament and of the Council on a common regulatory framework for electronic communication networks and services, OJ 2003 L114/45.

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create a specific type of competition. As a matter of legal boundaries, neither § 2 Sherman Act nor Article 102 TFEU mandates the respective competition authorities and courts to impose a certain market structure. At the same time, however, both provisions are intended to achieve more than merely preventing complete foreclosure of markets. § 2 Sherman Act intends to prevent the monopolisation of a market and hence already prohibits the attempt to monopolise.61 Under § 2 Sherman Act, ‘effective’ competition within an essential facilities test would thus mean preventing a monopolisation of the downstream market. With regard to leveraging in general and input foreclosure in particular under Article 102 TFEU, the ECJ has similarly made clear that competition to be preserved on adjacent markets must be more than merely residual competition.62 One of the central problems involved in designing an essential facilities test with regard to refusals to deal based on IP is defining what type of dynamic competition such rule should protect—or, to put it differently, which opportunity loss from a ‘lost’ new market option it should prevent. This problem has been discussed in respect of the ‘new product’ criterion under the ECJ’s Magill and IMS Health jurisprudence.63 As has been pointed out, it is essential that a competition rule does not have the effect of inducing competition by clones.64 If mere duplication or product differentiation sufficed to meet the threshold, the test would essentially be the same as that for non-IP based refusals. On the other side of the scale, demanding that the new downstream product is not substitutable for the product offered by the IP holder would imply the most narrow concept of competition to be protected.65 As has been alluded to, however, in cases of non-substitutability—ie the undertaking seeking supply wants to serve a completely distinct new market—the incentive not to serve this market is usually lower than in scenarios where the ‘new’ product would cut into the incumbent’s profit.66 In these cases of non-substitutability, the likelihood of follow-on innovation being blocked and thus the need for a rule to prevent foreclosure may be relatively minimal. One criterion that has been suggested for identifying relevant dynamic competition (or a ‘new product’ or ‘technical development’ under Article 102 lit. b TFEU) is that it must expand the market by bringing in consumers whose preferences were such as not to buy the ‘old’ product.67 Such an approach, however, would be under-inclusive, since there may be scenarios where the ‘new’ product would not attract new consumers, but would ‘merely’ satisfy existing customers’ preferences better and thus add significant utility. The relevant threshold should be that dynamic competition will add significant utility for consumers through technological development. Although substitutability is usually a concept intended to capture constraints on pricing power and thus on static competition, it may also serve as a quantitative proxy to capture whether a product with a new 61

See above at 3.2.1.2. See below at 8.2.1.3.3. 63 For the legal analysis of the ‘new product’ requirement see below at 8.2.1.3.4. 64 See above at 4.5.2. 65 Such a narrow concept is preferred by Geradin (2004), ‘Limiting the Scope of Article 82 EC: What Can the EU Learn from the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS, and Deutsche Telekom?’, 41 Common Market Law Review 1519, at 1531–32. Such a non-substitutability requirement was used under German telecommunications law to define ‘new markets’ which were partially exempted from sectorspecific regulation. See Kirchner & Käseberg (2008) in Scheurle & Mayen (eds), Telekommunikationsgesetz, § 9a, paras 23–46. 66 See above at 4.5.1. 67 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 446–48. 62

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characteristic adds such significant consumer utility (assuming consistent consumer preferences). Two scenarios may be distinguished: First, if the marketing of the new product would lead to a new relevant market, there should be a strong presumption that the product is ‘new’. Second, a new product often features all the characteristics of the old product, but with better performance and/or additional characteristics. Therefore, the old product may not serve as substitute for the new one (one-sided substitutability). Thus the lower the degree of two-sided (SSNIP) substitutability for existing products, the greater would usually be the utility for consumers added through new or improved products or follow-on innovation (in the sense of a positive correlation). No or a low degree of such substitutability would hence be a good proxy for significant added utility. A relatively low degree of substitutability may also be easier to verify by competition authorities (and to control by courts) than the abstract notion of ‘significant innovative value’. In sum, the minimum threshold that a potential new product has to meet should be more than insignificant product differentiation (since this would only induce competition by imitation), but it must not necessarily lead to a completely new market. In all cases, irrespective of whether the refusal is based on tangible or intellectual property, it should be incumbent upon the party seeking supply or the competition authority to prove (1) that the refusal harms competition and (2) that competition would be feasible given supply. In the case of a refusal based on IP, the first element would consist of showing harm to dynamic competition due to a foreclosure of innovative goods or services or follow-on innovation.

6.2

CONDITION 2: NO EX ANTE INVESTMENT DEFENCE

If the above requirements are met, there should be a presumption that the refusal concerned causes harm to competition and consumers. As the discussion on the general consumer harm standard has shown, under both § 2 Sherman Act and Article 102 TFEU, a defendant may invoke a defence against the allegation having caused such harm which is based on the benefits the incriminated conduct generates. Whereas under § 2 Sherman Act agencies and courts usually favour a simple balancing exercise, the European Commission’s Guidelines suggest carrying out an Article 101(3)-like proportionality inquiry.68 Both balancing tests, however, are inherently hard to apply in cases involving a (potentially risky) ex ante investment decision which has led to an innovation.

6.2.1

The Difficulties of Balancing in Innovation Cases

Under a test corresponding to Article 101(3) TFEU, the defendant first has to claim that his conduct generates efficiencies and that these ‘efficiencies have been, or are likely to be, realised as a result of the conduct’.69 Already the latter element is problematic, since in

68

See above at 3.3.3.3.1. Guidance Paper on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty, para 30. See also the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, paras 8, 84–92. 69

6.2

CONDITION 2: NO EX ANTE INVESTMENT DEFENCE

161

refusal to deal cases the conduct itself—ie the refusal—does not generate such efficiencies. However, for the purposes of this condition, the refusal has to be viewed as the mirror side of the vertical integration or exclusive distribution strategy of the defendant. This strategy may be necessary to recoup the investment in the creation of the input the applicant is seeking access to. What is more problematic, however, is the question of how to measure the efficiencies that the defendant may claim. Under such a test in innovation cases, the defendant must invoke the value of his innovation (or the IP respectively), which may be difficult to approximate. According to the second condition of an Article 101(3)-like defence, the defendant has to show that ‘the conduct is indispensable to the realisation of those efficiencies’, ie ‘there must be no less anti-competitive alternatives to the conduct that are capable of producing the same efficiencies’.70 Applying such logic to refusals to deal, this condition will only be met by those (constructive) refusals that are needed to recoup the underlying investment and cover ex ante risk. Pricing beyond this indispensability limit would be illegal. According to the third requirement of an Article 101(3)-like defence, ‘the likely efficiencies brought about by the conduct [must] outweigh any likely negative effects on competition and consumer welfare in the affected markets’.71 Under this approach, net harm to competition and consumers depends on all players in the affected markets, including their incentives to innovate. Therefore, such a condition would require an assessment as well as a balancing of the refusal’s impact on the incentives to innovate of all players in the affected markets, including follow-on innovators. This requirement thus encapsulates the Commission’s incentive balancing test as applied in its Microsoft decision72 and endorsed by some commentators.73 This incentive balancing test has two major deficiencies: First, as has already been pointed out, such an open-ended balancing exercise is, to say the least, inherently complex.74 The task of conduct-specific rules is to reduce the uncertainty implied by the application of a general (balancing) standard by typifying the relevant and identifiable costs and benefits of conduct.75 An open-ended balancing test for refusals to deal would merely rephrase the existing general standard in conduct-specific terms. Second, even if it were feasible to obtain information on the relevant effects, the underlying balancing question is conceptually mistaken with regard to follow-on innovation. As has been pointed out,76 ex ante incentives to innovate cannot be traded-off in the sense of a balancing test. If a refusal to deal based on IP fulfils the first two conditions under an Article 101(3)-like defence, this means that competition policy acknowledges the efficiencies resulting from the innovation and that the refusal is necessary to recoup the investment in such innovation and the risk involved. A requirement beyond this, which asks whether the negative effects on the incentives for follow-on innovators outweigh such efficiencies from initial innovation, disregards the fact that follow-on innovation would not even be possible without the initial innovation. Put differently, if an obligation to supply makes an investment unprofitable,

70

Ibid. Ibid. 72 For a more detailed analysis see below at 8.2.1.3.5. 73 See eg Lévêque (2005), ‘Innovation, Leveraging and Essential Facilities: Interoperability Licensing in the EU Microsoft Case’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyright—EU and US Perspectives, pp 103–26. 74 See above at 3.4. 75 See above at 3.3.1. 76 See above at 2.4.1.1. 71

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the ex ante incentives for initial innovation fall below the relevant minimum threshold and would make any balancing against (incentives for) follow-on innovation redundant. Under the fourth condition of an Article 101(3)-like defence, the conduct in question must ‘not eliminate effective competition, by removing all or most existing sources of actual or potential competition’.77 As has already been noted, a dominant company with a market position approaching that of monopoly would never be able to satisfy this condition, even if its behaviour would generate efficiencies that outweighed the loss of residual competition. The requirement also rests on the problematic general assumption that even temporary monopolistic market structures lead to a reduction in innovation.78

6.2.2

Ex Ante Investment

As has been shown, an Article 101(3)-like approach under Article 102 TFEU suffers from major deficiencies, particularly in cumulative innovation settings. While its ‘incentives balancing’ element is practically impossible to carry out, its conditions are unduly narrow. Therefore, this approach should be replaced. Accordingly, the presumption of harm to competition as set out above at 6.1 should be rebuttable in two cases: where the dominant firm can demonstrate, first, that it would not have invested in the creation of the upstream facility or technology if it had known about the obligation to supply (ex ante efficiency defence), or second, that supply would not be feasible at reasonable cost (ex post efficiency defence, see below at 6.3). If the dominant firm is able to support its justification with arguments and evidence, it should be for the competition authority or the rival seeking supply to rebut and show that these arguments and evidence cannot prevail. This allocation of the burden of proof would also be consistent with the main general standard currently applied under § 2 Sherman Act and Article 102 TFEU.79 Demonstrating that a duty to supply would have reduced the ex ante incentives to innovate below the minimum threshold essentially consists of two steps: First, the dominant firm should have to provide data on its investment as well as the risk involved.80 Since the individual risk is generally difficult to estimate, data on the typical risk borne in the industry concerned may have to be relied upon. The investment costs may comprise all costs of creating and bringing to the market the facility or technology concerned, including, eg, the costs of expanding a network in single network contexts.81 A specific question arises if the initial investment has been financed by state resources, for instance in the case of electricity or gas networks or publicly funded research which led to a patent. Under market conditions, an agreement regarding transfer of ownership should reflect the underlying investment and risk. In these cases, the new owner should be allowed to justify a refusal to

77 Guidance Paper on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty, para 30. 78 See above at 2.4.1.3 and 3.3.3.3.1. 79 See above at 3.3.3.3.3. 80 Similarly, under Art 7(1) of the EC Database Directive (Directive 96/9/EC of the European Parliament and of the Council of 11 March 1996 on the legal protection of databases, OJ 1996 L77/20), in order to obtain certain rights the maker of a database has to show that there has been qualitatively and/or quantitatively a substantial investment. For an analysis of the notion of ‘substantive investment’ under the Database Directive see Derclaye (2005), ‘Database Sui Generis Right: What is a Substantial Investment? A Tentative Definition’, 36 International Review of Intellectual Property and Copyright Law 2. 81 See above at 4.6.1.2.

6.4

CONCLUSION

163

supply based on the underlying investment. Second, the dominant firm has to argue that it would not be able to recoup its investment plus a reasonable profit, if it had to supply its rivals at their maximum ability to pay. If the dominant firm took an ex ante risk, it should substantiate such a claim in this context. The competition authority (or the applicant), in turn, would have to show that the rival that is seeking supply is reasonably efficient. It would also have to rebut any suggestion that supply at the applicant’s maximum ability to pay would reduce the dominant firm’s incentives to innovate below the relevant minimum threshold.

6.3

CONDITION 3: NO EX POST EFFICIENCY DEFENCE

The final condition for an essential facilities type of test should be that an obligation to supply must not disrupt the dominant firm’s current business operations, ie provision of the product or technology concerned would not lead to unreasonable costs. Again, the relevant minimum threshold must be profitability of the essential ‘facility’ for its owner. Such an ex post efficiency defence, for which the owner of the facility should carry the burden of proof, is acknowledged under both § 2 Sherman Act and Article 102 TFEU.82 Typical examples of such defences include the following scenarios: —

where granting access to the applicant would reduce the efficiency of downstream users or licensees or the value of the facility or IP right,83 — where granting access would constrain the improvement, expansion or further development of the facility or IP right,84 or — where granting access would cause unreasonable cost if extra capacity had to be installed.85 While the benchmark—the profitability of the investment in the facility—is the same as for the ex ante efficiency defence, the perspective in terms of relevant point in time is different. The scenarios captured by the ex post efficiency defence cannot be anticipated (at least there cannot be a legitimate expectation of anticipation) at the time of the investment decision. Therefore, the ex post efficiency defence cannot be subsumed into and should be separated from the ex ante efficiency defence.

6.4

CONCLUSION

Under any type of essential facilities analysis it is essential to assess the source of the bottleneck.86 The ultimate source is not the property right itself that grants the right to refuse

82

See below at 7.3.1 and 8.2.1.3.5. Temple Lang (2002), ‘Compulsory Licensing of Intellectual Property in European Community Antitrust Law’, paper submitted to the DoJ/FTC Hearings, Washington DC, May 2002 (available at www.ftc.gov/opp/ intellect/020522langdoc.pdf), p 22. See also Temple Lang (2000), ‘The Principle of Essential Facilities in European Community Competition Law—The Position Since Bronner’, Journal of Network Industries 375. 84 Ibid. 85 For an analysis of the obligations of a dominant undertaking to adapt its infrastructure to the needs of firms seeking access in the context of tangible property see Höppner (2009), Netzveränderungen im Zugangskonzept. 86 Economic Advisory Group for Competition Policy (2005), An Economic Approach to Article 82, Report for DG Competition, p 45. 83

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accesss, but the economic parameters of the markets concerned. The essential facilities rule suggested in this chapter differentiates between refusals to deal based on IP and other refusals. Under this rule, a dominant firm is only liable for a refusal based on IP if such a refusal causes harm to dynamic competition. For all refusals, irrespective of the type of underlying property, the firm that would have to grant access should be allowed to claim that an obligation to supply would make an investment in such property unprofitable. Furthermore, the obligation to supply should not lead to unreasonable costs for the current business operations of the firm that has to grant access. There should be no balancing of efficiencies or incentives to innovate.

7 Cumulative Innovation under US IP and Antitrust Laws The object and the end of all Government is to promote the happiness and prosperity of the community by which it is established, and it can never be assumed that the Government intended to diminish its power of accomplishing the end for which it was created; and in a country like ours, free, active, and enterprising, continually advancing in numbers and wealth, new channels of communication are daily found necessary both for travel and trade, and are essential to the comfort, convenience, and prosperity of the people. … No one will question that the interests of the great body of the people of the State would, in this instance, be affected by the surrender of this great line of travel to a single corporation, with the right to exact toll and exclude competition for seventy years. While the rights of private property are sacredly guarded, we must not forget that the community also have rights, and that the happiness and wellbeing of every citizen depends on their faithful preservation. US Supreme Court, judgment in the Charles River case (1837)1 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. US Supreme Court, judgment in Trinko (2004)2

The previous chapters analysed the need for IP and competition rules that keep innovation, technology and product markets open to follow-on innovation and improvements. Whether US IP and antitrust laws and policies account for this need is assessed in this chapter in three steps: Section 7.1 outlines how far IP laws strike an ‘internal’ balance between the position of the owner of a first-generation IP and a follow-on innovator or improver. Sections 7.2–7.4 analyse the general no duty to deal rule under US antitrust law and the potential exceptions to it, which have been narrowed down by antitrust agencies and courts in recent years, culminating in the Supreme Court’s Trinko judgment. Finally, potential future tendencies are explored in 7.5.

7.1

THE INITIAL INNOVATOR’S AND THE IMPROVER’S POSITIONS UNDER US IP LAWS

The starting point for the analysis of an initial innovator’s legal position when refusing to license his IP has to be his rights as well as potential limits on those rights under the

1 2

Proprietors of Charles River Bridge v Proprietors of Warren Bridge, 36 US (11 Pet) 420, at 422 (1837). Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, 540 US 398, at 408 (2004).

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applicable IP law. As has already been pointed out,3 there may be scenarios where conduct falls foul of § 2 Sherman Act but the underlying IP is protected under a non-US IP law. Nevertheless, there are two reasons to focus on US IP laws: First, the position under US antitrust law regarding conduct covered by IP has been shaped primarily in cases involving IP protected under US law. Second, by preferring ‘IP reform’ over antitrust intervention, agencies, courts and commentators often explicitly highlight the importance of policy levers under US IP laws. US patent, copyright and trade secret laws provide for different legal positions of initial innovators and follow-on innovators as well as different levers that account for, or at least may be suitable to account for, the need to keep innovation, technology and product markets open for follow-on innovation and improvements.

7.1.1

US Patent Law

During the 20-year term of protection, the patentee—ie the patentee to whom the patent was issued and his successors in title4—may (i) not use the patent at all, (ii) use the patent himself, but not license it, or (iii) grant an exclusive licence or several licences. The first right was confirmed by the Supreme Court in Continental Paper Bag v Eastern Paper Bag.5 Referring to the District Court’s argument that the patentee ‘accumulate[s] patents merely for the purpose of … shutting out competitors’,6 the Supreme Court held that ‘such exclusion may be said to have been of the very essence of the right conferred by the patent, as it is the privilege of any owner of property to use or not use it, without question of motive’.7 Also confirming the right to refuse to license a patent, the Supreme Court held in Hartford-Empire Co v United States in the context of antitrust remedies that ‘[a] patent owner is not in the position of a quasi-trustee for the public or under any obligation to see that the public acquires the free right to use the invention. He has no obligation either to use it or to grant its use to others.’8

3

See above at 2.2.1.1. Cf 35 USC. § 100 (d). 5 210 US 405 (1908). 6 Cited in ibid, at 428. 7 Ibid, at 429. See also US v Studiengesellschaft Kohle, 670 F2d 1122, at 1127 (DC Cir 1981). In the context of copyright see Fox Film Corp v Doyal, 286 US 123, at 127 (1932): ‘The owner of a copyright, if he pleases, may refrain from vending or licensing and content himself with simply exercising the right to exclude others from using his property.’ But in relation to patent law see the dissenting opinion of four Justices written by Justice Douglas in Special Equipment Co v Coe, 324 US 370, at 380–83 (1945): ‘The right of suppression of a patent came into the law over a century after the first patent act was passed … [I]t is time to be rid of that rule. It is inconsistent with the Constitution and the patent legislation which Congress has enacted. … It is a mistake therefore to conceive of a patent as but another form of private property. The patent is a privilege “conditioned by a public purpose”. … The result is that suppression of patents has become commonplace. Patents are multiplied to protect an economic barony or empire, not to put new discoveries to use for the common good. … One patent is used merely to protect another. … It is difficult to see how that use of patents can be reconciled with the purpose of the Constitution “to promote the progress of science and the useful arts”.’ 8 Hartford-Empire Co v US, 323 US 386, at 432 (1945). 4

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If, in turn, somebody, without authority, makes, uses, offers to sell, or sells a patented invention within the US, or imports into the US any patented invention during the term of the patent,9 he infringes the patent. Infringement may be literal or may occur under the doctrine of equivalents. Literal infringement ‘requires that the accused device embody every element of the claim as properly interpreted’.10 If the accused device differs from the claimed invention such that it evades literal infringement, ‘but in ways deemed minor or insubstantial, or by features that are reasonably interchangeable with those of the claimed intervention’,11 it may still infringe the patent under the doctrine of equivalents. Infringement under this doctrine occurs where the accused device performs (1) substantially the same function, (2) in substantially the same way, (3) to achieve substantially the same result as the claimed invention12 (so-called ‘function, way, result’ test13). In analysing the (bargaining) position of an improver under US IP laws, Lemley introduced the following distinction between three situations:14 First, a rival infringes the existing patent without being able to patent his improvement (‘minor improver’). In this situation, US patent law does not offer protection to the minor improver. Here, the patent owner thus captures the value of the improvement. Second, a rival’s improvement itself is non-obvious in view of the prior art, and he can patent his improvement, but still infringes the prior patent, which is part of that prior art (‘significant improver’).15 This scenario can arise where the improvement, itself non-obvious, adds to the basic structure claimed in the original patent. This does not relieve the improver of liability for infringement.16 In this situation, the owner of the original patent can prevent the improver from using his patented technology, but the significant improver can also prevent the owner of the original patent from using the improvement (‘blocking patents’).17 This means that, unless the parties bargain, no one gets the benefit of the improvement. Third, although the improvement may fall within the literal claims of the original patent, it is sufficiently radical to constitute a departure from the existing patent.18 Under US patent law, the reverse doctrine of equivalents may allow such a ‘radical improver’ to escape infringement. His product must be ‘so far changed in principle from a patented article that it performs the same or a similar function in a substantially different way’.19 However, application of the reverse doctrine by the courts is rare.20 Only in this latter case will the improver not need a licence.

9

Cf 35 USC. § 271(a). Texas Instruments, Inc v US International Trade Commission, 805 F2d 1558, at 1562 (Fed Cir 1986). Hovenkamp et al (2004), IP and Antitrust, § 2.2, at 2–19, summing up the Supreme Court’s statement in Warner-Jenkinson Co v Hilton Davis Chemical Co, 520 US 17, at 40 (1997). 12 Graver Tank & Manufacturing Co v Linde Air Products Co, 339 US 605, at 608–09 (1950). 13 Hovenkamp et al (2004), IP and Antitrust, § 2.2, at 2–19. 14 Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989. See above at 4.5. 15 Ibid, at 1009. 16 Lemley cites as an example of this situation the case of Marconi Wireless Telegraph Co v De Forest Radio Telephone & Telegraph Co (236 F 942 (SDNY 1916), aff ’d 243 F 560 (2d Cir 1917)), where the court held that a triode (a container having three electrodes) infringed a prior patent on a diode (a container having two electrodes), since the triode necessarily contained two electrodes in a container. 17 Ibid, at 1009–10. See above at 4.5. 18 Ibid, at 1010. 19 Graver Tank & Manufacturing Co v Linde Air Products Co, 339 US 605, at 608–09 (1950). 20 Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989, at 1011. 10 11

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If somebody without a licence makes or uses a patented invention, he will infringe the patent. If the IP holder’s exclusionary conduct raises competition concerns, however, a potential infringer may resort to an antitrust claim or, as a defendant who is accused of already having infringed a patent, to an antitrust counterclaim. The full functional equivalent of an antitrust duty to license—a compulsory patent licence—only exists in US law under the Clean Air Act and the Atomic Energy Act.21 It is thus only available in very limited circumstances and only for overriding public policy reasons. There are, however, three other ‘internal’ devices under US patent law which may, at least as a byproduct, prevent the monopolisation of markets and thus alleviate competition and follow-on innovation concerns: (i) a research exemption (7.1.1.1), (ii) the patent misuse doctrine (7.1.1.2), and (iii) substitution of the property with a liability rule (7.1.1.3). 7.1.1.1

Research Exemption

Under US patent law, courts have developed an affirmative defence for non-commercial research via an interpretation of the scope of infringing ‘use’.22 In Whittemore v Cutter, Justice Story laid the foundations for the distinction between infringing commercial and non-infringing non-commercial use. He stated that use ‘for profit’ would bring an activity within the realm of infringement and commented that it could never have been the intention of the legislature to punish a man, who constructed … a machine merely for philosophical experiments, or for the purpose of ascertaining the sufficiency of the machine to produce its described effects. (emphasis added)23

The first prong of this statement developed into the common law experimental use exemption for non-commercial use. Its scope, however, has gradually been narrowed over time. In Madey v Duke University the Court of Appeals for the Federal Circuit (‘Federal Circuit’) held that, regardless of whether a particular institution or entity is engaged in an endeavor for commercial gain, so long as the act is in furtherance of the alleged infringer’s legitimate business and is not solely for amusement, to satisfy idle curiosity, or for strictly philosophical inquiry, the act does not qualify for the very narrow and strictly limited experimental use defense. Moreover, the profit or non-profit status of the user is not determinative. (emphasis added)24

This judgment shifts the focus of the experimental use defence from the question of commercial versus non-commercial nature of the experimentation (and the profit versus non-profit status of the alleged infringer) to merely a question of whether the use was in furtherance of the alleged infringer’s legitimate business. From an ex ante incentive perspective, it would be decisive to focus instead on the effects of a research exemption on the original innovator’s incentives instead of the infringer’s motives and business.25 What is even more important for the positive analysis in this context is that, due particularly to

21 Compulsory licensing provisions were considered for incorporation into US patent law within a revision in 1952, but they were ultimately dropped. 22 For an analysis of US patent law in this regard see Eisenberg (1989), ‘Patents and the Progress of Science: Exclusive Rights and Experimental Use’, 56 University of Chicago Law Review 1017. 23 29 F Cas 1120, at 1121 (CCD Mass 1813). 24 307 F3d 1351, at 1362 (Fed Cir 2002). 25 See above at 4.4.

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Madey, the common law research exemption under US patent law26 is reduced to a ‘mere de minimis exemption’, which does not fulfil the function of a research exemption for follow-on innovation.27 However, as will be pointed out in more detail below in the context of US antitrust law with regard to refusals to deal,28 so far US antitrust agencies and courts have not attempted to fill this gap by construing an antitrust duty to license in such situations to prevent the monopolisation of innovation markets.29 Instead, legislative proposals to introduce a broader research exemption have been made, but not adopted.30 7.1.1.2

Patent Misuse as a Defence

A lever to prevent the monopolisation of product markets under US patent law is the patent misuse doctrine, which the Supreme Court first applied in Motion Picture Patents.31 Today’s scope of the doctrine and, as a consequence, its relationship to antitrust are subject to debate.32 According to the Federal Circuit’s narrow interpretation, patent misuse is an affirmative defense to an accusation of patent infringement, the successful assertion of which ‘requires that the alleged infringer show that the patentee has impermissibly broadened the “physical or temporal scope” of the patent grant with anti-competitive effect’.33

According to this interpretation, the doctrine captures specific anti-competitive practices, ie those that increase the scope of the patent. One scenario involving such misuse might be the use of restrictive licensing agreements which involve the tying of unpatented products.34 At a normative level, some have argued that patent misuse principles should be completely aligned with antitrust principles.35 The Federal Circuit itself, however, has reaffirmed in various cases that the misuse doctrine is broader than antitrust.36 On this broader view, the

26 Additionally, s 271(e)(1) of the US Patent Act provides for a statutory exemption for research ‘reasonably related’ to regulatory approval by the Food and Drug Administration. This exemption, called ‘FDA safe harbour’, was the subject of the Supreme Court judgment in Merck KGaA v Integra Life Sciences I, Ltd, 545 US 193, 125 S Ct 2372 (2005). See below at 7.5. 27 Strandburg (2006), ‘The Research Exemption to Patent Infringement: The Delicate Balance Between Current and Future Technical Progress’ in Yu (ed), Intellectual Property and Information Wealth—Patents and Trade Secrets, vol 2, pp 107–36, at p 111. For criticism of the narrowing of the research exemption’s scope see also the FTC Report To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, ch 4, p 37; National Academy of Sciences (NAS) Committee on Intellectual Property Rights in the Knowledge-Based Economy, A Patent System for the 21st Century, p 82. 28 See below at 7.3. 29 See above at 4.4. 30 The proposed ‘Patent Competitiveness and Technological Innovation Act of 1990’, which included a broader research exemption, was not enacted. 31 Motion Picture Patents Co v Universal Film Manufacturing Co, 243 US 502 (1917). 32 For an analysis see Hovenkamp et al (2004), IP and Antitrust, § 3.2; Fromm & Skitol (2003), ‘Harmonization of the IP Misuse Doctrine and Antitrust Law: A Call for Help from the Agencies and Congress’, Antitrust Source (January issue) 1. See also Moore & Clark (2006), ‘Persistence in Parallax: Antitrust and Misuse Viewed through Brulotte, Philips, and Independent Ink’, 6 Newsletter of the ABA’s Intellectual Property Committee 33. 33 Virginia Panel Corp v MAC Panel Co, 133 F3d 860, at 868–69 (Fed Cir 1997) (quoting Windsurfing Int’l v AMF, Inc, 782 F2d 995 (Fed Cir 1986)). 34 See s 271(d)(5) Patent Act, according to which tying may only constitute misuse if the patentee has market power in the tying product market. 35 See eg Judge Posner in USM Corp v SPS Technology, Inc, 693 F2d 505, at 512 (7th Cir 1982). 36 For an analysis of the case law as well as arguments in favour of a misuse doctrine independent of antitrust law see Feldman (2003), ‘The Insufficiency of Antitrust Analysis for Patent Misuse’, 55 Hastings Law Journal 399.

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doctrine also rests on the notion of the integrity of the patent system. This suggests that the patent misuse doctrine may encompass types of conduct that would not be captured by an antitrust counterclaim, which is solely based on antitrust principles.37 On the other hand, the patent misuse doctrine may to some extent be more narrow than antitrust law with regard to refusals to license. § 271(d)(4) of the Patent Act, added in 1988 by the Patent Misuse Reform Act, provides: No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having … refused to license or use any rights to the patent …

It is a moot point whether this provision also creates immunity for (unilateral) refusals to license under antitrust law (against both an antitrust claim and a counterclaim). Some have argued that the provision refers to both ‘misuse’ and ‘illegal extension of the patent right’ and that reading the latter phrase to mean nothing more than patent misuse would render it redundant.38 These commentators read the latter phrase as referring to antitrust violations. Others have convincingly argued that the 1988 amendment does not apply to antitrust claims.39 In their view, Congress may have used both phrases to refer to different aspects of the doctrine of patent misuse. The Supreme Court confirmed this latter view in its judgment in Illinois Tool Works, stating that ‘the 1988 amendment does not expressly refer to the antitrust laws’.40 The DoJ and FTC have fallen into line with this position, referring to the principle that immunity from antitrust laws is both exceptional and disfavoured.41 This means that § 271(d)(4) Patent Act does not immunise refusals to license patents against the application of antitrust law. In that sense, the scope of applicability of the patent misuse doctrine is indeed more narrow than that of antitrust. However, as the analysis of the case law on different types of refusals to supply based on IP will show, to a large extent these two abstract considerations—that the patent misuse doctrine may be both broader and more narrow than antitrust doctrine—are not reflected in the practice of agencies and courts. Without anticipating the detailed analysis to follow,42 one may note that the substantive analysis concerning a refusal to license patents is often the same under both the patent misuse doctrine and antitrust law.

37 Aside from substance, there are also differences between the two instruments with regard to standing and the remedy. In particular, a misuse holding bars enforcement of the patent until the misuse is purged. 38 Gleklen (2002), ‘Per Se Legality for Unilateral Refusals to License IP is Correct as a Matter of Law and Policy’, Antitrust Source (July issue) 1, at 3. The Federal Circuit had also interpreted § 271(d)(4) to apply to antitrust claims involving refusals to license patent rights; see Re Independent Service Organisations Antitrust Litigation, 203 F3d 1322, at 1325 (Fed Cir 2000). For a critical comment on the judgment see Rabinowitz (2005), ‘When Does a Patent Right Become an Antitrust Wrong? Antitrust Liability for Refusals to Deal in Patented Goods’, 11 Richmond Journal of Law & Technology. 39 See eg the ABA Section of Antitrust Law, 1995 Federal Antitrust Guidelines for the Licensing of Intellectual Property: Comments & Text 48 (1996); Melamed & Stoeppelwerth (2002), ‘The CSU Case: Facts, Formalism and the Intersection of Antitrust and Intellectual Property Law’, 10 George Mason Law Review 407, at 410–12. 40 Illinois Tool Works Inc v Independent Ink, Inc, 547 US 29 (2006). For an analysis of the judgment see Kobayashi (2008), ‘Spilled Ink or Economic Progress? The Supreme Court’s Decision in Illinois Tool Works v Independent Ink’, 53 Antitrust Bulletin 5. 41 See the DoJ’s and FTC’s joint 2007 Report Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, pp 26–27. 42 See below at 7.3. See also Hovenkamp et al (2004), IP and Antitrust, § 3.2c, at 3–10, stating that, ‘[g]enerally speaking, patent misuse doctrine is largely coextensive with antitrust doctrine’.

7.1

7.1.1.3

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Substituting the Property Rule with a Liability Rule?

If a patentee discovers an infringement as described above, two basic civil remedies are available to him:43 first, an injunction to prevent the violation of his patent right, and second, damages which have to amount at least to a ‘reasonable royalty’ for the use made of the invention by the infringer.44 Hovenkamp et al note that so far only a few courts have refused to grant injunctions against the infringement of patents and relegated the patentee to a damages remedy, and only in cases where inventions related to public health or safety were at issue.45 Thus the courts do not generally substitute the statutory property rule with a liability rule.46 The Supreme Court’s 2006 judgment in eBay v MercExchange,47 however, may be interpreted as limiting the current use of injunctions, thus restraining the property rule. In this case, the District Court had found that eBay had infringed MercExchange’s valid patent. The District Court, however, refused to issue an injunction to stop the ongoing infringement, arguing inter alia that a ‘plaintiff ’s willingness to license its patents’ and ‘its lack of commercial activity in practicing the patents’ would be sufficient to establish that the patent holder would not suffer irreparable harm if an injunction did not ensue.48 On appeal, the Federal Circuit reversed, emphasising its ‘general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances’.49 The Supreme Court, on the one hand, rejected the District Court’s arguments against injunctive relief. On the other, it strongly rejected the automatic rule of the Federal Court. It instead held that the traditional four-factor test applied by courts of equity when considering whether to award permanent injunctive relief to a prevailing plaintiff also applied to disputes arising under the Patent Act. This test requires a plaintiff to demonstrate ‘(1) that it has suffered an irreparable injury; (2) that remedies available at law are inadequate to compensate for that injury; (3) that considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction’.50 Most importantly, a concurring opinion by four justices emphasised that there may be circumstances in which an injunctive relief is not appropriate. It is worth quoting a passage of this opinion: In cases now arising trial courts should bear in mind that in many instances the nature of the patent being enforced and the economic function of the patent holder present considerations quite unlike earlier cases. An industry has developed in which firms use patents not as a basis for

43 Cf 35 USC, § 281. Whether a licensee possesses independent standing to sue an alleged infringer depends on whether he holds a legal title to the patent. For this assessment, courts consider whether the terms of a licence agreement can be interpreted to convey ‘all substantial rights’ in a patent (Prima Tek II, LLC v A-Roo Co, 222 F3d 1372, at 1377–78 (Fed Cir 2000)). 44 Cf 35 USC. § 283 and § 284. 45 Hovenkamp et al (2004), IP and Antitrust, § 13.2b; Hovenkamp et al (2005), ‘Unilateral Refusals to License in the US’ in Lévêque & Shelanski (eds), Antitrust, Patents, and Copyright, p 14, citing, amongst others, the case of Milwaukee v Activated Sludge (69 F2d 577 (7th Cir 1934)), in which the patentee owned a patent for the treatment of raw sewage and successfully sued a sewage treatment plant for infringement. The court in this case refused to grant an injunction, and instead awarded the patentee damages. 46 Some commentators have used the notion of the ‘judicially created compulsory licence’. Since a liability rule can only serve as ‘shield’ and not as ‘sword’, however, this notion is not apt. See above at 4.4.1 and 4.5.3. 47 547 US 388 (2006). 48 275 F Supp 2d 695, at 712 (2003). 49 401 F 3d 1323, at 1339 (2005). 50 547 US 388, at 391 (2006).

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producing and selling goods but, instead, primarily for obtaining licensing fees. See FTC, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy, ch 3, pp 38–39 (Oct 2003) … For these firms, an injunction, and the potentially serious sanctions arising from its violation, can be employed as a bargaining tool to charge exorbitant fees to companies that seek to buy licenses to practice the patent. … When the patented invention is but a small component of the product the companies seek to produce and the threat of an injunction is employed simply for undue leverage in negotiations, legal damages may well be sufficient to compensate for the infringement and an injunction may not serve the public interest. In addition injunctive relief may have different consequences for the burgeoning number of patents over business methods, which were not of much economic and legal significance in earlier times. The potential vagueness and suspect validity of some of these patents may affect the calculus under the four-factor test. The equitable discretion over injunctions, granted by the Patent Act, is well suited to allow courts to adapt to the rapid technological and legal developments in the patent system.51

The emphasis on the four-factor test and in particular the concurring opinion may be interpreted as a proposal to partially substitute the property rule with a liability regime. The opinion, however, seems to be limited to situations involving patent thickets and hold-up where a non-practising entity attempts to extract an excessive licensing fee.52 A representative of the FTC has pointed out that if the patentee uses his patent exclusively—ie uses his invention in his own products or keeps it from the market to avoid competition with his products—denial of an injunction may cause irreparable damage (first factor) by creating competition with the patentee’s intended exclusive use.53 The discretion under the fourfactor test thus seems unlikely to be applied to address the potential foreclosure of product markets for improved products.

7.1.2

US Copyright Law

Similar to the position of the holder of an initial patent, § 106 of the US Copyright Act gives the owner of a copyright the exclusive right to, amongst other things, reproduce the copyrighted work in copies and to authorise such reproduction. This means that the copyright owner may (i) not use the copyright at all, (ii) use it himself, or (iii) grant (exclusive) licences. The Supreme Court confirmed these rights vis-à-vis arguments relating to anticompetitive effects. For example, in Stewart v Abend the Court stated that ‘nothing in the copyright statutes would prevent an author from hoarding all of his works during the term of the copyright’ and that ‘a copyright owner has the capacity arbitrarily to refuse to license one who seeks to exploit the work’.54 Infringement occurs if somebody copies the protected work. Such infringing copying extends to taking only the non-literal elements of a work, such as the structure, sequence and organisation of a computer program. Again similar to patent law, a copyright owner

51 547 US 388 (2006), at 397. The Supreme Court (in Quanta v LG Electronics, 553 US 617 (2008)) limited another patent-friendly position of the Federal Circuit, holding that the exhaustion doctrine applies to the authorised sale of components that ‘substantially embody’ a process patent. 52 See above at 4.2.2. 53 See the speech of the FTC Chairman Deborah Platt Majoras, ‘A Government Perspective on IP and Antitrust Law’, delivered in Washington, 21 June 2006, at p 8. 54 495 US 207, at 228–29 (1990).

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has two basic civil remedies available to him in case of infringement of his exclusive rights:55 first, an injunction to prevent or restrain infringement of his copyright, and second, a claim for damages and additional profits of the infringer.56 The position of improvers under the Copyright Act is even weaker than under the Patent Act: Again referring to Lemley’s terminology and analysis, minor improvements in the context of copyright such as editorial or factual corrections—with the exception of fair use cases— infringe the original work.57 With regard to significant improvements, ie those improvements to a copyrighted work which themselves contain original, creative expression, § 103(a) of the Copyright Act provides that ‘[t]he subject matter of copyright … includes compilations and derivative works, but protection for a work employing preexisting material in which copyright subsists does not extend to any part of the work in which such material has been used unlawfully’. Consequently, only where the improver’s contribution can be separated from the other parts of the work might his improvement be copyrightable. Conversely, where the improver’s contribution is inextricably intertwined with the pre-existing material, the owner of the initial copyright may capture the entire value of such improvement.58 There is thus no analogous situation of ‘blocking copyrights’. Finally, in relation to radical improvements, such as ‘a work in which the new material predominates over infringing material’, there is no functional equivalent to the patent reverse doctrine of equivalents.59 Such improvers infringe the original copyright where they copy any substantial amount of the original work. As under the US patent system, the Copyright Act provides only for very few compulsory licensing provisions.60 There are some ‘internal’ levers, however, which may prevent the monopolisation of markets through conduct covered by an exclusive right. 7.1.2.1

Independent Creation, Fair Use, and Reverse Engineering

In contrast to patent law, one way to use a copyrighted work legally is through independent creation, which provides for a complete defence. More importantly, US copyright law provides the fair use doctrine, under which use for, amongst other things, research purposes may not constitute infringement. Pursuant to § 107 Copyright Act, fair use analysis has to take into account the ‘purpose and character of the use’ of a copyrighted work, its nature, the ‘amount and substantiality of the portion used in relation to the copyrighted work as a whole’, and the ‘effect of the use upon the potential market for or value of the copyrighted work’. If, for example, such use is ‘transformative’,61 this factor counts as evidence of fair use. In a technical innovation context, courts have applied the fair use doctrine to the copying of

55

Cf 17 USC. § 501. Cf 35 USC. § 502 and § 504. Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989. See above at 7.1.1. 58 Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989, at 1020–21. 59 Ibid, at 1023. 60 The compulsory licensing provisions in the Copyright Act provide for compulsory licences for, inter alia, licensing for secondary transmissions by cable TV systems (§ 111(d)), compulsory licensing for the creation of sound recordings of previously published dramatic works (§ 115), and public performance using coin-operated jukeboxes (§ 116). 61 For an analysis of the respective jurisprudence see Leval (1990), ‘Toward a Fair Use Standard’, 103 Harvard Law Review 1105. For an economic analysis of the fair use doctrine in relation to the question whether use is ‘transformative’ see Landes & Posner (2003), The Economic Structure of Intellectual Property Law, pp 122–23. 56 57

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protected elements of copyrighted computer software in the process of reverse engineering, ie the process of taking the publicly available object code and attempting to reconstruct the original source code.62 The intermediate copying of the object code of a copyrighted computer program necessary to disassemble the program to view its expression constitutes fair use under specific conditions. In Sega v Accolade, the Ninth Circuit found that … where disassembly is the only way to gain access to the ideas and functional elements embodied in a copyrighted computer program and where there is a legitimate reason for seeking such access, disassembly is a fair use of the copyrighted work, as a matter of law. Our conclusion does not, of course, insulate Accolade from a claim of copyright infringement with respect to its finished products. Sega has reserved the right to raise such a claim, and it may do so on remand.63

In the 1998 Digital Millennium Copyright Act, added as § 1201(f) of the Copyright Act, US Congress specifically recognised reverse engineering needed for interoperability as an exception to the anti-circumvention rules. Despite the legality of reverse engineering as such, two problems remain: First, reverse engineering is often costly and may thus not provide an alternative to obtaining a licence from a private perspective. From a social perspective, it may lead to the wasteful duplication of costs for the development of a work.64 Second, the fair use doctrine does not help the new follow-on software escape infringement. As Lemley has noted generally, the fair use doctrine usually does not allow radical improvers to avoid infringement, whereas the reverse doctrine of equivalents would have this effect under patent law.65 The main reason for this is that the Supreme Court has singled out the ‘effect of the use upon the potential market for or value of the copyrighted work’ as ‘undoubtedly the single most important element of fair use’.66 Hence a radical improvement which competes with the original work cannot benefit from the fair use doctrine. 7.1.2.2

Copyright Misuse

Similar to patent law, copyrights have been found unenforceable by courts for misuse, in particular in cases concerning the information technologies sector. Copyright misuse has been especially relevant in cases on the leveraging of the power conferred by copyright to control markets ‘beyond the scope of the right’, such as aftermarkets.67 Thus the deterrence of fair use may constitute misuse. In contrast to patent law, the copyright misuse defence is not largely coextensive with antitrust principles, but has been based by courts on broader principles of public policy.68 Courts have held that a party may misuse its copyright without

62

See also above at 4.6 in the context of interoperability. Sega v Accolade. 977 F2d 1510, at 1527–28 (9th Cir 1992). See also the Court of Appeals for the Federal Circuit in Atari Games v Nintendo, 975 F2d 832 (Fed Cir 1992). 64 For an economic analysis of the private and social costs and benefits of reverse engineering see Samuelson & Scotchmer (2002), ‘The Law and Economics of Reverse Engineering’, 111 Yale Law Journal 1575. 65 Lemley (1997), ‘The Economics of Improvement in Intellectual Property Law’, 75 Texas Law Review 989, at 1024–25. 66 Harper & Row Publishers, Inc v Nation Enterprises, 471 SS 539, at 566 (1985). 67 See eg Lasercomb America, Inc v Reynolds, 911 F2d 970 (4th Cir 1990). 68 See eg Lasercomb America, Inc v Reynolds, 911 F2d 970, at 977–78 (4th Cir 1990). See Frischmann & Moylan (2000), ‘The Evolving Common Law Doctrine of Copyright Misuse: A Unified Theory and its Application to Software’, 15 Berkeley Technology Law Journal 865. 63

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necessarily violating antitrust law.69 On a normative level, some have argued, as with patent misuse, for an alignment with antitrust principles.70 To the extent that the copyright misuse doctrine has been invoked to address competition problems, the relevant case law will be analysed in conjunction with the antitrust case law on refusals to license.71

7.1.3

US Trade Secret Law

US trade secret law protects the owner of a trade secret against misappropriation. In the case of misappropriation, the owner of a trade secret may obtain injunctive relief and/ or compensatory damages.72 Persons who are in need of the secret information, such as follow-on innovators and improvers, may lawfully obtain this information via independent discovery or reverse engineering. As has been pointed out in the copyright context,73 however, such independent development or reverse engineering may be too costly from the private view and may entail the wasteful duplication of R&D efforts from the public perspective. Trade secret misuse arguments, unlike patent and copyright, seem to have been invoked only infrequently.74 The main argument that has been made against such a doctrine is that a trade secret owner—in contrast to an owner of a patent or a copyright—would have no leverage since ‘he cannot guarantee his licensees freedom from encroachment of others’.75 This argument is not sound since the non-availability of the information to others may protect its owner’s market power and secrecy may thus also shield the possibility of leveraging such a position. For the purpose of a positive analysis, however, it is fair to conclude that US trade secret law does not have an inbuilt lever to prevent the leverage of market power.

69 Eg in Video Pipeline, Inc v Buena Vista Home Entertainment, Inc, 342 F3d 191 (3rd Cir 2003), where the Court stated: ‘[I]t is possible that a copyright holder could leverage its copyright to restrain the creative expression of another without engaging in anti-competitive behaviour or implicating the fair use and idea/expression doctrines.’ See also Re Napster, Inc Copyright Litigation, 191 F Supp 2d 1087, 1 at 103 (ND Cal 2002). For a summary of the jurisprudence see Hovenkamp et al (2004), IP and Antitrust, § 3.4b. For an analysis of the doctrine see Gifford (2002), ‘The Antitrust/Intellectual Property Interface: An Emerging Solution to an Intractable Problem’, 31 Hofstra Law Review 363, at 398–406. 70 For example Judge Posner: ‘“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.” This point applies with even greater force to copyright misuse, where the danger of monopoly is less.’ Saturday Evening Post Co v Rumbleseat Press, Inc, 816 F2d 1191, at 1200 (7th Cir 1987), quoting USM Corp v SPS Techs, Inc, 694 F2d 505, at 512 (7th Cir 1982). For a concurring suggestion see Bohannan (2011), ‘IP Misuse as Foreclosure’, 96 Iowa Law Review 476, who suggests interpreting patent and copyright misuse as ‘foreclosure of competition, innovation, or the public domain’. 71 See below at 7.3.3. 72 See above at 2.2.1.2. 73 See above at 7.1.2.1. 74 Hovenkamp et al (2004), IP and Antitrust, § 3.5, at 3–51. For an analysis see Ridgway (2006), ‘Revitalizing the Doctrine of Trademark Misuse’, 21 Berkeley Technology Law Journal 1547. For an analysis of the relationship between trade secrecy and antitrust see First (2011), ‘Trade Secrets and Antitrust Law’, New York University Law and Economics Working Paper 255. 75 Quick Point Pencil Co v Aronson, 567 F2d 757, at 766 n 9 (8th Cir 1977) (Larson, J, dissenting); affirmatively cited by Hovenkamp et al (2004), IP and Antitrust, § 3.5, at 3–51.

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7.2

THE GENERAL ‘NO DUTY TO DEAL’ RULE UNDER US ANTITRUST LAW

The above analysis has shown that US IP laws give IP owners the right (i) not to use their IP, (ii) to refuse to license their IP, either at all or to specific customers, and (iii) to enforce their IP.76 Limitations on these rights to account for follow-on innovation and improvements and levers that can address competition concerns on innovation and product markets are limited. In particular the patent research exemption has been narrowed by the Court of Appeals for the Federal Circuit. Switching to the antitrust perspective, § 2 Sherman Act generally does not restrict the right even of a firm with market power to choose whether and with whom it deals, even outside an IP context. The Supreme Court established this broad general rule in US v Colgate, holding that [i]n the absence of any purpose to create or maintain a monopoly, the 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 …77

Later jurisprudence established a narrow set of circumstances under which there may be liability for refusals to deal under § 2 Sherman Act. The Supreme Court summed up its position in Aspen Skiing, stating that [t]he high value that we have placed on the right to refuse to deal with other firms does not mean that the right is unqualified.78

Accordingly, in refusal to deal cases, courts usually have, first, emphasised the general no duty to deal rule (‘Colgate doctrine’) and then assessed the potential exceptions to this principle. However, in IP cases, this usual two-step approach had been modified by the courts even before the Supreme Court’s Trinko judgment. Before considering and engaging in any assessment of an exception, courts asked in abstracto whether an IP holder could be liable at all for a refusal to supply based on IP (7.2.1). The Trinko judgment has arguably even further reduced the likelihood that an IP holder who refuses to deal is liable under § 2 Sherman Act (7.2.2).

7.2.1

No General Duties to Use and License IP Even Pre-Trinko

The Supreme Court itself never had to address directly the problem of liability for a refusal to license IP under § 2 Sherman Act. In another context, however, the Court held that a patentee’s decision ‘to exclude others from the use of the invention is not an offense against the Anti-Trust Act’.79 Similarly, in the context of an antitrust counterclaim based on sham litigation allegations, the Court emphasised the right of an IP holder—whose IP was not infringed in the case—to enforce his IP. The Court held that ‘to condition a copyright upon a demonstrated lack of anti-competitive intent would upset the notion of copyright as a “limited grant” of “monopoly privileges” intended simultaneously “to motivate the creative 76 Hovenkamp et al (2005), ‘Unilateral Refusals to License in the US’ in Lévêque & Shelanski (eds), Antitrust, Patents, and Copyright—EU and US Perspectives, pp 12–55, at pp 13–16. 77 250 US 300, at 307 (1919). 78 Aspen Skiing Co v Aspen Highlands Skiing Corp, 472 US 585, at 601 (1985). 79 US v United Shoe Machine Co, 247 US 32, at 57 (1918).

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activity of authors” and “to give the public appropriate access to their work product”.’ 80 Analysts of the Supreme Court’s and lower courts’ jurisprudence suggested even before Trinko that the judiciary had established an even broader no duty to deal rule for IP than for tangible goods.81 According to the most extreme view, a unilateral refusal to license IP even pre-Trinko was per se legal under § 2 Sherman Act.82 The DoJ and the FTC, in their 1995 Guidelines for the Licensing of Intellectual Property, state rather more reluctantly that an IP owner has no general duty to license its protected product, but at the same time acknowledge that IP rights may be used in an anti-competitive way.83 Lower courts have applied different approaches and tests, ranging from immunity, through per se legality with exceptions, to presumptive legality.84 7.2.1.1

Immunity from Antitrust Liability

The most deferential approach to refusals to deal based on IP was adopted in SCM v Xerox Corp.85 In that case, Xerox had obtained patents on plain paper photocopier parts and technology. It refused to grant a licence to SCM, which wanted to compete with Xerox in the market for plain paper photocopiers. SCM challenged Xerox’s acquisition of the patent and its subsequent refusal to license, alleging that the refusal violated § 2 Sherman Act. In particular, SCM contended that ‘a unilateral refusal to license a patent should be treated like any other refusal to deal by a monopolist’.86 In its judgment, the Second Circuit stated that patent and antitrust laws ‘necessarily clash’ when ‘the patented product is so successful that it evolves into its own economic market … or succeeds in engulfing a large section of a preexisting product market’.87 The court rejected SCM’s argument, holding that ‘[w]here a patent holder … merely exercises his “right to exclude others from making, using, or selling the invention,” by refusing unilaterally to license his patent for its seventeen year term, such conduct is expressly permitted by the patent laws’.88 Indeed, ‘[i]f the threat of treble damage liability for refusing to license were imbedded in the minds of potential patent holders as a likely prospect incident to every successful commercial exploitation of a patented invention, the efficacy of the economic incentives afforded by [the] patent system might be severely diminished’.89 The court concluded that,

80 Professional Real Estate Investors v Columbia Pictures, 508 US 49, at 64 (1993), citing Sony Corp of America v Universal City Studios, Inc, 464 SS 417, at 429 (1984). 81 For an analysis of the pre-Trinko jurisprudence see Kobak (2002), ‘Antitrust Treatment of Refusals to License Intellectual Property’, 22 Licensing Law Journal 1. 82 See eg Gleklen (2002), ‘Per Se Legality for Unilateral Refusals to License IP is Correct as a Matter of Law and Policy’, Antitrust Source (July issue) 1. 83 At 2.2. 84 The general approaches to the relationship between IP and antitrust have already been analysed above at 2.3. Here, only the specific immunity approaches to a unilateral refusal to license are dealt with. For an overview of the leading cases see ABA (2007), Intellectual Property and Antitrust Handbook, pp 273–318. For attempts to reconcile the different approaches see Hovenkamp et al (2004), IP and Antitrust, § 13.3d4. For a critical analysis of the approaches that are deferential to IP see Shelanski (2009), ‘Unilateral Refusals to Deal in Intellectual and Other Property’, 76 Antitrust Law Journal 369. 85 645 F2d 1195 (2d Cir 1981), cert denied 455 US 1016 (1982). 86 Ibid, at 1204. 87 Ibid, at 1203. 88 Ibid, at 1204. 89 Ibid, at 1206.

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where a patent has been lawfully acquired, subsequent conduct permissible under the patent laws cannot trigger any liability under the antitrust laws.90

This approach of absolute immunity to antitrust liability for refusals to deal based on IP has since been followed by other US courts.91 7.2.1.2

Per Se Legality with Exceptions (Xerox)

A more differentiated approach was suggested in Re Independent Service Organizations Antitrust Litigation (Xerox).92 In that case, CSU alleged that Xerox had violated the Sherman Act by setting the prices of its patented parts of photocopiers much higher for independent service organisations (ISOs) than for end-users, in order to force ISOs to raise their prices and thus eliminate ISOs from the service aftermarket for Xerox copiers. Xerox argued that its refusal to sell or license patented parts had been lawful and counterclaimed for patent infringement. In its judgment, the Federal Circuit explicitly rejected an inquiry into the subjective intent behind the decision to exclude competitors. Instead, the court stated that ‘[a] patent holder’s right to exclude others is surely within the limits of the patent monopoly as Congress specifically authorizes such conduct in the patent statute’; ‘[a]ccordingly, courts generally have not imposed liability on patent holders for conduct that is permissible under the patent laws’. The court held that [i]n the absence of any indication of illegal tying, fraud in the Patent and Trademark Office, or sham litigation, the patent holder may enforce its right to exclude others from making, using, or selling the claimed invention free from liability under the antitrust laws. (emphasis added)93

Under this approach, a patent-holder would be immune from antitrust liability except in the three scenarios carved out by the Federal Circuit. 7.2.1.3

Presumptive Legality (Kodak II)

In contrast to the above immunity and per se legality approaches, the First Circuit, in Data General Corp v Grumman Systems Support Corp (Data General),94 took a less deferential stance towards IP. In this case, Data General, which had created software that diagnosed problems in its computers, began restricting the licensing of this software to its own technicians. It sued Grumman, which was active in the aftermarket for services, for copyright violation and trade secret misappropriation. Grumman filed an antitrust counterclaim based on the argument that Data General’s refusal to license the software violated § 2 Sherman Act. In its judgment, the First Circuit stated that the right to exclude ‘creates a system of incentives that promotes consumer welfare … by encouraging investment in the creation

90

Ibid. See eg Miller Insituform v Insituform of North America, 830 F2d 606 (6th Cir 1987), which applied SCM. See also Coco (2007), ‘Patent Immunity from Antitrust: The Abbott Cases in the United States’, 28 European Competition Law Review 494. 92 203 F3d 1322 (Fed Cir 2000), cert denied, 121 S Ct 1077 (2002). 93 Ibid, at 1327. 94 36 F3d 1147 (1st Cir 1994). 91

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of desirable artistic works of expression’.95 Therefore antitrust defendants, according to the judgment, cannot be required ‘to prove and reprove the merits of the legislative assumption in every case where a refusal to license a copyrighted work comes under attack’.96 The court thus concluded that a party’s desire to exclude others from the use of its [protected] work is a presumptively valid business justification …97

Without further explaining the possibility of such a rebuttal, the First Circuit stated that ‘there may be rare cases in which imposing antitrust liability is unlikely to frustrate the objectives of the Copyright Act’, which are to ‘encourage investment in the creation of desirable artistic and functional works of expression’.98 The First Circuit’s approach may be interpreted as presumptive legality with the possibility of objective rebuttal. In this case, Data General’s exercise of its right to exclude constituted ‘a presumptively valid business justification’ which Grumman could not rebut. In a similar case, Kodak started restricting ISOs’ ability to procure spare parts for its copiers, after a period in which these parts had been generally available to those ISOs. In Kodak I, the ISOs alleged that Kodak had (i) illegally tied sales of such parts to maintenance and repair services for copiers and (ii) monopolised the service aftermarket for Kodak copiers by refusing to sell replacement parts to them. With regard to the complementary refusal to deal99 claim, the Supreme Court, quoting Aspen, stated that the right to refuse to deal with competitors ‘is not absolute; it exists only if there are legitimate competitive reasons for the refusal’.100 While Kodak had asserted that its refusal would prevent ISOs from free-riding on Kodak’s investment in equipment, parts and service, it had not raised as a business justification that some parts were patented or copyrighted. A jury on remand reached a verdict for the plaintiff ISOs. Appealing to the Ninth Circuit, Kodak argued that its refusal was based on its reluctance to sell patented or copyrighted parts. The Ninth Circuit rejected this justification and found that Kodak was using its monopoly on parts and equipment to exclude competition in the aftermarket for service and thereby monopolise this aftermarket (Kodak II).101 The court adopted the First Circuit’s presumption in Data General, but held that the presumption could be rebutted by evidence of ‘pretext’102 and that [n]either the aims of intellectual property law, nor the antitrust laws justify allowing a monopolist to rely upon a pretextual business justification to mask anti-competitive conduct.103

Applying this rebuttable presumption, the court found that ‘the proffered business justification played no part in the [defendant’s] decision to act’, that ‘Kodak photocopy and micrographics equipment requires thousands of parts, of which only 65 were patented’, and that ‘Kodak’s parts manager testified that patents “did not cross [his] mind” at the time [the 95

Ibid, at 1186–87. Ibid, at 1187. 97 Ibid, at 1187. 98 Ibid, at 1186–87 and fn 64. 99 For a general analysis of complementary refusals to supply see above at 4.1.1.2. 100 Eastman Kodak Co v Image Technical Services, 504 US 451, at 483 (1992). 101 Image Technical Services Inc v Eastman Kodak Co, 125 F3d 1195 (9th Cir 1997), cert denied, 523 US 1094 (1998). 102 Ibid, at 1218–19. 103 Ibid, at 1219. 96

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firm] began the parts policy’.104 This approach by the Ninth Circuit may be summarised as ‘presumptive legality with the possibility of intent-based rebuttal’.105

7.2.2

The Effects of Trinko

The varying approaches of the lower courts set out above arguably all have the purpose of accounting for the specific incentive function of IP. With regard to the differences between the approaches and the ensuing legal uncertainty, some commentators suggested that the problem of liability for a refusal to license IP was ripe for review by the Supreme Court.106 Although the Trinko case concerned tangible property (access to a telecommunications network), inferences may be drawn with regard to the current Supreme Court’s thinking on the issue. Generally, the Trinko judgment has been107 and must be interpreted as reinforcing the general no duty to deal rule. In its ruling, the Supreme Court still recognised that ‘[u]nder certain circumstances, a refusal to cooperate with rivals can constitute anticompetitive conduct and violate § 2’. The Court, however, did ‘not believe that traditional antitrust principles justify adding the present case to the few existing exceptions from the proposition that there is no duty to aid competitors’.108 Even more importantly, the Court used several arguments in its judgment which apply a fortiori to IP: First, with regard to the relationship between monopoly power and the incentives of firms to innovate, the Court highlighted that a firm’s ability to charge monopoly prices ‘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’.109 Second, the Court emphasised that compelled sharing reduces the incentives to innovate.110 Finally, the Court highlighted the costs of antitrust intervention, stating that [e]nforced 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.111

104

Ibid, at 1218–20. Carrier (2006), ‘Refusals to License Intellectual Property After Trinko’, 55 DePaul Law Review 1191, at 1195; Hovenkamp et al (2004), IP and Antitrust, § 13.3d3. For an analysis of the Kodak case see Baker (1999), ‘Promoting Innovation Competition through the Aspen/Kodak Rule’, 7 George Mason Law Review 495, and Shapiro (1995), ‘Aftermarkets and Consumer Welfare: Making Sense of Kodak’, 63 Antitrust Law Journal 483. 106 Eg Hovenkamp et al (2004), IP and Antitrust, § 13.3d4, at 13–28, 13–29. 107 There has been extensive discussion regarding the consequences of the Trinko judgment. See, amongst others, Hay (2005), ‘Trinko: Going All the Way’, 50 Antitrust Bulletin 527; Thorne (2005), ‘A Categorical Rule Limiting Section 2 of the Sherman Act: Verizon v Trinko’, 72 University of Chicago Law Review 289; Lao (2005), ‘Aspen Skiing and Trinko: Antitrust Intent and Sacrifice’, 73 Antitrust Law Journal 171; Fox (2005), ‘Is there Life in Aspen After Trinko? The Silent Revolution of Section 2 of the Sherman Act’, 73 Antitrust Law Journal 153; Lopatka & Page (2005), ‘Bargaining and Monopolization: In Search of the Boundary of Section 2 Liability Between Aspen and Trinko’, 73 Antitrust Law Journal 114; Economides (2005), ‘Hit and Miss: Leverage, Sacrifice, and Refusal to Deal in the Supreme Court Decision in Trinko’, NYU Stern Working Paper #05-32. 108 Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, 540 US 398, at 411 (2004). 109 Ibid, at 407. 110 Ibid, at 407–08. 111 Ibid, at 408. 105

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Additionally, ‘[j]udicial oversight under the Sherman Act would seem destined to distort investment and lead to a new layer of interminable litigation’. Furthermore, ‘[e]ffective remediation of violations of regulatory sharing requirements will ordinarily require continuing supervision of a highly detailed decree’.112 Citing Areeda, the Court held that ‘[t]he problem should be deemed irremedia[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency’.113 Since all of the above arguments apply a fortiori to dynamic industries and IP, it is reasonable to conclude that the current Supreme Court would favour immunity or per se legality for unilateral refusals to license.114 Indeed, in its more recent judgment in linkLine, the Supreme Court reaffirmed its Trinko arguments, in particular its ‘institutional concerns’ that courts are ‘ill suited as central planners’.115 Referring to Justice Breyer’s opinion in Town of Concord,116 the Court added that ‘antitrust rules “must be clear enough for lawyers to explain them to clients”’ and, implicitly, that pricing rules (in the case of price squeezes) without safe harbours may violate this principle.

7.3

POTENTIAL EXCEPTIONS TO THE NO DUTY TO DEAL RULE

Pre-Trinko, several exceptions to the general no duty to deal principle under § 2 Sherman Act were considered by courts and scholars. Contrary to the Colgate test initially suggested by the Supreme Court, these exceptions are based not on the intent of the firm that refuses to deal, but on objective conditions.117 The potential—functionally partially overlapping— exceptions include the following rules and scenarios: (1) (2) (3) (4) (5) (6)

the essential facilities doctrine (7.3.1), unjustified changes in the pattern of dealing (the Aspen Skiing scenario) (7.3.2), the monopoly leveraging doctrine (7.3.3), refusals as part of a margin squeeze strategy (7.3.4), discriminatory refusals to deal (7.3.5), and concerted refusals to deal (7.3.6).

All of these potential exceptions require that the refusal causes the refusing firm to acquire or maintain monopoly power. As has been pointed out, there should be no presumption under antitrust laws that the owner of IP has market power in markets on which the IP owner can exercise his exclusivity rights.118 Such a presumption, however, had developed under US antitrust law through a series of Supreme Court and lower court judgments.119

112

Ibid, at 414–15. Ibid, at 415. 114 See similarly Carrier (2006), ‘Refusals to License Intellectual Property After Trinko’, 55 DePaul Law Review 1191, at 1209. See also Carrier (2006), ‘Of Trinko, Tea Leaves, and Intellectual Property’, 31 Journal of Corporation Law 357, at 373. 115 Pacific Bell Telephone Co v linkLine Communications, Inc, 129 S Ct 1109 (2009). 116 Town of Concord v Boston Edison Co, 915 F2d 17, at 25 (1st Cir 1990). 117 For a legal summary of these exceptions see Schopler (2005), ‘Refusals to Deal as Violations of the Federal Antitrust Laws’, 41 ALR Federal 175. 118 See above at 6.1.1.2. 119 For an analysis of the case law concerning this presumption see Hovenkamp et al (2004), IP and Antitrust, § 4.2e, who ascribe the longevity of this presumption to the strict stare decisis doctrine. 113

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It was originally largely limited to tying cases and had its foundations in the patent misuse doctrine.120 In International Salt Co v United States,121 it migrated from patent to antitrust law. After the Supreme Court reaffirmed this presumption in Jefferson Parish,122 US Congress eliminated it in the patent misuse context. §271(d)(5) of the Patent Act now reads: (d) No patent owner otherwise entitled to relief for infringement or contributory infringement of a patent shall be denied relief or deemed guilty of misuse or illegal extension of the patent right by reason of his having done one or more of the following: … (5) conditioned the license of any rights to the patent or the sale of the patented product on the acquisition of a license to rights in another patent or purchase of a separate product, unless, in view of the circumstances, the patent owner has market power in the relevant market for the patent or patented product on which the license or sale is conditioned. (emphasis added)

Both the DoJ and the FTC, in their Licensing Guidelines, state that they ‘will not presume that a patent, copyright, or trade secret necessarily confers market power upon its owner’.123 Similarly, the US Antitrust Modernization Commission recommended that ‘market power should not be presumed from a patent, copyright, or trade mark in antitrust tying cases’.124 In its judgment in Illinois Tool Works,125 the Supreme Court drew on the above amendment to the Patent Act, the DoJ’s and the FTC’s practice as well as scholarly criticism126 and placed tying arrangements in the rule of reason category. The Court held that Congress, the antitrust enforcement agencies, and most economists have all reached the conclusion that a patent does not necessarily confer market power upon the patentee. Today, we reach the same conclusion, and therefore hold that, in all cases involving a tying arrangement, the plaintiff must prove that the defendant has market power in the tying product.127

In the following analysis of the potential exceptions to the general no duty to deal rule, special emphasis will be placed on two aspects: First, the effects of the Trinko judgment on the respective exception, and second, the relationship between antitrust rules and the doctrines of patent and copyright misuse.

7.3.1

Essential Facilities Doctrine

Potentially the strongest exception to the general no duty to deal rule is the essential facilities doctrine. Without using the notion of ‘essential facility’,128 the Supreme Court, 120

See above at 7.1.1.2. International Salt Co v United States, 332 US 392 (1947). Jefferson Parish Hospital District No 2 v Hyde, 466 US 2 (1984). 123 Ibid, at 2.2. 124 Antitrust Modernization Commission (2007), Report and Recommendations, recommendation 19. 125 Illinois Tool Works Inc et al v Independent Ink, Inc, 547 US 28 (2006). For an analysis of the judgment see Kobayashi (2008), ‘Spilled Ink or Economic Progress? The Supreme Court’s Decision in Illinois Tool Works v Independent Ink’, 53 Antitrust Bulletin 5. 126 Citing Areeda et al (2004), Antitrust Law X, at 1737a (‘there is no economic basis for inferring any amount of market power from the mere fact that the defendant holds a valid patent’) and Burchfiel (1991), ‘Patent Misuse and Antitrust Reform: “Blessed be the Tie?”’, 4 Harvard Journal of Law & Technology 1, at 57. 127 Illinois Tool Works Inc v Independent Ink, Inc, 547 US 28 (2006). 128 The notion was used first by the DC Circuit Court in Norman F Hecht v Pro-Football, Inc, 570 F2d 982, at 992 (DC Cir 1977). 121 122

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in Otter Tail,129 held that refusing access to an (electricity) network may constitute illegal monopolisation under § 2 Sherman Act. Based on these judgments, all federal circuit courts have recognised an essential facilities doctrine which requires a monopolist to deal with competitors under certain conditions.130 The Seventh Circuit’s decision in MCI Communications Corp v AT&T Co contains the most frequently cited list of elements of an essential facilities claim: (1) control of the essential facility by a monopolist; (2) a competitor’s inability practically or reasonably to duplicate the essential facility; (3) the denial of the use of the facility to a competitor; and (4) the feasibility of providing the facility.131

The feasibility analysis is not only an inquiry into whether access to the essential facility is physically possible (in particular due to capacity constraints); it is based on a broader notion, requiring that the monopolist has ‘no valid business reason’ for denying access to the facility.132 Thus, the feasibility analysis captures all potential ex post efficiency justifications133 for a refusal to deal. As compared with the essential facilities test suggested in chapter six, the four-element inquiry as set out in MCI does not provide an efficiency justification based on ex ante or dynamic efficiencies respectively, ie there is no inquiry into whether the defendant would have invested in the facility, given an obligation to supply.134 7.3.1.1

Does § 2 Sherman Act Allow for an Essential Facilities Doctrine?

The essential facilities doctrine under § 2 Sherman Act has been criticised both on legal grounds and for policy reasons.135 The latter normative arguments have already been dealt with.136 As a matter of law, based on the Chicago one monopoly profit theory, one could argue that a refusal to deal or monopolistic pricing does not lead to the maintenance of or an increase in monopoly power on a downstream market, but instead merely constitutes exploitative behaviour, which § 2 is not supposed to capture. As has already been pointed out, however, the Chicago one monopoly profit theory rests on very narrow and unrealistic assumptions.137 Therefore, monopolistic pricing for the upstream product not only

129 Otter Tail Power Co v United States, 410 US 366 (1973). The early classic case of United States v Terminal Railroad Association of St Louis (224 US 383 (1912)) concerned a concerted refusal to grant access to a railroad network. The Court concluded that the defendant had infringed § 1 and § 2 Sherman Act. In this case, the duty to grant access only arose as a remedy. It was not the refusal to grant access that triggered liability. For an analysis of the Supreme Court essential facility cases see Lipsky & Sidak (1999), ‘Essential Facilities’, 51 Stanford Law Review 1187, at 1195–210. 130 Elhauge (2003), ‘Defining Better Monopolization Standards’, 56 Stanford Law Review 253, at 261, and the judgments cited therein at fn 20. 131 708 F2d 1081, at 1132–33 (7th Cir 1983). 132 See eg City of Anaheim et al v Southern California Edison, 995 F2d 1373, at 1380 (1992); see also Areeda & Hovenkamp (2002), Antitrust Law IIIA, 773e. 133 See above at 6.3. 134 See above at 6.2. 135 Eg by Areeda (1989), ‘Essential Facilities: An Epithet in Need of Limiting Principles’, 58 Antitrust Law Journal 841; Werden (1987), ‘The Law and Economics of the Essential Facility Doctrine’, 32 St Louis University Law Journal 433. 136 See above at 4.4–4.9. 137 See above at 4.1.1.1.

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constitutes exploitative conduct, but may also distort competition on the downstream market in the sense of having the required exclusionary effects. A second fundamental legal argument against the essential facilities doctrine under § 2 Sherman Act (and under similar antitrust statutes) could be that it leads to liability not for an act, but for an omission (no supply). Such liability, in turn, necessitates a duty to deal as a positive remedy, bringing antitrust into the realm of regulation.138 Such an argument, however, would contravene the purpose of § 2, which is to prevent monopolisation due to foreclosure. Exclusionary effects can result in the same way from an omission as from an act. Moreover, the omission (no supply) could be framed as positive act (refusal to supply). From a legal point of view, there would thus be no fundamental argument against the existence of an essential facilities doctrine under § 2 Sherman Act. 7.3.1.2

IP as an Essential Facility?

The holder of an IP right may refuse to supply the invention or work itself (ie refuse to license)139 or a product140 on the basis of his rights. Both the IP itself and the product may potentially constitute essential inputs. Focusing on the first scenario of refusals to license,141 so far, no final reported decision in the US has explicitly held an IP right itself to be an essential facility.142 There are some lower courts findings that come close to finding an IP right to be an essential facility: in Intergraph v Intel, the District Court found that Intel’s patents and trade secrets related to its chip architecture constituted essential facilities.143 The decision was reversed by the Federal Circuit, which held that the doctrine requires anti-competitive action intended to eliminate competition in a downstream market.144 The Federal Circuit, however, found that Intergraph and Intel were not competitors. In Aldridge v Microsoft Corp,145 the plaintiff had sold a disk caching program. Microsoft included a competing disk caching function in its operating system Windows 95. Suing Microsoft to get pre-release access to Microsoft’s interfaces, Aldridge argued that Windows 95 constituted an essential facility. Applying the MCI test, the court stated that ‘a facility is

138 See eg Hovenkamp et al (2005), ‘Unilateral Refusals to License in the US’ in Lévêque & Shelanski (eds), Antitrust, Patents, and Copyright—EU and US Perspectives, pp 12–55, at p 18: ‘The essential facilities doctrine is unique in that a monopolist’s status … rather than any affirmative conduct determines liability.’ See also ibid, fn 33. 139 See the above scenarios 1–4 (at 4.4–4.7). 140 See the above scenario 5 (at 4.8). 141 The scenario of a refusal to sell a product protected by an IP right will be analysed immediately below at 7.3.1.3. 142 Hovenkamp et al (2005), ‘Unilateral Refusals to License in the US’ in Lévêque & Shelanski (eds), Antitrust, Patents, and Copyright—EU and US Perspectives, pp 12–55, at p 20. See also the remark of William J Kolasky in his speech ‘North Atlantic Competition Policy: Converging Toward What?’, London, 17 May 2002: ‘While the essential facilities doctrine originated in the United States, we have construed the doctrine very narrowly, limiting it largely to regulated utilities and joint ventures, out of fear that its overbroad application would both chill incentives to invest and innovate and require antitrust agencies to undertake the uncomfortable task of having to regulate the terms of access. For this reason, there are no cases in the United States applying the essential facilities doctrine to require the compulsory licensing of intellectual property.’ 143 Intergraph Corp v Intel Corp, 3 F Supp 2d 1255 (ND Ala 1998). 144 Intergraph Corp v Intel Corp, 195 F3d 1346, at 1357 (Fed Cir 1999): ‘The essential facility theory is not an invitation to demand access to the property or privileges of another, on pain of antitrust penalties and compulsion; thus the courts have required anti-competitive action by a monopolist that is intended to “eliminate competition in the downstream market”.’ 145 995 F Supp 728 (SD Texas 1998).

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essential … only when it is vital to both the plaintiff ’s individual competitive viability and the viability of the market in general’.146 Without directly addressing the issue of IP rights, the court came to the conclusion that Microsoft ‘could lawfully decline to reveal advances in technology’.147 Moreover, the court noted that the essential facilities doctrine had only been applied in cases of natural or government-supported monopolies.148 In BellSouth v Donnelly, the Southern District Court of Florida found that the defendant had infringed the plaintiff ’s copyright in yellow pages topic headings. Dealing with the defendant’s antitrust counterclaim, it held that the essential facilities doctrine can apply to information, stating that [a]lthough the doctrine of essential facilities has been applied predominantly to tangible assets, there is no reason why it could not apply, as in this case, to information wrongfully withheld. The effect in both situations is the same: a party is prevented from sharing something essential to compete.149

On appeal, however, the Eleventh Circuit found that the headings were not protected by copyright.150 7.3.1.3 A Product Embodying IP as an Essential Facility? The abovementioned cases of SCM, Xerox and Kodak I and II151 all involved refusals to sell products which incorporated an IP, in concreto the sale of parts for a durable good— parts of which were protected by an IP—to independent service organisations in order to monopolise the service aftermarket. From an economic point of view, cases such as these involve two possibly anti-competitive practices: First, a firm with market power on the market for the durable good also has market power on the market for spare parts (or, more generally, for complementary parts) for this durable good. It leverages this market power from the spare parts market to the market for services (aftermarket) by tying the sale of the parts with the service. Such bundling vis-à-vis the customer horizontally forecloses the independent service organisations. Second, such a firm refuses to sell the spare (or complementary) parts to such independent service organisations. It justifies this vertical foreclosure be reference to its IP on the spare or complementary part. One could analyse the latter conduct under the rubric of an essential facilities doctrine and ask whether the spare parts (or products complementary to the main product) constitute an essential input for the service market. As has been pointed out,152 in these cases the essential facilities doctrine should indeed apply. The above judgments, however, have not applied an essential facility test, but have discussed the refusal to sell the product protected by IP as part of a general leveraging theory.153

146

Ibid, at 753. Ibid, at 755–56. 148 Ibid, at 754. For an analysis of the question whether software may constitute an essential facility under § 2 see McGowan (1996), ‘Regulating Competition in the Information Age: Computer Software as an Essential Facility under the Sherman Act’, 18 Hastings Communications and Entertainment Law Journal 771. 149 BellSouth Advertising v Donnelley Information, 719 F Supp 1551 (SD Fla 1988). 150 999 F2d 1436 (11th Cir 1993). 151 See above at 7.2.1.2–7.2.1.3. 152 See above at 4.8. 153 See below at 7.3.3. 147

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7.3.1.4 Trinko and its Effects Even before the Trinko judgment, there was debate as to whether the Supreme Court itself had clearly adopted the essential facilities doctrine as such.154 In Aspen, the Court, in a footnote, stated that it found it ‘unnecessary to consider the possible relevance of the “essential facilities” doctrine’.155 Although the Court did not use those words in Otter Tail Power Co v United States, the case can be and has been read as if the Court had adopted the doctrine. In its Trinko judgment, however, the Court described the doctrine as a creation of some lower courts and stated that it had ‘never recognized such a doctrine’ and found ‘no need to either recognize it or to repudiate it here’.156 Thus, despite its asserted Supreme Court origins, the Court made clear that it does not support the doctrine. Aside from casting this general doubt on the existence of the doctrine, the Court weakened the doctrine by adopting the position that ‘essential facility claims should … be denied where a state or federal agency has effective power to compel sharing and to regulate its scope and terms’. Hovenkamp, an opponent of the doctrine, concluded from the judgment that [w]hile not stating it in so many words, Trinko may effectively have brought the era of antitrust essential facility claims to an end, certainly in regulated industries where an agency is actively supervising the conduct that forms the basis of an antitrust claim. If so, that would be an important step in our recognition that competition is not regulation, and federal courts are not regulatory agencies.157

Transferring the lex specialis logic from Trinko to the IP context, one could conclude that where a compulsory licensing regime exists, the essential facilities doctrine does not apply. Such lex specialis logic, however, should only apply to those (sector-specific) regulatory regimes which remedy the same concerns as the general essential facilities doctrine. Compulsory licensing provisions are rare and narrow and exist only for public policy reasons.158 Furthermore, distinguishing Trinko from Aspen Skiing and Otter Tail under the perspective of an unjustified change in the pattern of dealing, the Court pointed out that, in contrast to Aspen and Otter Tail, the services requested were not otherwise marketed or available to the public. The unbundled elements offered pursuant to the Telecommunications Act ‘exist only deep within the bowels of Verizon’.159 This statement makes clear that, if the Supreme Court (still) recognises the essential facilities doctrine at all, the doctrine will not apply to goods or services on hypothetical markets.

154 See eg Breyer, J, concurring in part and dissenting in part in AT&T Corp v Iowa Utilities Board, 525 US 366, at 428 (1999) (the essential facilities doctrine is ‘an antitrust doctrine that this Court has never adopted’); Areeda & Hovenkamp (2002), Antitrust Law IIIA, 773e (‘The Supreme Court has never articulated or approved the modern version of the essential facility doctrine’); Marquardt & Leddy (2003), ‘The Essential Facilities Doctrine and Intellectual Property Rights: A Response to Pitofsky, Patterson, and Hooks’, 70 Antitrust Law Journal 847. Affirmatively: Pitofsky et al (2003), ‘The Essential Facilities Doctrine under US Antitrust Law’, 70 Antitrust Law Journal 443, at 452–54. 155 Aspen Skiing Corp v Aspen Highlands Skiing Co, 472 US 585, at fn 44 (1985). 156 540 US 398, at 411 (2004). But see the critical statement by Lemley (transcript of a hearing at the AEIBrookings Joint Center for Regulatory Studies, San Francisco, 5 April 2004): ‘[The US Supreme Court in Trinko] didn’t just do away with the [essential facilities] doctrine altogether; in a rather Stalinist bit of revisionist history, it announced that the doctrine had never existed in the first place.’ 157 Hovenkamp (2006), The Antitrust Enterprise, p 248. 158 See above at 7.1.1. 159 Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, 540 US 398, at 410 (2004).

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Unjustified Change in the Pattern of Dealing

A second potential exception to the general no duty to deal rule which is often invoked by firms seeking the continuation of supply and discussed in the literature is based on the precedent in Aspen Skiing.160 In this judgment, the Supreme Court held that at a monopolist was not allowed to terminate a supply relationship with a competitor, since the following circumstances were present: (1) the termination constituted an ‘important change in a pattern of distribution that had originated in a competitive market and had persisted for several years’, ie a change of a dealing that has been presumptively efficient;161 (2) the competitor was not able to compete after the termination (ie there was an ‘exclusionary’ effect); and (3) there was no valid business justification, ie the termination was not motivated by efficiency concerns, but by the willingness to sacrifice short-run benefits in exchange for long-run benefits due to the disappearance of its rival.162 On a normative level, it has already been argued that an asymmetric regime in the sense of a lower liability threshold for a termination of supply than for a refusal de novo would give rise to inappropriate incentives and would thus be unjustified in most cases.163 As a matter of law, the Supreme Court in Trinko cast general doubt on Aspen Skiing as a basis for § 2 liability, stating that Aspen Skiing is at or near the outer boundary of § 2 liability. The Court there found significance in the defendant’s decision to cease participation in a cooperative joint venture …164

The Court, however, evaded explicitly overruling the Aspen Skiing precedent by distinguishing Trinko, holding inter alia that the plaintiff did not allege that the defendant, Verizon, voluntarily engaged in a course of dealing with its rivals. The reading of Trinko with regard to the termination of supply relationships has been diverse: Fox has argued that the Trinko facts fit the Aspen doctrine better than do the Aspen facts and that, a fortiori, if a case with the Aspen facts pattern were to come before the Supreme Court today, the Court would predictably dismiss the action.165 Another commentator has analysed the post-Trinko judgments of lower courts. In his view, these judgments suggest that Trinko has been an ‘instructive roadmap for plaintiffs’ in cases involving the termination of voluntary supply relationships, thus making such claims easier.166 A point that is often neglected is that, in Aspen, there was also a horizontal relationship between the plaintiff and the defendant, who offered a service in cooperation. As compared

160 Aspen Skiing Corp v Aspen Highlands Skiing Co, 472 US 585 (1985). For a summary and analysis of the judgment in the light of recent thinking see Jacobs (2005), ‘Hail or Farewell? The Aspen Case 20 Years Later’, 73 Antitrust Law Journal 59. 161 Aspen Skiing Corp v Aspen Highlands Skiing Co, 472 US 585, at fn 31 (1985), interestingly quoting Bork (1978), The Antitrust Paradox, p 156: ‘By disturbing optimal distribution patterns one rival can impose costs upon another, that is, force the other to accept higher costs.’ 162 Aspen Skiing Corp v Aspen Highlands Skiing Co, 472 US 585, at 602–03 (1985). 163 See above at 4.1.5. 164 540 US 398, at 399 (2004). For an analysis of the effects of Trinko on the Aspen doctrine see Lopatka & Page (2005), ‘Bargaining and Monopolization: In Search of the “Boundary of Section 2 Liability” between Aspen and Trinko’, 73 Antitrust Law Journal 115. 165 Fox (2005), ‘Is there Life in Aspen After Trinko? The Silent Revolution of Section 2 of the Sherman Act’, 73 Antitrust Law Journal 153, in particular at 166–67. 166 See the analysis of the post-Trinko case law by Skitol (2007), ‘Three Years After Verizon v Trinko: Broad Dissatisfaction with the Whole Thrust of Refusal to Deal Law’, Antitrust Source (April issue) 1, at 5.

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with a purely vertical relationship, the Aspen scenario may give rise to specific efficiencies from the cooperation (such as economies of scale), but also to anti-competitive collusion. Indeed, the Supreme Court in Trinko argued, albeit without referring directly to Aspen, that ‘compelling negotiation between competitors may facilitate the supreme evil of antitrust: collusion’.167 In its judgment in linkLine, the Supreme Court (only) referred to its Aspen ruling when stating that ‘there are … limited circumstances in which a firm’s unilateral refusal to deal with its rivals can give rise to antitrust liability’.168 This suggests that the Aspen doctrine of a ‘continued duty to deal’ is still alive post-Trinko. It is questionable, however, whether such a doctrine would apply to the termination of an IP licensing agreement. As Hovenkamp et al point out,169 even before Trinko, the courts in Xerox, Data General and Kodak,170 which involved refusals to continue an existing supply relationship, had not considered the pre-existing relationship as decisive. The disruption of an existing licensing relationship was an issue in the US proceedings against IBM on the basis of allegations that it unlawfully attempted to monopolise the markets for IBMcompatible mainframe computers and mainframe operating systems. In this case, IBM, the firm with the largest patent portfolio, had a policy of licensing patents to third parties under RAND terms, including to firms which were developing and marketing alternatives to its mainframe platform. This policy had also been the result of inquiries by competition authorities into IBM’s strategies.171 According to its policy, IBM granted Fundamental Software, Inc (‘FSI’) a licence to use IBM’s 31-bit mainframe operating system. Under this licence, FSI had developed software which enabled computers not using an IBM processor to emulate IBM’s 31-bit architecture. T3 Technologies (‘T3’), a system integrator, which combined software and hardware from different suppliers, entered into a reseller agreement with FSI, according to which it sold IBM compatible mainframes (‘tServers’). When IBM upgraded its technology to a 64-bit operating system and discontinued its old 31-bit system, it declined to renew FSI’s licence for the old system. This refusal to renew the licence caused T3’s sales of tServers to cease. T3 then entered into a reseller agreement with Platform Solutions, Inc (‘PSI’), which sought to license IBM’s new 64-bit operating system. However, IBM ultimately refused to grant a licence to PSI. As a consequence, T3 was not able to sell its new IBM-compatible mainframe product. When PSI continued to develop and market its alternative mainframe platforms, IBM sued PSI for breach of its software licences and infringement of patents (partially) covering its 31-bit and its new 64-bit operating system. IBM then acquired PSI. However, before the acquisition, T3 had intervened in the US court case and complained of antitrust violations by IBM, including the tying of licences of IBM’s operating system to the purchase of IBM mainframes.

167

540 US 398, at 408 (2004). Pacific Bell Telephone Co v linkLine Communications, Inc, 129 S Ct 1109 (2009). 169 Hovenkamp et al (2004), IP and Antitrust, § 13.3e, at 13–33. 170 See above at 7.2.1.2 and 7.2.1.3. 171 In the US, the DoJ had started an inquiry into IBM’s alleged monopolisation of the computer system market in 1969, but finally dropped the case in 1982. In the EU, the Commission had initiated proceedings against IBM on the basis of alleged tying or bundling of main memory and software to the purchase of its CPUs and discrimination against other manufacturers of memory and software by delaying the supply of changes in interface codes to them. In 1984, IBM committed to the Commission to provide other firms with its technical interface information needed to permit their products to be used with IBM’s mainframe computers. For an analysis see Vickers (2008), ‘A Tale of Two EC Cases: IBM and Microsoft’, 4 Competition Policy International 2. See also below at 8.3.1. 168

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The Southern District Court of New York172 granted IBM’s motion for summary judgment on T3’s antitrust claims raised, since it found that T3 lacked antitrust standing. The Court stated further that, even if T3 had antitrust standing, its claims would in any case fail because IBM’s refusal to deal with FSI and PSI would not constitute anti-competitive conduct. Referring to Trinko, the Court noted that the right to refuse dealings is not unqualified; it is subject to a limited exception in cases where voluntary dealings are terminated so as to forsake short-term profits for an anti-competitive objective. T3 had argued that IBM decided to cease its licensing and support of the 31-bit operating system with the sole purpose of foreclosing competition without a legitimate business reason. However, the Court considered that T3 did not demonstrate that IBM had sacrificed short-term profits with an anti-competitive purpose. In particular, the Court noted that IBM had invested ‘billions of dollars’ to develop the more functional and competitive 64-bit technology. The Court therefore concluded that, ‘[i]n these circumstances, IBM is not required to support and maintain its thirty-one bit technology’.173 Accordingly, the Court did not consider IBM’s refusal to deal in the 31-bit operating system with FSI and PSI to be anti-competitive even under the limited Aspen exception. In its assessment, the Court did not address the question whether the Aspen exception also applies to IP.174

7.3.3

Monopoly Leveraging Doctrine

A third potential exception to the general no duty to deal rule under § 2 Sherman Act may be the monopoly leveraging doctrine. Although liability under the doctrine will not necessarily lead to a duty to supply, it often addresses tying and bundling concerns, which may also be understood as conditional refusals to deal.175 The leveraging doctrine may thus put limits in particular on conditional refusals. In IP cases, this holds likewise for IP misuse doctrines, which functionally partly overlap with the antitrust leveraging doctrine. The leveraging doctrine goes back to the judgment in Griffith176 and has been confirmed in Kodak, where the Supreme Court, citing older case law, stated that it has held many times that power 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’.177

The most important discussion about the contours of the doctrine arose with regard to the question whether the leveraging firm must be likely to achieve monopoly power in the market into which it leverages its existing market power. According to the judgment of the Court of Appeals for the Second Circuit in Berkey Photo, a firm that uses its monopoly power in one market to obtain a competitive advantage in another market

172

IBM v Platform Solutions, Inc and T3 Technologies, Inc, 2009 WL 3127744 (No 06 Civ 13565(LAK)). Ibid, at 7. 174 The DoJ has been simultaneously reviewing T3’s allegations. The European Commission has also investigated practices of IBM which allegedly are intended to keep its mainframe customers captive (see below at 8.3.1). 175 See above at 4.1.3. 176 See United States v Griffith, 334 US 100, 107–08 (1948). 177 Kodak v Image Technical Services, 504 US 451 (1992). 173

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violates § 2 Sherman Act if its power in one market is ‘exercise[d] … to the detriment of the competition’ in another market.178 Referring to the judgment of the Court of Appeals in Trinko, however, the Supreme Court clarified that, [t]o the extent the Court of Appeals dispensed with a requirement that there be a ‘dangerous probability of success’ in monopolizing a second market, it erred.179

As Hovenkamp et al point out, the leveraging theory thus collapses into a claim for attempted monopolisation of the second market.180 Despite this narrow interpretation, the leveraging doctrine is still wider than the essential facilities doctrine, as we have already seen.181 Whether the leveraging doctrine is congruent with (or parallel to) misuse doctrines is subject to considerable debate. 7.3.3.1

Relationship to IP Misuse Doctrines

With regard to the relationship between patent misuse and the leveraging doctrine, two questions have to be distinguished: first, the preliminary question of immunity against liability, and second, the question of the substantive tests. § 271(d)(4) of the Patent Act exempts a patentee from liability for misuse ‘by reason of his having … refused to license or use any rights to the patent’. Refusals to license are thus immunised against patent misuse on a statutory level. § 271(d), however, does not immunise such refusals against the application of antitrust law, as has been pointed out.182 With regard to immunity against antitrust claims, however, courts have developed different ‘immunity theories’ through case law, as the above analysis of the jurisprudence on the applicability of antitrust law to IP has shown.183 Under the Federal Circuit’s approach in Xerox, a patentholder who enforces his right to exclude others from making, using or selling the claimed invention is immune against antitrust liability, except in the case of (1) tying, (2) fraud in the Patent and Trademark Office, or (3) sham litigation.184 This approach would align antitrust immunity with immunity against patent misuse according to § 271(d).185 It is unclear, however, whether the Federal Circuit in Xerox only addressed unilateral, unconditional refusals to deal or whether its per se legality approach would apply also to all conditional and even to concerted refusals to deal. Aside from this doubt, the Xerox stance towards refusals to deal based on IP differs considerably from the First Circuit’s approach in Data General and the Ninth Circuit’s approach in Kodak, which may be summarised as presumptive legality with the possibility of intent-based rebuttal.186 Absent guidance from the Supreme Court, there is thus no clear-cut answer with regard to the question of immunity against patent misuse as well as against antitrust liability and, consequently, with regard to the question whether such immunity would be congruent for both.

178 179 180 181 182 183 184 185 186

Berkey Photo Inc v Eastman Kodak Co, 603 F2d 263, 275 (2d Cir 1979), cert denied, 444 US 1093 (1980). In fn 4, citing Spectrum Sports, Inc v McQuillan, 506 US 447, at 459 (1993). See above at 3.2.1.3. Hovenkamp et al (2004), IP and Antitrust, § 10.3, at 10–15. See above at 4.5.4. See above at 7.1.1.2, in particular the Supreme Court’s interpretation of § 271(d) in Illinois Tool Works. See above at 7.2.1.1–7.2.1.3. See above at 7.2.1.2. Hovenkamp et al (2004), IP and Antitrust, § 3.3, at 3–40, 41. See above at 7.2.1.3.

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The second question is whether the patent misuse and leveraging doctrines are congruent in substance. With regard to patent misuse, the Federal Circuit held as follows: When a practice alleged to constitute patent misuse is neither per se patent misuse nor specifically excluded from a misuse analysis by § 271(d), a court must determine if that practice is ‘reasonably within the patent grant, ie, that it relates to subject matter within the scope of the patent claims’ Mallinckrodt, Inc v Medipart, Inc, 976 F2d 700, 708, 24 USPQ2d 1173, 1179–80 (Fed Cir 1992). If so, the practice does not have the effect of broadening the scope of the patent claims and thus cannot constitute patent misuse. Id, 976 F2d at 708, 24 USPQ2d at 1180. If, on the other hand, the practice has the effect of extending the patentee’s statutory rights and does so with an anticompetitive effect, that practice must then be analyzed in accordance with the ‘rule of reason.’ Id. Under the rule of reason, ‘the finder of fact must decide whether the questioned practice imposes an unreasonable restraint on competition, taking into account a variety of factors, including specific information about the relevant business, its condition before and after the restraint was imposed, and the restraint’s history, nature, and effect.’ State Oil Co v Kahn, 118 S Ct 275, 279, 139 L Ed 2d 199 (1997). (emphasis added)187

Under the patent misuse doctrine, there are thus three types of behaviour: (i) per se misuse, (ii) practices falling under § 271(d) Patent Act, and thus immunised against liability, and (iii) practices to be analysed under the rule of reason. The latter analysis is indeed largely congruent with an antitrust analysis under the rule of reason. Since the Federal Circuit has limited the scope of per se illegality for tying under the patent misuse doctrine in a judgment,188 one may thus conclude that the patent misuse and antitrust leveraging doctrines, from a substantive point of view, are to a great extent congruent.189 By contrast, copyright misuse and antitrust (leveraging) principles are not congruent, as has been indicated.190 In particular, courts have abstained from a market power inquiry when applying the copyright misuse doctrine. Aside from this substantive difference, both copyright and patent misuse doctrine procedurally are sharper swords than the antitrust leveraging doctrine: first, the standing requirement under the antitrust injury doctrine is more stringent, and second, the consequence of a finding of misuse—unenforceability of the IP against anybody—may be even more detrimental to an IP holder than treble damages under antitrust law.191 Due to these differences, copyright misuse may have a role in a cumulative innovation and dynamic competition context, in particular in the computer industry, as an additional punitive instrument: If a court finds that the claimant has sought to improperly expand the scope of its copyright, it may find misuse. As a consequence, the copyright owner cannot enforce his copyright until the misuse has been ‘purged’,192 ie the improper attempt to expand the right has been discontinued and its effects have been dissipated.

187

Virgina Panel Corp v MAC Panel Co, 133 F3d 860, at 869 (Fed Cir 1997). US Philips Corp v International Trade Commission, 424 F3d 1179 (Fed Cir 2005). The Federal Circuit held that mandatory package licensing should not constitute per se patent misuse, but instead should be analysed under the rule of reason (at 1193). 189 There remain differences between the IP misuse doctrine and antitrust regarding non-compete covenants and royalty payment arrangements (see Fromm & Skitol (2003), ‘Harmonization of the IP Misuse Doctrine and Antitrust: A Call for Help from the Agencies and Congress’, Antitrust Source (January issue) 1). 190 See above at 7.1.2.2. 191 For an analysis of the differences with regard to procedure and consequences see Myers (2007), The Intersection of Antitrust and Intellectual Property, pp 55–56. 192 See eg Lasercomb America, Inc v Reynolds, 911 F2d 970 (4th Cir 1990). 188

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The function of the copyright misuse doctrine may be demonstrated by reference to the judgment in DSC Communications v DGI Technologies. The plaintiff sold a microprocessor card for use on its phone switches which ran on its copyrighted operating system. The defendant wanted to sell a competing microprocessor card compatible with the plaintiff ’s switch. To test its card with such a switch, it was necessary for the defendant to place its microprocessor cards in the plaintiff ’s phone switch, thereby creating a temporary RAM copy of the plaintiff ’s operating system in the switch. Rejecting the copyright infringement claim based on the temporary copying, the Fifth Circuit found that the plaintiff ‘seems to be attempting to use its copyright [on the operating system software] to obtain a patentlike monopoly over unpatented microprocessor cards’.193 Importantly, the misuse doctrine in this case did not address compatibility (or interoperability) with (systems) software protected by IP itself, but compatibility with a product containing unpatented technology. The misuse doctrine may thus prevent an improper extension of a copyright, irrespective of market power. Like the patent misuse doctrine, and in line with the logic underlying the antitrust leveraging doctrine, however, it is not designed to, and has not been used to, prevent pure input foreclosure through a unilateral refusal to deal. Neither patent and copyright misuse nor the antitrust leveraging doctrine thus serve as a functional substitute for an essential facilities doctrine with a cumulative innovation rationale. 7.3.3.2 The NYMEX Case Probably the most important post-Trinko refusal to supply case in an IP context was NYMEX. The case paradigmatically involved issues of construction of IP law, and a claim based on leveraging as well as on the essential facilities and Aspen doctrines. The plaintiff, New York Mercantile Exchange (‘NYMEX’), is the world’s largest exchange for the trading of physical commodity futures contracts and options on those contracts. Its settlement prices are used as benchmarks in transactions executed outside of NYMEX. NYMEX is statutorily obliged to report these prices to the public. The data provided on a realtime basis to subscribers was made available subject to the condition that it could not be used in competition with NYMEX. For its database of settlement prices NYMEX obtained a copyright registration, but not for the settlement prices themselves. The defendant, Intercontinental Exchange (‘ICE’), entered the market for executing the trades and was effectively forced to rely on NYMEX’s settlement prices. NYMEX sued ICE for violating its alleged copyright in the settlement prices. ICE counterclaimed that NYMEX’s refusal to supply the prices would violate § 2 Sherman Act. In essence, the District Court194 found that the settlement price was based on NYMEX’s analysis of factual data, and that the price was therefore a ‘real-world fact’ that NYMEX merely ‘discovered’. Accordingly, the prices were not copyrightable. The court also dismissed the counterclaim. Citing Trinko, it found that the essential facilities doctrine did not apply because the Commodities Futures Trading Commission had the authority to

193

DSC Communications Corp v DGI Technologies, Inc, 81 F3d 597, at 601 (5th Cir 1996). New York Mercantile Exchange, Inc v Intercontinental Exchange, Inc, 323 F Supp 2d 559 (SDNY 2004). For an analysis see Fox (2005), ‘A Tale of Two Jurisdictions and an Orphan Case: Antitrust, Intellectual Property, and Refusals to Deal’, 28 Fordham International Law Journal 952, in particular at 959–61; Czapracka (2007), ‘Where Antitrust Ends and IP Begins—On the Roots of the Transatlantic Clashes’, Yale Journal of Law & Technology 44, at 97–98. 194

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193

compel access to NYMEX settlement information. The court also rejected the counterclaim based on the Aspen doctrine, referring to the lack of any prior voluntary course of dealing between the parties and the lack of any alleged consumer harm. Again relying on Trinko, the District Court found that ICE had failed to allege proof of a dangerous probability of successful monopolisation of a second market and hence rejected ICE’s leveraging claim. The Second Circuit affirmed.195 Without explicitly addressing the problem of whether settlement prices are facts, the Court instead found against NYMEX under the merger doctrine. This doctrine bars copyright protection if there is only one way to express an idea or a fact, and thus the idea and its articulation are merged into one singular expression.196 Relying on this doctrine, the Second Circuit found that NYMEX sought to protect a price that can only come in a dollar amount and thus in one form. The judgment of the District Court shows that the lex specialis principle of Trinko has further limited the already narrow room for application of the essential facilities doctrine under § 2 Sherman Act, even beyond the sectors typically associated with ‘natural monopolies’. More importantly, both the District Court’s judgment and the Court of Appeals’ judgment demonstrate that, in some cases, a stringent use of IP levers may render the application of antitrust law unnecessary.

7.3.4

Margin Squeeze

A fourth potential restriction on refusals to deal may be thought to arise in situations involving constructive refusals to supply which lead to margin squeeze. In its recent judgment in linkLine,197 the Supreme Court had to answer the question whether a pricesqueeze claim may be brought under § 2 Sherman Act when the defendant is under no antitrust obligation to sell the inputs to the plaintiff in the first place. Referring extensively to its Trinko judgment, the Court answered in the negative. In essence following the dissenting opinion from a judge at the Court of Appeals in the case, the Court drew a sharp distinction between a high upstream and a low downstream price: With regard to high pricing at the upstream wholesale level, the Court held that a claim is only actionable if a firm has an antitrust duty to deal with its competitors. In this case, as in Trinko, the duty arose only from Federal Communications Commission regulations.198 With regard to the downstream retail level, the Court held that potentially ‘too low’ prices are only actionable if they meet the predatory pricing standard set in Brooke Group.199

195

497 F3d 109 (2d Cir 2007), cert denied, 2008 WL 177710 (US 17 March 2008). The first Supreme Court judgment on the merger doctrine was Baker v Selden, 101 US 99 (1879). Some courts regard the merger doctrine as a defence to copyright infringement, while others see it as a bar to copyrightability at the outset. 197 Pacific Bell Telephone Co v linkLine Communications, Inc, 129 S Ct 1109 (2009). 198 Pacific Bell Telephone Co, owned by AT&T, owns and operates lines used for digital subscriber line (DSL) services. AT&T is legally obliged (as a condition of a merger) to provide wholesale ‘DSL transport’ service to independent firms at a price no greater than the retail price of AT&T’s DSL service. linkLine Communications is an independent internet service provider which purchased wholesale DSL access from AT&T and then competed with AT&T’s retail operations. 199 Brooke Group Ltd v Brown & Williamson Tobacco Corp, 509 US 209, at 222–24 (1993): ‘[T]o prevail on a predatory pricing claim, a plaintiff must demonstrate that: (1) “the prices complained of are below an appropriate measure of its rival’s costs”; and (2) there is a “dangerous probability” that the defendant will be able to recoup its “investment” in below-cost prices.’ In his dissenting Ninth Circuit opinion (linkLine Communications, Inc v SBC California, Inc, 503 F 3d 876, at 886–87 (2007)), Judge Gould, with a view to the Trinko and Brooke Group 196

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Due to the Supreme Court’s distinction between up- and downstream pricing, a price-squeeze does not exist as stand-alone claim. Thus a (constructive) refusal to supply is not actionable as part of such a price-squeeze claim under § 2 Sherman Act, even in a tangible property context.200 7.3.5

Discriminatory Refusals to Deal

A fifth potential exception to the no general duty to deal rule may arise in scenarios involving discrimination. A refusal to deal may be discriminatory in two regards: First, the firm with monopoly power may deal exclusively with one customer, while refusing to supply others (selective refusal to deal). Second, such a firm may supply customers at different prices (discriminatory pricing). With regard to selective refusals to deal, the Supreme Court held in United States v United Shoe Machinery Co that an owner of intellectual property ‘necessarily has the power of granting [a licence] to some and withholding it from others’.201 Invoking liability for selective refusals to deal would run counter to the right of the IP holder to grant exclusive licences, which has been confirmed in other judgments.202 Exclusive licences, according to the FTC/DoJ Licensing Guidelines, may only raise antitrust concerns if the licensees themselves, or the licensor and its licensees, are in a horizontal relationship.203 In Trinko, the Supreme Court differentiated the case from Otter Tail, where ‘the defendant was already in the business of providing a service to certain customers (power transmission over its network), and refused to provide the same service to certain other customers’.204 The latter discriminatory element has been cited as a factor potentially giving rise to liability for a refusal to deal.205 Such an inference, however, would be misguided: The argument in Trinko was made in the context of differentiating refusals to start supplying from refusals to continue supplying. Furthermore, even if one recognises the discriminatory element in Otter Tail as a factor for liability in future refusal to supply cases, it is important to highlight that the case concerned tangible property. A holder of IP is therefore likely to be free to selectively refuse to deal. With regard to price discrimination in IP licensing, it is important to clarify that the Robinson-Patman Act does not apply.206 Under § 2 Sherman Act, agencies and courts

judgments, noted that ‘the notion of a “price squeeze” is itself in a squeeze between two recent Supreme Court precedents’. The Supreme Court similarly stated that the plaintiffs ‘have … tried to join a wholesale claim that cannot succeed with a retail claim that cannot succeed, and alchemize them into a new form of antitrust liability never before recognized by this Court. We decline the invitation to recognize such claims. Two wrong claims do not make one that is right.’ 200

For a comparison with the respective interpretation of Art 102 TFEU see below at 8.2.2. 247 US 32 (1918). 202 See eg Extractol Process Ltd v Hiram Walker & Sons Inc, 153 F2d 264, at 268 (7th Cir 1946) (‘No legitimate attack can be made on the patent or patent grant because the patentee chooses A and B as its licensees and refuses a license to X, Y, or Z’). See also US v Studiengesellschaft Kohle, mbH, 670 F2d 1122, at 1137 (DC Cir 1981); Genentech, Inc v Eli Lilly & Co, 998 F2d 931, at 949 (Fed Cir 1993) (patentees must have the power to select exclusive licences). 203 See the Guidelines, at 4.1.2 and 5.5–5.7. Exclusive licensing must be differentiated from exclusive dealing, which arises when a licence prevents or restrains the licensee from licensing, selling, distributing or using competing technologies (see the Guidelines, 4.1.2). 204 Verizon Communications Inc v Law Offices of Curtis V Trinko, LLP, 540 US 398, at 410 (2004). 205 See Antitrust Modernization Commission (2007), Report and Recommendations, p 102. 206 Hovenkamp et al (2004), IP and Antitrust, § 13.5c, at 13–51. 201

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195

regard differentiated pricing for licences, similar to exclusive licensing, as generally welfare-enhancing. The more recent case law, by requiring proof of anti-competitive effects, has established a rule of reason. Establishing such a foreclosure effect, however, seems likely only in situations which are comparable to a flat refusal to deal.207 In sum, based on the current interpretation of § 2 Sherman Act by US courts, neither discrimination with regard to the licensee nor with regard to the royalty would give rise to an exception to the general ‘no duty to license’ rule.

7.3.6

Concerted Refusals to Deal

A final exception to the no duty to deal principle may arise in situations of concerted refusals to supply. The category of concerted refusals to deal is a clear ‘survivor’ of the Trinko judgment: In its judgment the Supreme Court differentiated Trinko from two former refusal to deal precedents—Terminal Railroad and Associated Press208—which it (correctly) characterised as involving concerted action rather than unilateral conduct. The Supreme Court argued that concerted action is both more dangerous and easier to remedy.209 The category of concerted refusals to deal ranges from ad hoc boycotts by unrelated competitors to the exclusion of rivals from a potentially efficient collaboration such as a joint venture. Accordingly, US courts, depending on the factual circumstances of the case, have applied different tests to concerted refusals to deal, ranging from per se illegality for naked group boycotts210 through a truncated rule of reason (ie a market power inquiry)211 to a full rule of reason.212 The horizontal coordination element in concerted conduct, such as a concerted refusal to license IP,213 generally falls under § 1 Sherman Act, which prohibits unreasonable agreements in restraint of trade. Agreements concerning the disposition of IP rights can thus be illegal under § 1 even if unilateral conduct, under § 2, is not.214 Specifically with regard to IP, one typical scenario to be assessed under antitrust rules is a patent pool agreement which excludes competitors from access to pooled competing technologies.215 Such a horizontal agreement and/or the specific decision not to license technology may violate § 1 Sherman Act. According to the 1995 DoJ/FTC Guidelines,

207

Ibid, at 13–53, and § 23.4. Associated Press v United States, 326 US 1 (1945). 209 540 US 398, fn 3 (1994): Concerted action ‘presents greater anti-competitive concerns and is amenable to a remedy that does not require judicial estimation of free-market forces: simply requiring that the outsider be granted nondiscriminatory admission to the club’. 210 Eg Fashion Originators’ Guild of America v FTC, 312 US 457 (1941). 211 Eg Northwest Wholesale Stationers, Inc v Pacific Stationery & Printing Co, 472 US 284 (1985). 212 For a legal analysis see Areeda & Hovenkamp (2004), Fundamentals of Antitrust Law, § 22. For a comparative analysis of the case law on horizontal agreements not to deal with particular firms under US and EC law see Elhauge & Geradin (2007), Global Competition Law and Economics, pp 126–50. 213 For a description and economic analysis of this scenario see above at 2.2.2.1 and 4.1.2. 214 Hovenkamp et al (2005), ‘Unilateral Refusals to License in the US’ in Lévêque & Shelanski (eds), Antitrust, Patents, and Copyright—EU and US Perspectives, pp 12–55, at p 38, citing Zenith Radio Corp v Hazeltine Research, 395 US 100, at 135 (1969), where a concerted refusal to license patents was held illegal, even if unilateral refusals would not have been. Similarly, in SCM v Xerox (645 F2d 1195, at 1204 (2d Cir 1981); see above at 7.2.1.1), the Second Circuit distinguished between ‘a concerted refusal to license patents’, which it characterised as ‘attempting to enlarge … [a] monopoly beyond the scope of the patent’, and ‘refusing unilaterally to license’ a patent, which is ‘expressly permitted by the patent laws’. 215 For an analysis of the case law see Hovenkamp et al (2004), IP and Antitrust, § 34.4b2. 208

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‘exclusion from a pooling or cross-licensing arrangement among competing technologies is unlikely to have anti-competitive effects unless (1) excluded firms cannot effectively compete in the relevant market for the good incorporating the licensed technologies and (2) the pool participants collectively possess market power in the relevant market’.216 In such a scenario, compulsory licensing at reasonable rates is a recognised remedy.217 The second typical scenario in the IP context involves bilateral private standard-setting,218 which is often institutionalised in standard-setting organisations. A standard may incorporate technologies which are protected by IP, in particular by patents.219 Here, a refusal to license may occur on the basis of licensing agreements, which have been negotiated ex ante by participants in the standard-setting organisation. Such licensing agreements may violate § 1 Sherman Act.220 7.4

THE REMEDY

Since no decision or judgment has so far found liability under § 2 Sherman Act for a purely unilateral refusal to license IP, there is no typical remedy under US antitrust law to analyse. However, there are cases in which liability did not arise on the basis of a refusal to deal based on IP, but in which agencies or courts ordered a compulsory licence as a remedy.221 Three important cases will be analysed here in order to assess the respective rationale underlying the compulsory licence. 7.4.1

Example 1: Kodak II

In the abovementioned Kodak II case, Kodak was found liable for unilaterally using its monopoly in photocopier parts to monopolise the aftermarket for photocopier servicing.222 The District Court’s injunction had forced Kodak to sell its spare parts protected by intellectual property rights as well as license its copyrighted diagnostic and service software for 10 years on ‘reasonable and non-discriminatory terms and prices’. On appeal, the Ninth Circuit held that ‘direct price administration’ is ‘generally considered beyond [courts’] function’ and that Kodak was ‘entitled to monopoly prices on its patented and copyrighted parts’ anyway. The Ninth Circuit thus dropped the reasonableness requirement and amended the District Court’s injunction to provide that ‘Kodak should be permitted to charge all its customers … any non-discriminatory price that the market will bear’.223

216

1995 Antitrust Guidelines for the Licensing of Intellectual Property, at 5.5. See eg US v Glaxo Group Ltd, 410 US 52 (1973), which involved a patent pool. 218 As opposed to de facto standards and standards compelled by public regulation. 219 See above at 4.7. 220 For a review of the competition concerns in such cases see the FTC/DoJ Final Report, ch 3. For a legal analysis of standard-setting see in particular Hovenkamp et al (2004), IP and Antitrust, § 35; Lemley (2002), ‘Intellectual Property Rights and Standard-Setting Organizations’, 90 California Law Review 1889. 221 For an overview of the remedies available in § 2 cases see the contribution of the US to the 2007 OECD Report Remedies and Sanctions in Abuse of Dominance Cases, DAF/COMP(2006)19, pp 173–80. For a historical overview of compulsory licensing as a remedy under US antitrust law see the speech of the then Deputy Assistant Attorney-General of the DoJ’s Antitrust Division, Makan Delrahim, ‘Forcing Firms to Share the Sandbox: Compulsory Licensing of Intellectual Property Rights and Antitrust’, London, 10 May 2004. 222 See above at 7.2.1.3. 223 Image Technical Services Inc v Eastman Kodak Co, 125 F3d 1195, at 1225–26 (9th Cir 1997). 217

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THE REMEDY

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The Ninth Circuit thus essentially limited the pricing constraints on Kodak to nondiscrimination. As we saw earlier,224 such an approach to the royalty question preserves the IP holder’s incentive to innovate to the maximum degree. Allowing for monopoly pricing, however, may not sufficiently constrain the licensor to enable competition by reasonably efficient firms on the downstream market or the aftermarket. 7.4.2

Example 2: Microsoft

In the US Microsoft case,225 the Court of Appeals for the DC Circuit held that Microsoft had violated § 2 Sherman Act by engaging in a variety of exclusionary acts to prevent the further rise of a perceived competitive threat from so-called middleware.226 Middleware is software that runs on operating systems such as Microsoft Windows, but has APIs on which software developers can rely instead of calling on the operating system’s own APIs. Middleware written for multiple operating systems—such as, at that time, Netscape Navigator and Sun Microsystem’s Java—reduce the application barrier to entry to the market for operating systems by making it easier for software developers to create applications which work on different operating systems. Contrary to the European Commission’s Microsoft decision, however, the judgment did not deal with potential liability for a refusal to license IP. On remand, the District Court entered an order which largely resembled an agreement between Microsoft, the Federal Government and several state plaintiffs.227 Despite the lack of liability for a refusal to license,228 this order contains several obligations which compel Microsoft to license its IP229 as well as to disclose information

224

See above at 5.1. For a description and analysis of the US Microsoft case see Page & Lopatka (2007), The Microsoft Case: Antitrust, High Technology, and Consumer Welfare. For an economic analysis of the case see, amongst many others, Bresnahan (2002), ‘The Economics of the Microsoft Case’, Stanford Law and Economics Olin Working Paper No 232; and Bresnahan (2001), ‘Network Effects and Microsoft’, Working Paper, available at www.stanford. edu/~tbres/Microsoft/Network_Theory_and_Microsoft.pdf; Gilbert & Katz (2001), ‘An Economist’s Guide to US v Microsoft’, 15 Journal of Economic Perspectives 25; Fisher & Rubinfeld (2001), ‘US v Microsoft—An Economic Analysis’ 46 Antitrust Bulletin 1. 226 United States v Microsoft Corp, 253 F3d 34 (DC Cir), cert denied, 534 US 952 (2001). 227 See New York v Microsoft Corp, 224 F Supp 2d 76, at 86 (DDC 2002) and Microsoft Corp, 231 F Supp 2d. 228 See New York v Microsoft Corp, 224 F Supp 2d 76, at 190: ‘Although this aspect of the remedy plainly exceeds the scope of liability it is appropriately forward-looking’ and thus in the public interest, because it is ‘closely connected with the theory of liability in this case and further[s] efforts to prevent future monopolization’. For a general analysis of the relationship between liability and the remedy under § 2 Sherman Act and Art 102 TFEU see above at 5.2. 229 See Section III.B of the order: ‘… Microsoft’s provision of Windows Operating System Products to Covered OEMs shall be pursuant to uniform license agreements with uniform terms and conditions. … Microsoft shall charge each Covered OEM the applicable royalty for Windows Operating System Products as set forth on a schedule, to be established by Microsoft …, that provides for uniform royalties for Windows Operating System Products, except that: … 2. the schedule may specify reasonable volume discounts …; and 3. the schedule may include market development allowances, programs, or other discounts in connection with Windows Operating System Products … I. Microsoft shall offer to license to ISVs, IHVs, IAPs, ICPs, and OEMs any intellectual property rights owned or licensable by Microsoft that are required to exercise any of the options or alternatives expressly provided to them under this Final Judgment, provided that 1. all terms, including royalties or other payment of monetary consideration, are reasonable and non-discriminatory; 2. the scope of any such license (and the intellectual property rights licensed thereunder) need be no broader than is necessary to ensure that an ISV, IHV, IAP, ICP or OEM is able to exercise the options or alternatives expressly provided under this Final Judgment …’ (emphasis added). 225

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on interfaces230 and communications protocols231 to allow for interoperation or communication of application software with its Windows operating system. As US antitrust officials have noted, this remedy overlaps with the interoperability remedy as adopted in the European Commission’s 2004 Microsoft decision. It has the same aim of providing competing software developers with the opportunity to build products that communicate and interoperate with Windows-based PCs.232 The decree also extensively determines compliance and enforcement procedures, including the appointment of a standing threeperson Technical Committee to assist in both monitoring compliance with and enforcing the terms of the settlement.233 In its memorandum opinion in the enforcement stage, the District Court rejected the plaintiffs’ suggestion that the court should require Microsoft to license its IP royalty free. In the court’s view, this would amount to ‘a divestiture of one of Microsoft’s most valuable assets’ and thus to a structural remedy.234 Referring to the Court of Appeals’ final judgment on liability, the District Court held that such a divestiture would only be appropriate ‘where Plaintiffs have adduced evidence of “a clearer indication of a significant causal connection between the conduct and … maintenance of the market power”’.235 However, the plaintiffs failed to provide such evidence. Justifying the terms of the remedy, the District Court nevertheless held that the effectiveness of the disclosure provisions in the Court’s remedy is dependent upon the provision of the relevant technical information on terms which are consistent with the goal of fostering competition. In this regard, the Court must restrict the terms of the mandatory license so as to ensure that the goal of the remedial provision is not thwarted by discriminatory or oppressive license terms. Accordingly, the Court shall prohibit Microsoft from imposing unreasonable or discriminatory license terms, but shall permit Microsoft to require a reasonable royalty for the licenses necessary to exercise the rights guaranteed by the final judgment. The reasonableness standard is appropriate and likely necessary in this context because it avoids ‘involv[ing] the judiciary in the administration of intricate and detailed rules’ relating to specific licenses. Paramount Pictures, 334 US at 163 (‘The judiciary is unsuited to affairs of business management …’). At the same time, however, the requirement of reasonableness imposes upon Microsoft an objective standard which curtails Microsoft’s ability to manipulate the terms of the intellectual property licenses in an attempt to circumvent the licensing and disclosure mandates of the remedial decree.236

230 See Section III.D: ‘… Microsoft shall disclose to ISVs, IHVs, IAPs, ICPs, and OEMs, for the sole purpose of interoperating with a Windows Operating System Product … the APIs and related Documentation that are used by Microsoft Middleware to interoperate with a Windows Operating System Product. … the term APIs means the interfaces, including any associated callback interfaces, that Microsoft Middleware running on a Windows Operating System Product uses to call upon that Windows Operating System Product in order to obtain any services from that Windows Operating System Product. …’ 231 See Section III.E: ‘… Microsoft shall make available for use by third parties, for the sole purpose of interoperating or communicating with a Windows Operating System Product, on reasonable and non-discriminatory terms …, any Communications Protocol that is, on or after the date this Final Judgment is submitted to the Court, (i) implemented in a Windows Operating System Product installed on a client computer, and (ii) used to interoperate, or communicate, natively (ie, without the addition of software code to the client operating system product) with a Microsoft server operating system product.’ 232 Press release by the Assistant Attorney-General for Antitrust R Hewitt Pate on the EC’s decision in the Microsoft case of 24 March 2004. See also the speech of the then Deputy Assistant Attorney-General of the DoJ’s Antitrust Division, Makan Delrahim, ‘Forcing Firms to Share the Sandbox: Compulsory Licensing of Intellectual Property Rights and Antitrust’, London, 10 May 2004. 233 See in particular section IV.B.8 of the decree. 234 New York v Microsoft Corp, Memorandum Opinion of Judge Kollar-Kotelly, Civil Action No 98-1233 (CKK), p 166. 235 Ibid, p 166. 236 Ibid, pp 166–67.

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THE REMEDY

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Many commentators have condemned most of the remedies in the US Microsoft case, including the disclosure provisions, as a failure.237 This applies in particular to Section III.E of the decree, which mandates the disclosure of Microsoft’s Communications Protocols to allow for interoperability with its Windows operating system and which was intended by the Court to be the ‘most forward-looking provision in the … remedy’.238 As a matter of abstract description, one may distinguish between three goals that a remedy in the context of a dominant platform and network effects may intend to achieve: (i) allowing for entry to complementary markets to the platform market, (ii) lowering the (applications) barrier to entry in the future to allow for a viable platform threat, or, (iii) as the most ambitious goal, creating platform competition (in the sense of engineering a specific result on the platform market). While the first goal can be associated with the classic essential facilities doctrine, the explicit objective of Section III.E was to preserve a platform threat (in this case through middleware) in the sense of the second goal. However, even measured by the least ambitious goal of allowing for entry to complementary markets, the disclosure provision has to a large extent failed. Until August 2007, only 13 licensees were shipped product under the Microsoft Communications Protocol Program (MCPP) established under Section III.E.239 This failure was due in particular to a delay in implementation by Microsoft. Microsoft neither provided adequate technical documentation supporting the protocols nor offered licence terms which complied with the RAND requirement in the first years.240 Measured against more ambitious goals, the provision has been even less successful. Nine of the abovementioned 13 licensees self-described their product as being complements to Windows servers. With regard to this number, the California Group of plaintiffs stated: ‘The disclosure provisions … have failed to achieve any competitively meaningful result. … [I]t would appear that the principal competitive effect of MCPP products has been to promote the diffusion of Microsoft technology into mixed networks rather than to provide alternative platforms.’241

7.4.3

Example 3: Rambus

A third example that is of analytical value as regards the remedy in cases of refusals to supply protected information is the FTC’s final order in the Rambus case.242 The FTC

237 In particular Shapiro (2009), ‘Microsoft: A Remedial Failure’, 75 Antitrust Law Journal 739. As Hovenkamp ((2006), The Antitrust Enterprise, p 298) anticipated: ‘[T]here is little reason to believe that the consent decree that the government negotiated with Microsoft will achieve any of these goals. If so, the Microsoft case may prove to be one of the great debacles in the history of public antitrust enforcement, snatching defeat from the jaws of victory.’ 238 New York v Microsoft Corp, 224 F Supp 2d 76, at 226 (DDC 2002). 239 California Group’s Report on Remedial Effectiveness at Exhibit 1, New York v Microsoft Corp, No 98-1233 (DDC, filed 30 August 2007). 240 See, in particular, the Joint Status Report on Microsoft’s Compliance with the Final Judgments of 3 July 2003, available at www.justice.gov/atr/cases/f201100/201135.htm. For an analysis see Page & Childers (2009), ‘Measuring Compliance with Compulsory Licensing Remedies in the American Microsoft Case’, 76 Antitrust Law Journal 239; Page (2009), ‘Mandatory Contracting Remedies in the American and European Microsoft Cases’, 75 Antitrust Law Journal 787. 241 California Group’s Report on Remedial Effectiveness at Exhibit 1, New York v Microsoft Corp, No 98-1233 (DDC, filed 30 August 2007). 242 Re Rambus, Inc, Opinion of 5 February 2007, No 9302. For a short analysis of the similar Dell case see above at 4.1.6.

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found that Rambus, a memory chip developer, knowingly failed to disclose a patent to a standard-setting organisation and thereby acquired monopoly power in violation of § 2 Sherman Act. While two of the Commissioners would have required royalty-free licences as the remedy, the majority decided that, absent its exclusionary acts, Rambus would have granted licences under RAND terms.243 Pursuant to the final opinion, a reasonable royalty ‘is or approximates the outcome of an auction-like process appropriately designed to take lawful advantage of the state of competition existing ex ante … between and among available IP options’.244 Furthermore, the decision defined the ex ante value of a technology as ‘the amount that the industry participants would have been willing to pay to use a technology over its next best alternative prior to the incorporation of the technology into a standard’.245 Setting the maximum royalty rates that Rambus can charge, the FTC explicitly pointed to the patent judgment in Georgia Pacific, which identified as a factor in calculating reasonable royalties ‘the rates paid by the licensee for the use of other patents comparable to the patent in suit’ (emphasis added).246 The remedy order ultimately limits the allowable royalty rates to 0.25 and 0.5% respectively of net sales of products complying with the standard in question for the first three years after the entry into force of the order. In addition to requiring Rambus to grant worldwide non-exclusive licences at these maximum royalty rates, the order requires Rambus to employ a Compliance Officer as its representative who, at the same time, has a monitoring function. However, the Court of Appeals reversed the FTC’s decision on the grounds of insufficient liability.247 It argued that the FTC had found the consequences of Rambus’s nondisclosure only in the alternative: that it prevented the standard-setting organisation from either (i) adopting a non-proprietary standard, or (ii) extracting a RAND commitment from Rambus when standardising its technology. The Court, strangely, held that the latter—deceit merely enabling a monopolist to charge higher prices than it otherwise could have charged—would not in itself constitute monopolisation.248 Both Rambus and Microsoft make clear that US agencies and courts are willing to engage in an extensive ‘but for’ inquiry with regard to remedies in § 2 cases. At the same time, the mandatory disclosure of Microsoft’s communications protocols shows that remedies under § 2 Sherman Act may not only be based on a narrow ‘but for’ assessment, but may also be forward-looking in the sense of actively attempting to lower barriers to entry in a rapidly changing market. While the Kodak remedy—essentially only limiting the undertaking concerned to non-discrimination—may be considered an exception, Rambus and Microsoft on the other hand have made clear that royalty-free licensing would require a significant causal connection (and hence the corresponding evidence) between the anti-competitive

243 In the EU, the Commission, in its preliminary assessment, found that Rambus’ conduct constituted patent ambush infringing Art 102 TFEU (Case COMP/38.636—Rambus). In its decision of 9 December 2009, the Commission accepted licensing commitments by Rambus under Art 9 of Regulation 1/2003. 244 Re Rambus, Inc, Opinion of 5 February 2007, No 9302, p 17, citing Swanson & Baumol (2005), ‘Reasonable and Nondiscriminatory (RAND) Royalties, Standards Selection, and Control of Market Power’, 73 Antitrust Law Journal 1. 245 Re Rambus, Inc, Opinion of 5 February 2007, No 9302, p 17. 246 Ibid, p 18. On the Georgia Pacific factors see above at 5.1.5. 247 522 F3d 456 (DC Cir 2008), cert denied, No 08-694, 2009 WL 425102 (23 February 2009). 248 Ibid: ‘[A]n otherwise lawful monopolist’s use of deception simply to obtain higher prices normally has no particular tendency to exclude rivals and thus to diminish competition.’

7.5

FUTURE TENDENCIES

201

conduct and the maintenance or creation of monopoly power. Thus RAND pricing may have emerged as the default solution. While the final order in the Microsoft case left the question of ‘reasonableness’ open and thus to be determined within a later bargaining process, the FTC’s Rambus decision specified the maximum royalty by tying it to the net sales of the products incorporating the patent in question. This may be seen as an evolution towards clearer specifications with regard to the royalty.

7.5

FUTURE TENDENCIES

In recent years, policy statements of the DoJ have reflected the Supreme Court’s generally narrow interpretation of § 2 Sherman Act and its sceptical stance towards a duty to deal, albeit to very variable degrees. Similarly, in its 2007 final Report, the Antitrust Modernization Commission (AMC)249 endorsed ‘the longstanding principle that, in general, firms have no duty to deal with a rival in the same market’ as well as the Supreme Court’s arguments in Trinko.250 In the AMC’s view, ‘refusals to deal with horizontal rivals in the same market should rarely, if ever, be unlawful under antitrust law, even for a monopolist’. The AMC noted, however, that ‘[a]lthough the Court’s decision in Trinko provided some guidance on the factors that might suggest liability for a refusal to deal with a rival, the decision is far from definitive. Businesses need better guidance from the courts on how to avoid antitrust scrutiny for a refusal to deal with a rival.’251 It demanded that ‘to the extent that circumstances exist in which firms may be liable for a refusal to deal with a rival in the same market, the courts should further clarify those circumstances’.252 In their joint 2007 Report on Antitrust Enforcement and Intellectual Property Rights, the DoJ and FTC, after a lengthy analysis of both the state of the law and normative arguments, concluded that antitrust liability for mere unilateral, unconditional refusals to license patents will not play a meaningful part in the interface between patent rights and antitrust protections. (emphasis added)253

In its 2008 Report on Single-Firm Conduct under § 2 of the Sherman Act, however, the DoJ went further, stating that antitrust liability for unilateral, unconditional refusals to deal with rivals should not play a meaningful part in section 2 enforcement. (emphasis added)254

249 For an analysis of the AMC’s recommendations with regard to the IP/antitrust interface and unilateral refusals to supply see Cotter (2008), ‘Reflections on the Antitrust Modernization Commission’s Report and Recommendations Relating to the Antitrust/IP Interface’, 53 Antitrust Bulletin 745; and Hylton (2008), ‘Unilateral Refusals to Deal and the Antitrust Modernization Commission Report’, 53 Antitrust Bulletin 623. 250 See Antitrust Modernization Commission (2007), Report and Recommendations (available at www.amc. gov/report_recommendation/amc_final_report.pdf), p 104. 251 Ibid, p 101. 252 Ibid, p 104. See also recommendations 14, 15, 18. 253 DoJ & FTC (2007), Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition, pp 6, 23–24, 30, 32. The Report summarises the findings of their joint hearings entitled ‘Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy’. 254 Ibid, p 127.

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The DoJ was particularly critical of the essential facilities doctrine as a ‘flawed means of deciding whether a unilateral, unconditional refusal to deal harms competition’.255 The DoJ Report was heavily criticised by the FTC with regard to both its general approach to § 2 and its stance on refusals to deal. In a statement, three FTC Commissioners concluded that the DoJ Report offered ‘a blueprint for radically weakened enforcement of Section 2 of the Sherman Act’.256 In their view, specifically the DoJ’s ‘baseline test for Section 2 liability would only condemn conduct … if the demonstrable anti-competitive effects are disproportionately greater than the procompetitive potential’. Such a test would ‘distort the rule of reason standard, which simply asks whether anti-competitive harm outweighs the procompetitive benefits’.257 With regard to the DoJ Report’s approach to refusals to deal, the FTC Commissioners emphasised that ‘a firm with monopoly power or near-monopoly power may violate Section 2 if it refuses to license to, or otherwise refuses to deal with, a rival’.258 After the change in the US administration at the beginning of 2009, the DoJ withdrew its Report. In a speech,259 the new Assistant Attorney General of the Antitrust Division criticised three major policy statements of the 2008 Report: first, its scepticism regarding the ability of antitrust enforcers and courts to distinguish between anti-competitive acts and lawful conduct; second, its statement that a dominant firm’s ability to act efficiently should be a core concern in evaluating any possible anti-competitive impact of its conduct; and third, its adoption of the disproportionality test, under which the anti-competitive harm must substantially outweigh procompetitive benefits to be actionable. She pointed out that the greatest weakness of the Section 2 Report is that it raised many hurdles to Government antitrust enforcement. … the 2008 Report counselled in favor of the exercise of extreme caution in enforcing Section 2 … While there is no question that Section 2 cases present unique challenges (for example, in the fashioning of injunctive remedies), the Report advocated extreme hesitancy in the face of potential abuses by monopoly firms. We must change course and take a new tack.

The statement also explicitly referred to the Supreme Court judgments in Lorain Journal260 and Aspen,261 which both put limits on an unfettered right to refuse to deal. This statement signals the end of the administration’s hostility to § 2 enforcement in general and with regard to refusals to deal in particular.262 The outcomes of ongoing cases will show the extent to which the signalled change in policy will actually be implemented. However, it is unclear how far the Supreme Court will fall in line with the new, less minimalist approach of the DoJ towards § 2 interpretation and enforcement.263

255

Ibid, p 129. See the Statement of Commissioners Harbour, Leibowitz and Rosch of 8 September 2008, p 1. 257 Ibid, p 5. 258 Ibid, p 9. 259 See ‘Vigorous Antitrust Enforcement in this Challenging Era’, speech delivered by Christine A Varney, Assistant Attorney-General of the DoJ’s Antitrust Division, 12 May 2009. 260 Lorain Journal Co v US, 342 US 143 (1951). 261 Aspen Skiing v Aspen Highlands Skiing, 472 US 585 (1985). 262 On the political influence on US antitrust policy as compared to EU competition policy see below at 9.2.1. 263 For an analysis of the political dimension of § 2 interpretation see Baker (2010), ‘Preserving a Political Bargain: The Political Economy of the Non-Interventionist Challenge to Monopolization Enforcement’, 76 Antitrust Law Journal 605. 256

7.6

CONCLUSION

203

In the IP area, the Supreme Court has already acknowledged in its judgment in KSR that over-broad IP protection may stifle innovation.264 As a consequence, it has raised the bar for patent protection by interpreting the non-obviousness requirement in a more stringent way than the patent-friendly Federal Circuit. In its judgment in Merck, the Supreme Court set aside the Federal Circuit’s holding that narrowly interpreted the statutory exemption for experimental activity intended to develop a drug.265 It has thus broadened the scope of the research exemption for drug research (so called ‘FDA safe harbour’).266 This development, in combination with the Court’s very sceptical view in Trinko on liability under § 2 Sherman Act which would lead to access to property, might be interpreted as an integrated ‘antitrust immunity plus modest IP change’ approach.267 Such an approach is also reflected in the Recommendations of the AMC. The AMC in particular suggests that patent reform should ensure the quality of patents and that the Patent and Trademark Office and the courts should avoid an overly lax application of the obviousness standard.268

7.6

CONCLUSION

The reductionist approach of US agencies and courts to the interpretation and enforcement of § 2 Sherman Act in general and to refusals to supply in particular in recent years culminated in the Trinko judgment. The Supreme Court judgment has strengthened the general no duty to deal principle by doing away with or limiting many of its exceptions, in particular by casting strong doubts on the essential facilities doctrine. Accordingly, unilateral refusals to deal are rarely actionable and are even less likely to give rise to liability when the challenge involves a refusal to share IP. There seem to be only two ‘survivors’ after Trinko: a continued duty to deal under the Aspen doctrine and a rule against concerted refusals to deal. However, the Aspen doctrine is unlikely to be successfully invoked against the holder of an IP. This reductionist antitrust stance has not generally been counter-balanced by an interpretation of IP laws which accounts for the need to allow for (competition by) follow-on

264 KSR v Teleflex, 550 US 398 (2007). The Court stated: ‘We build and create by bringing to the tangible and palpable reality around us new works based on instinct, simple logic, ordinary inferences, extraordinary ideas, and sometimes even genius. These advances, once part of our shared knowledge, define a new threshold from which innovation starts once more. And as progress beginning from higher levels of achievement is expected in the normal course, the results of ordinary innovation are not the subject of exclusive rights under the patent laws. Were it otherwise patents might stifle, rather than promote, the progress of useful arts.’ 265 Merck KGaA v Integra Life Sciences I, Ltd, 545 US 193 (2005). 266 The Court recognised that ‘scientific testing is a process of trial and error’ and that ‘Congress did not limit §271(e)(1)’s safe harbor to the development of information for inclusion in a submission to the FDA; nor did it create an exemption applicable only to the research relevant to filing an ANDA [Abbreviated New Drug Application] for approval of a generic drug. Rather, it exempted from infringement all uses of patented compounds “reasonably related” to the process of developing information for submission under any federal law regulating the manufacture, use, or distribution of drugs.’ In fn 7 of the judgment, the Court expressly avoided submitting a view as to whether, or to what extent, § 271(e)(1) exempts from infringement the use of research tools in the development of information for the regulatory process. The EU has introduced a provision similar to this so-called Hatch-Waxman exemption under US patent law (in Art 1 No 8 of Directive 2004/27 EC). This exemption has been transposed into German law through § 11 No 2b of the Patent Act. 267 For an analysis of such an approach see above at 2.5.1. 268 See AMC (2007), Report and Recommendations, Recommendation 21 (in particular lit a and c).

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innovation. On the contrary, with regard to innovation markets, the room for application of the research exemption under patent law has even been further limited. Except for patent law—which provides a blocking patent for a significant improvement and the reverse doctrine of equivalents for a radical improvement—none of the IP laws provide for strong ‘internal’ levers which would account for the need to provide for sufficient incentives for follow-on innovation. However, this approach of ‘strong IP rights for original innovators plus small antitrust’ may have begun to change to some extent, for various reasons: in the antitrust area due to a more active enforcement of § 2 Sherman Act by the agencies, and in the IP area due to the Supreme Court’s acknowledgement that the unfettered exercise of the growing number of IP rights may stifle follow-on innovation.

8 Cumulative Innovation under European IP Laws and EU Competition Law … in the balancing of the interest in protection of the intellectual property right and the economic freedom of its owner against the interest in protection of free competition, the latter can prevail only where refusal to grant a licence prevents the development of the secondary market to the detriment of consumers. European Court of Justice, judgment in IMS Health1 The circumstance relating to the appearance of a new product, as envisaged in Magill and IMS Health … cannot be the only parameter which determines whether a refusal to license an intellectual property right is capable of causing prejudice to consumers within the meaning of Article 82(b) EC. As that provision states, such prejudice may arise where there is a limitation not only of production or markets, but also of technical development. Court of First Instance, judgment in Microsoft2

As compared to the (at least potentially) ‘integrated’ US approach to the IP/antitrust interface, European competition law and policy regarding conduct based on IP rights has evolved against a backdrop of increasingly harmonised, but still differing, national IP regimes.3 EU competition policy thus had and continues to perform the difficult balancing act of providing for a level-playing field for competition, but at the same time respecting the core of national IP policies as protected by Article 345 TFEU.4 Some ‘integration’ of innovation and competition rationales has taken place, in the sense that competition concerns have influenced and partly been taken into account under directives which have harmonised IP protection.5 Conversely, competition policy regarding IP-related agreements—in particular through the changes in the Block Exemption Regulations for Research and Development6 and for Technology Transfer7—has moved away from a legalistic to a more economic approach which is at least able to account for incentives to innovate. At the same time, the ECJ’s interpretation of Article 102 TFEU, in particular its lit. b in the refusal to deal scenario, has been relatively stable since the judgments in Volvo and, in particular, Magill.

1 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, para 48, referring to the Opinion of AG Tizzano in that case (5042, para 62). 2 Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 647. 3 See above at 2.2.1. 4 See above at 2.3.2.1. 5 See above at 2.2.1.4 and 2.2.1.5. 6 EC 2659/2000. 7 EC 772/2004.

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In order to analyse how IP laws in Europe and EU competition law account for the need to provide for incentives to innovate, while minimising distortions to competition due to input foreclosure, this chapter first outlines the position of an IP holder and an improver, exemplified under German IP laws (8.1). It then analyses the Commission’s and the Court’s application of Article 102 TFEU in refusal to supply scenarios (8.2) as well as the Commission’s practice with regard to remedies in such cases (8.3).

8.1

THE ORIGINAL INNOVATOR’S AND THE IMPROVER’S POSITIONS UNDER NATIONAL IP LAWS IN THE EU

Given only partial harmonisation, IP laws in the European Union differ;8 the situation is the same with regard to rules on follow-on innovation and improvements. Despite the differences in detail, however, the basic policy levers—such as, under patent laws, the construction of the patent claim, a research exemption and compulsory licensing provisions—exist under several national IP regimes in the EU. German patent, copyright and trade secret law—though not fully paradigmatic—may provide illustrations of the extent to which the need to provide for incentives for the creation and marketing of follow-on innovation and improvements is taken into account under European IP laws.

8.1.1

German Patent Law

Under § 9 of the German Patent Act, the patentee has the exclusive right to exploit the patented invention or to authorise another person to do so (through licensing9) during the 20-year term of protection.10 Like US patent law, the German Patent Act does not require the use of a patent. Failure to work a patent may only be a factor leading to a compulsory licence under very restrictive conditions.11 To assess whether an improvement (or generally any device) infringes a patent, it is necessary to determine the patent’s scope by means of interpretation. In this interpretation, the terms of the claims are decisive.12 If the accused device realises all claim elements, literal infringement is to be found. If the device deviates from the meaning of the wording of the patent claim, it may still infringe the patent under the doctrine of equivalents. Rather unlike the US ‘function, way, and result’ test,13 under German patent law a device is to be regarded as an equivalent of the patented invention if (1) the accused variant solves the

8

For an overview see Seville (2009), EU Intellectual Property Law and Policy. Cf § 15(2) of the Patent Act. 10 See above at 2.2.1.1. 11 Such a compulsory licence can be granted under § 24 Patent Act in cases of a public interest and in the case of dependency (see in more detail below at 8.1.1.2). The non-use of a patent alone does not establish such public interest, but may feed into it (see Rogge (2006) in Benkard (ed), Patentgesetz, § 24, para 15; Kraßer (2009), Patentrecht, p 858). The Paris Convention for the Protection of Industrial Property, in its Art 5A(2), allows each member country ‘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’ (emphasis added). 12 Cf § 14 of the Patent Act. See Kühnen (2008) in Schulte (ed), Patentgesetz, § 14, para 21. 13 See above at 7.1.1. 9

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problem underlying the invention with modified means which objectively have the same effect as the invention (‘Gleichwirkung’), (2) a person ‘skilled in the art’ is able by means of his general technical knowledge to find, without inventive effort, the modified means as having the same effect (‘Naheliegen’), and (3) the considerations to be applied by the skilled person in this regard must be so closely oriented to the essence of the technical teaching described in the patent claim that the person skilled in the art considers the variant with its modified means as equivalent to the solution provided by the invention as defined in the claim (‘Gleichwertigkeit’).14 Whereas the first element of the test captures functional substitutability, the latter two elements also approximate the inventive step underlying the accused device. If the accused equivalent only embodies elements of the patent that already belonged to the prior art relevant for the patent, the improver has a defence (‘FormsteinEinwand’) against the infringement claim.15 If an improver does not escape the scope of the original patent and does not have a licence, the holder of the original patent may obtain a cease-and-desist order and damages under § 139 Patent Act. Alongside the above methods of interpreting the initial patent’s scope, German patent law accounts for follow-on innovation as well as for competition concerns through three basic policy levers: (i) a research exemption (8.1.1.1), (ii) mandatory and dependency licensing (8.1.1.2), and (iii) an antitrust compulsory licensing defence (8.1.1.3). 8.1.1.1

Research Exemption

To enable research into follow-on innovation and thus keep innovation markets open, national patent laws in the EU, absent harmonisation in this regard,16 provide statutory research exceptions of varying scope. The German Patent Act, in its § 11 No 2, states that the ‘effects of a patent shall not extend to acts done for experimental purposes relating to the subject matter of the patented invention’. This exemption has been interpreted by courts as capturing experiments or trials on a patented substance both to test its claimed properties and to test for indications different from those claimed to the extent that the experiments are directed at the substance itself.17 If such experimentation leads to a follow-on invention, the follow-on innovator may want to market his dependent invention. In this case, he needs a licence from the holder of the initial patent if his use of the dependent

14 Federal Court of Justice (BGH), Judgment of 12 March 2002 (Docket No X ZR 168/00), 2002 Gewerblicher Rechtsschutz und Urheberrecht 515 (Schneidmesser I), and Judgment of 12 March 2002 (Docket No X ZR 135/01), 2002 Gewerblicher Rechtsschutz und Urheberrecht 519 (Schneidmesser II), as summarised and translated into English by Klett et al (2008), Intellectual Property Law in Germany—Protection, Enforcement and Dispute Resolution. See also Jestaedt (2005), Patentrecht, paras 805–39. The prior art limits the application of the doctrine of equivalents. 15 See Federal Court of Justice (BGH), Judgment of 29 April 1986 (Docket No X ZR 28/85), 1986 Gewerblicher Rechtsschutz und Urheberrecht 803 (Formstein). 16 See above, ch 2, n 32. The—failed—1989 Agreement relating to Community patents contained a research exception in its draft Art 27(b). The current Proposal (of 23 June 2011) for a Regulation of the Council and the European Parliament implementing enhanced cooperation in the area of the creation of unitary patent protection provides for limitations on the exclusive rights in its Art 8(b) for ‘(a) acts done privately and for non-commercial purposes; (b) acts done for experimental purposes relating to the subject matter of the patented invention …’. 17 BGH 1996 Gewerblicher Rechtsschutz und Urheberrecht 109; Neue Juristische Wochenschrift 1996, 782 (Klinische Versuche I); BGHZ 135, 217 (Klinische Versuche II).

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invention would infringe the initial patent.18 Conversely, the follow-on innovator may prevent the original innovator from using the follow-on innovation. The interpretation of the research exemption has been characterised by German courts as ‘very liberal’ as compared to other European countries.19 However, the provision would usually not exempt research tools, since their use is often not directed to their substance itself.20 As we saw above,21 such a relatively broad research exemption, in conjunction with the possibility for the holder of the initial patent to share in profits generated by the marketing of the follow-on innovation, is generally the appropriate rule to provide for sufficient incentives to innovate for both initial and follow-on innovators and to prevent the foreclosure of innovation markets. 8.1.1.2

Mandatory and Dependency Licenses

With regard to the commercial exploitation of an invention, § 24 of the German Patent Act holds: (1) A non-exclusive authorization to commercially exploit an invention shall be granted by the Patent Court in individual cases in accordance with the following provisions (compulsory license) if 1. the applicant for a license has unsuccessfully endeavored during a reasonable period of time to obtain from the patentee consent to exploit the invention under reasonable conditions usual in trade; and 2. public interest commands the grant of a compulsory license. (2) If the applicant for a license is unable to exploit an invention for which he holds protection under a patent of later date without infringing a patent of earlier date, he shall be entitled within the framework of subsection (1) to request the grant of a compulsory license with respect to the owner of the patent of earlier date if his own invention comprises, in comparison with that under the patent of earlier date, an important technical advance of considerable commercial significance. The patentee may require the applicant for a license to grant him a counter license under reasonable conditions for the exploitation of the patented invention of later date. (3) A compulsory license under subsection (1) may be granted for a patented invention in the field of semiconductor technology only if such grant is necessary to remove an anti-competitive practice on the part of the patentee that has been established in judicial or administrative proceedings. … (5) … The patentee shall be entitled to remuneration from the holder of a compulsory license that shall be commensurate with the circumstances and shall take into consideration the

18 This later royalty has been one of the arguments of the Federal Court of Justice for adopting its relatively wide interpretation of the research exemption. This line of argument has also been endorsed by the German Federal Constitutional Court to uphold the Federal Court of Justice’s interpretation of the research exemption as constitutionally legal (see Federal Constitutional Court (BVerfG), 2001 Gewerblicher Rechtsschutz und Urheberrecht 43, para 29 (Klinische Versuche)). The Constitutional Court also argued that patent owners had to accept such limitations on their rights in view of the development of the state of the art and the public interest (ibid, para 23). 19 OECD (2006), ‘Research Use of Patented Knowledge: A Review’, Directorate for Science, Technology and Industry Working Paper, p 18. For research exceptions under other European patent laws see eg in France Art L613–5 lit b of the Intellectual Property Code (‘The rights afforded by the patent shall not extend to: … (b) Acts done for experimental purposes relating to the subject matter of the patented invention …’); and in the UK § 60(5) of the Patent Act 1977 (‘An act which, apart from this subsection, would constitute an infringement of a patent for an invention shall not do so if (a) it is done privately and for purposes which are not commercial; (b) it is done for experimental purposes relating to the subject-matter of the invention …’) as well as the judgment in Monsanto Co v Stauffer Chemical Co [1985] RPC 515 (Eng CA). 20 See Holzapfel (2006), ‘Die patentrechtliche Zulässigkeit von Forschungswerkzeugen’, 1 Gewerblicher Rechtsschutz und Urheberrecht 10, at 13; Kühnen (2008) in Schulte (ed), Patentgesetz, § 11, para 13. 21 See above at 4.4.2.

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commercial value of the compulsory license. In the event of a significant change, with respect to the repeated remuneration that will become due in future, in the circumstances on which the determination of the amount of the remuneration was based, each party shall be entitled to require a corresponding adjustment.

In a nutshell, subsection (2) is specifically intended to allow for the exploitation of dependent patents and thus pursues a cumulative innovation rationale by addressing the scenario of—in Lemley‘s terminology22—a ‘significant improver’. It was only introduced in 1998 to align the compulsory licence provision with Article 31 lit. l of the TRIPS Agreement.23 Subsection (1) addresses the general situation where a party needs the licence from the patentee. It pursues a general public policy rationale and captures all other scenarios including that of a minor improver who does not have a patent himself. Neither subsection requires a market inquiry or the patentee to have market power. Even subsection (2), in demanding that the invention protected under a patent of later date cannot be exploited without infringing the patent of earlier date, does not demand fully-fledged ‘essentiality’ in the antitrust sense. In that regard, the antitrust essential facilities test is more narrow. However, since the Federal Patent Court was set up in 1961, in only one case has the Court granted a compulsory licence,24 and even that decision was quashed on appeal by the Federal Court of Justice.25 Some commentators have argued that this number does not show the irrelevance of the provision. In their view, the compulsory licensing scheme provides for a threat point within the bargaining game between the patentee and the party seeking the licence.26 However, the ‘public interest’ condition in subsection (1) has been interpreted narrowly by the Federal Court of Justice (BGH).27 Given this interpretation of the ‘public interest’ criterion, subsection (1) fails to provide for a sufficient bargaining position for improvers. This holds also for subsection (2), although the additional requirement of such ‘public interest’ was deleted from it in 2005.28 Subsection (2)—conforming with Article 31 lit. l of the TRIPS Agreement—notably requires an ‘important technical advance 22

See above at 7.1.1. For a detailed analysis see Rogge (2006) in Benkard (ed), Patentgesetz, § 24, paras 1–25. In the context of dependent gene patents: Schieble (2005), Abhängige Genpatente und das Institut der Zwangslizenz, pp 153–83. In the context of drugs: Müller (2003), Die Patentfähigkeit von Arzneimitteln, pp 268–92. Art 31 of the TRIPS Agreement holds: ‘Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder … the following provisions shall be respected: … (l) where such use is authorized to permit the exploitation of a patent (“the second patent”) which cannot be exploited without infringing another patent (“the first patent”), the following additional conditions shall apply: (i) the invention claimed in the second patent shall involve an important technical advance of considerable economic significance in relation to the invention claimed in the first patent; (ii) the owner of the first patent shall be entitled to a cross-licence on reasonable terms to use the invention claimed in the second patent; and (iii) the use authorized in respect of the first patent shall be non-assignable except with the assignment of the second patent.’ For an analysis of Art 31 of the TRIPS Agreement see below at 9.3.1. 24 Federal Patent Court (BPatG), 1994 Gewerblicher Rechtsschutz und Urheberrecht 98 (Polyferon I). For a general overview and analysis of mandatory licensing provisions under German law see Wolff (2005), Zwangslizenzen im Immaterialgüterrecht. 25 Federal Court of Justice (BGH), 1996 Gewerblicher Rechtsschutz und Urheberrecht 190 (Polyferon II). 26 Eg Rogge (2006) in Benkard (ed), Patentgesetz, § 24, para 4; Schieble (2005), Abhängige Genpatente und das Institut der Zwangslizenz, pp 158–59. 27 For a summary of the jurisprudence see Rogge (2006) in Benkard (ed), Patentgesetz, § 24, paras 14–21; Schieble (2005), Abhängige Genpatente und das Institut der Zwangslizenz, pp 162–65. 28 In 2005, Directive 98/44/EC on the legal protection of biotechnological inventions was transposed into German law. In its Art 12, the Directive only allows for the requirement of ‘significant technical progress of considerable economic interest’. To avoid different conditions for dependency licences for different types of inventions, the additional requirement of ‘public interest’ was deleted (see Bundestags-Drucksache 15/1709, p 13). 23

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of considerable commercial significance’ as compared with the invention protected under the prior patent, although a dependent patent, by definition, has to pass the inventive step test29 itself. In sum, due to their very restrictive conditions, the mandatory and dependency licensing provisions under § 24(1), (2) of the German Patent Act do not fulfil their function of allowing for follow-on innovation. Against this background, the clarification by the Federal Court of Justice in its Standard Spundfass judgment30 is welcome. In that judgment the Court held that the existence of § 24 Patent Act does not preclude a duty to license under Article 102 TFEU or under the German provisions on abuse of dominance in § 19 and § 20 of the German Act against Restraints of Competition. In the Standard Spundfass case, the plaintiff offered to the German chemical industry association a solution for tight-head drums as a standard. This solution was based on the plaintiff ’s patent. In accordance with an agreement with members of the industry association, the plaintiff gave free licences to these member firms as well as licences against royalties to other European firms. However, the plaintiff refused to give a licence to the defendant. When the defendant made use of the patent, the plaintiff obtained an injunction. The defendant counterclaimed, arguing that the plaintiff would have a duty to license. The Federal Court of Justice agreed with the defendant, holding that the plaintiff had discriminated against the defendant and was thus obliged to grant a licence to the defendant under § 20 German Act against Restraints of Competition, which prohibits anti-competitive discrimination. Most importantly in this context, the Federal Court of Justice clarified that § 24 of the Patent Act pursues a different rationale than the abuse of dominance provisions under competition law and thus does not preclude their application. According to the Court, ‘public interest’ under § 24 of the Patent Act includes technical, economic, social and medical aspects, which are independent from an abuse of a dominant position in the antitrust sense.31 The Court also held that the plaintiff ’s licensing of its patent did constitute a relevant market and that it was dominant on this market. However, it referred the case back, since it could not rule on whether the plaintiff could offer a justification for his discriminatory refusal.

29

Cf § 1(1) of the German Patent Act. Federal Court of Justice (BGH), Judgment of 13 July 2004 (Docket No KZR 40/02), BGH 2004 Gewerblicher Rechtsschutz und Urheberrecht 966 (Standard Spundfass), English translation in 2005 International Review of Intellectual Property and Copyright Law 742 (Standard Tight-Head Drum). For an analysis of the judgment see Heinemann (2005), ‘Kartellrechtliche Zwangslizenzen im Patentrecht’, Journal of Competition Law (ZWeR) 198; Leistner (2005), ‘Intellectual Property and Competition Law: The European Development from Magill to IMS Health compared to recent German and US Case Law’, Journal of Competition Law (ZWeR) 138. For a legal analysis of competition-related restrictions on IP rights and mandatory licences see Buhrow & Nordemann (2005), ‘Grenzen ausschließlicher Rechte geistigen Eigentums durch Kartellrecht’, Gewerblicher Rechtsschutz und Urheberrecht 407. 31 With regard to the ‘public interest’ condition and the relationship between the mandatory licensing provision under the Patent Act and abuse of dominance provisions under competition law, the Federal Court of Justice pointed out: ‘Als derartige Umstände, die die Annahme eines öffentlichen Interesses rechtfertigen, kommen unabhängig von einer etwaigen mißbräuchlichen Ausübung des Patentrechts technische, wirtschaftliche, sozialpolitische und medizinische Gesichtspunkte in Betracht. Die Frage, ob ein öffentliches Interesse die Erteilung einer Zwangslizenz an einen bestimmten Lizenzsucher gebietet, hängt von den Umständen des Einzelfalls ab und ist im Einzelfall unter Abwägung der schutzwürdigen Interessen des Patentinhabers und aller die Interessen der Allgemeinheit betreffenden maßgeblichen Gesichtspunkte zu entscheiden (BGHZ 131, 247, 251—Interferon-gamma). … Umgekehrt ist der Mißbrauch einer marktbeherrschenden Stellung für die patentrechtliche Zwangslizenz weder notwendige Voraussetzung noch ohne weiteres hinreichend.’ 30

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8.1.1.3 Antitrust Compulsory Licensing Defence In its Spundfass judgment, the German Federal Court of Justice further clarified the relationship between the compulsory licensing provision under the German Patent Act and antitrust abuse of dominance provisions. But it left open the question whether an ‘antitrust compulsory licensing defence’ (‘kartellrechtlicher Zwangslizenzeinwand’)32 against a patent infringement claim existed. Such a defence based on a licensing claim under Article 102 TFEU or §§ 19, 20 (in conjunction with § 33) of the German Act against Restraints of Competition had been rejected by Courts of Appeals before.33 However, in its judgment in Orange-Book-Standard, the Federal Court of Justice recognised such a defence.34 In this case, the plaintiff, Philips, held a patent whose use could not be avoided in the production of recordable and rewritable compact discs. Philips had granted licences relating to the patent to numerous undertakings under a standard licence agreement. The defendants, who produced and marketed CDs without such a licence, argued that the licence fee demanded by Philips was excessive and, furthermore, discriminatory, since Philips had granted the licence to other undertakings on more favourable conditions. The defendants thus claimed that Philips’ refusal to license with more favourable conditions would constitute an abuse of Philips’ dominant position and that a patent infringement claim filed by Philips should therefore be dismissed. Two lower courts upheld Philips’ claim that there had been an infringement of its patent and ordered the defendants to pay damages. While upholding the lower courts’ judgments, the Federal Court of Justice, in principle, recognised the antitrust compulsory licence defence against the patent holder’s claim. The Court also argued that the enforcement of a patent through an infringement claim by a patent owner whose refusal to license infringes Article 102 TFEU (or §§ 19, 20 of the Act against Restraints of Competition) would itself constitute an abuse of a dominant position. According to the Federal Court of Justice, the infringement claim would have the same foreclosure effect on the undertakings seeking the licence as the refusal to license.35 When enforcing the claim in this situation, the patent holder would violate the principle ‘dolo petit, qui petit quod statim redditurus est’ and thus not act in good faith. According to the judgment, however, the compulsory licence defence may only be invoked under two major conditions: First, the undertaking seeking the licence must make an unconditional offer to the patent holder which the latter may not refuse without violating his obligation under Article 102 TFEU or national competition law. Second, if the applicant already uses the patent before the patent holder has accepted the offer, it must behave

32 As has been pointed out (above at 2.2.2.3), the term ‘compulsory licensing (defence)’ is not correct, since it should only apply to a licence as a pure remedy. However, it is used here as a translation of the German notion ‘Zwangslizenzeinwand’. 33 See OLG Düsseldorf InstGE 2, 168, para 27; OLG Dresden 2003 Gewerblicher Rechtsschutz und Urheberrecht 601, at 603–04. See also Maaßen (2006), Normung, Standardisierung und Immaterialgüterrechte, pp 257–58. 34 Federal Court of Justice (BGH), Judgment of 6 May 2009 (Docket No KZR 39/06), in particular para 22; 2009 Gewerblicher Rechtsschutz und Urheberrecht 694. For an analysis of the judgment see Treacy & Lawrance (2009), ‘Doing Things by the (Orange) Book: How to Avoid an Injunction for Unlicensed Use of Standard/ Essential Patents’, 4 Journal of Intellectual Property Law & Practice 607. For a critical view on the (non-)application of Art 102 TFEU see de Bronett (2009), ‘Gemeinschaftsrechtliche Anmerkungen zum “Orange-Book-Standard”Urteil des BGH’, 9 Wirtschaft und Wettbewerb 899. See also Meinberg (2006), Zwangslizenzen im Patent- und Urheberrecht als Instrument der kartellrechtlichen Missbrauchsaufsicht im deutschen und europäischen Recht, p 196. 35 Federal Court of Justice (BGH), Judgment of 6 May 2009 (Docket No KZR 39/06), para 27.

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as if the patent owner had accepted the offer, ie pay the licence fee to the patent owner or at least deposit it.36 Importantly, the Federal Court of Justice argued that these conditions would also allow it to recognise an antitrust compulsory licence defence under copyright law. The Federal Court of Justice had previously rejected such a defence against copyright infringement claims. It feared that such a defence would put a copyright owner in a worse position than under a statutory compulsory licensing regime, which usually allows the IP owner to agree upon the use of the IP on condition that royalties are paid.37 The judgment in Orange-Book-Standard gives procedural guidance to parties on how to find (and make courts review) an appropriate royalty.38 However, it does not provide any substantive guidance on the pricing question, ie on what would constitute a royalty compatible with Article 102 TFEU or § 19 and § 20 of the Acts against Restraints of Competition.39 Furthermore, since the (alleged) abuse in the case was based on discrimination, the Court did not deal with the question of which exceptional circumstances would justify a compulsory licence if the patent holder decided not to grant a licence at all.

8.1.2

German Copyright and Unfair Competition Law

Under the German Copyright Act, a copyright owner has the exclusive right to exploit his work in any tangible form or to communicate his work to the public in any intangible form.40 The holder of a copyright whose rights have been infringed may claim injunctive relief and damages.41 The situation of an ‘improver’ depends on the degree of transformation of the original work and on the degree of personal intellectual creation: First, a transformation does not constitute a personal intellectual creation and thus does not meet the threshold for independent protection.42 In this scenario, no copyright in the transformation exists, and it may only be disseminated or exploited with the approval of the author of the work that was transformed.43 This fits into the category of ‘minor improvement’ as suggested by Lemley.44 Second, the adaptation of a work constitutes an intellectual creation in its own right. In this situation, the adaptation is protected as independent work.45 However, again it may only be disseminated or exploited with the approval of the author of the work that was adapted.46 This scenario may be likened to the situation of ‘blocking’ patents.47 With regard to databases, even the making of an adaptation or transformation requires the

36

Ibid, paras 29–33, 35–36. Ibid, para 34, referring to the Federal Court of Justice’s judgment in SPIEGEL-CD-ROM (BGHZ 148, 221, at 231–32). 38 Federal Court of Justice (BGH), Judgment of 6 May 2009 (Docket No KZR 39/06), paras 38–39. 39 Ibid, paras 31, 37. 40 Cf § 15 of the Copyright Act. 41 Cf § 97. 42 Cf § 2(2). 43 ‘Other transformations’ under § 23 sentence 1 of the German Copyright Act are those transformations that are not copyrighted as independent works. See Bullinger (2009) in Wandtke & Bullinger (eds), Praxiskommentar zum Urheberrecht, § 23, para 4. 44 See above at 7.1.1. 45 Cf § 3 of the Copyright Act. 46 Cf § 23 sentence 1. 47 See above at 4.5 and 7.1.1. 37

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approval of the author.48 Third, this means that only an independent work which has been created by free use may be disseminated or exploited without the consent of the author of the work.49 This scenario may be comparable to that of a ‘radical improver’. If the new work contains protected elements of the work used, however, the Federal Court of Justice interprets the notion of ‘free use’ rather strictly.50 German copyright law provides for the possibility of a compulsory licence in very limited specific circumstances.51 The compulsory licensing provision of the Patent Act (§ 24)52 does not apply analogously.53 Furthermore, there is no direct equivalent of the general US fair use and copyright misuse doctrines in German copyright law. Rather like the fair use doctrine, the Copyright Act provides an exhaustive list of limitations to the creator’s exclusive rights.54 However, these limitations generally do not pursue a follow-on innovation or a competition rationale.55 In this regard, German copyright law is complemented by,56 and relies on, (EU and national) competition law. This holds similarly for the provisions on software and databases.57 With regard to software protection, only § 69e provides for a limited right to reproduce the code and translate its form. § 69e transposes Article 6 of the Software Directive on decompilation into German law. Similarly, § 87c provides for a limited limitation of the rights of the maker of a database, allowing for the ‘reproduction of a qualitatively or quantitatively substantial part of a database’, eg ‘for the purposes of personal scientific use, if and to the extent that the copying for this purpose is necessary and the scientific use does not serve commercial purposes’. However, more importantly, sui generis protection for the content of databases under § 87a et seq is itself limited from the outside through the bar for and scope of protection, which takes into account the need for follow-on innovation as envisaged by recital 47 to the Database Directive.58 8.1.2.1 The IMS Health Case To illustrate the existing levers that account for follow-on innovation under German copyright and unfair competition law as well as the procedural and substantive interlinkages between national IP laws and EU competition law, the IMS Health saga is a case in point. IMS Health provided German wholesale pharmaceutical sales data under a system which divided Germany into 1860 geographic areas, or ‘bricks’, based on postal codes. The ‘brick structure’ database was developed by IMS in collaboration with the pharmaceuticals

48

Cf § 23 sentence 2 of the Copyright Act. Cf § 24(1). 50 See Bullinger (2009) in Wandtke & Bullinger (eds), Praxiskommentar zum Urheberrecht, § 24, para 9. 51 For example, under § 42a. 52 See above at 8.1.1.2. 53 See Nordemann (2008) in Nordemann et al (eds), Urheberrecht §§ 31ff, para 264. 54 In §§ 44a–63a. For a comparative analysis of the fair use doctrine under US copyright law and its equivalents under German copyright law see Förster (2008), Fair Use: Ein Systemvergleich der Schrankengeneralklausel des US-amerikanischen Copyright Act mit dem Schrankenkatalog des deutschen Urheberrechtsgesetzes. 55 Some limitations on copyright, such as § 55a of the German Copyright Act for databases, are intended to allow the end-user to make adaptations to the original work for the purpose of usage, but not to allow for follow-on creation. For an analysis of how far the digitisation of information and the new role of a consumer of copyrighted works as a possible follow-on creator, who builds upon pre-existing digitised materials, should change copyright exceptions see Mazziotti (2008), EU Digital Copyright Law and the End-User, in particular pp 15–40. 56 See Nordemann (2008) in Nordemann et al (eds), Urheberrecht, §§ 31ff, para 264. 57 See above at 2.2.1.4 and 2.2.1.5. 58 See above at 2.2.1.5. 49

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industry and became the de facto industry standard. This brick structure had also been in use on other markets for the provision of data. When IMS discovered that various competitors—NDC Health, AzyX (which shortly thereafter exited the market) and Pharma Intranet Information (later acquired by NDC)—were using its 1860 brick structure, it obtained injunctions against them before the Frankfurt District Court (Landgericht Frankfurt am Main) under German copyright law. At the same time, NDC complained to the European Commission that it could not supply data to German customers in another format and that IMS would abuse its dominant position by refusing to license the structure to NDC. The European Commission ordered IMS, by way of an interim measure, to license the 1860 brick structure to its then competitors on the market for German regional pharmaceutical sales data services. This licensing was to be granted in return for royalties to be agreed upon by the parties within a two-week period of the date of the request. If the parties failed to agree, appropriate royalties would be determined by independent experts.59 IMS Health brought an action seeking annulment of the decision. The President of the CFI suspended execution of the Commission’s decision until such time as the CFI gave judgment in the main action.60 NDC’s appeal was dismissed by the President of the Court of Justice.61 Parallelly, the Frankfurt District Court referred a question to the ECJ, namely under what circumstances such a refusal to license would infringe Article 82 EC (now Article 102 TFEU).62 Proceedings in IMS’s main action concerning the Commission’s decision to order IMS to license were stayed until the judgment in the preliminary ruling had been handed down. In its judgment, the Frankfurt Higher Regional Court (Oberlandesgericht Frankfurt am Main) dismissed an appeal brought by Pharma Intranet Information (PI) against the abovementioned judgment of the Frankfurt District Court preventing PI and its co-founder from using the 1860 brick structure or any derivative thereof.63 With regard to this judgment and an improvement in the market position of NDC, the Commission withdrew its decision.64 8.1.2.2 The Judgment of the Frankfurt Higher Regional Court The Frankfurt Higher Regional Court ruled on the legality of copying IMS’s database structure under German copyright and unfair competition law. The court dismissed PI’s appeal against the lower court’s judgment preventing it from using the 1860 brick structure. According to the judgment, IMS’s market report constituted a database within the meaning of § 4(2) Copyright Act and thus a copyrighted work. Although the report was segmented according to postal codes, the Frankfurt Higher Regional Court considered the brick structure to be a sufficiently individual personal creation. The court reasoned that alternative segmentations had also been on offer on the market and that industry experts from the customer side had contributed to creating the database.

59

Case COMP D3/38.044—NDC Health/IMS Health, Commission Decision 2002/165/EC, OJ 2002 L59/18. Case T-184/01R, IMS Health v Commission, First order (provisional stay) of 10 August 2001, [2001] ECR II-2349; Second order of 26 October 2001, [2001] ECR II-3193. 61 Case C-481/01, IMS Health Inc v NDC Health Corp, Judgment of 11 April 2002, (2002) 5 Common Market Law Review 1. 62 For an analysis of the ECJ’s judgment see in more detail below at 8.2.1. 63 OLG Frankfurt aM, Judgment of 17 September 2002 (Docket No 11 U 67/00, IMS-Health II), 2003 Multimedia und Recht 45. 64 Case COMP D3/38.044—NDC Health/IMS Health, Commission Decision 2003/741/EC, OJ 2003 L268/69. 60

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The Frankfurt Higher Regional Court found that IMS had made a substantial investment and that its market report with its data thus constituted a database within the meaning of § 87a German Copyright Act and could enjoy sui generis protection as foreseen under Article 7 of the Database Directive. However, the court rejected IMS’s claim for protection of the regional segmentation, ie the underlying structure without the data. The court argued that the segments would not constitute substantial parts of the database as required by Article 7(1) of the Database Directive and § 87b(1) of the Copyright Act.65 Importantly, the court argued that the purpose of the sui generis protection under § 87a et seq Copyright Act was to protect the data, but not to prevent others from creating their own databases by monopolising a specific structure of a database. Ultimately, however, the Frankfurt Higher Regional Court granted injunctive relief under the German Act against Unfair Competition. It held that NDC had unfairly exploited IMS’s work by using a slavish imitation of the database structure. This protection under unfair competition law against imitation, which is independent from IP protection—known as ergänzender wettbewerbsrechtlicher Leistungsschutz—had been developed by the courts under the former general clause in the Act against Unfair Competition. This case law is now partly codified in § 4 lit. 9 (and 10) of the Act against Unfair Competition.66 In particular in cases where there is no confusion of origin (like in the IMS case), the misappropriation of another’s work through imitation may also still be subsumed under the general clause in § 3 of the Act against Unfair Competition.67 In the particular case of IMS, the Frankfurt court argued that the NDC database at hand constituted a slavish imitation. According to the judgment, the brick structure would arouse a certain expectation of quality and would point to IMS as its original source. In the court’s view, PI had therefore exploited IMS’s ‘good reputation’. Three aspects addressed by the Frankfurt court are of importance: First, the court emphasised that PI could not defend itself by arguing that the brick structure had become an industry standard. According to the court, the commercial success of the standard does not put it in the public domain; on the contrary, it makes it a good which deserves particular protection.68 Second, however, the court was at the same time aware of the danger of monopolisation of the database market, stating that [t]he defendant or third parties cannot not simply be prohibited from developing freely and independently a brick structure that is similarly based on a breakdown by district, urban district

65 Under the Database Directive, protection may also apply to the materials necessary for the operation or consultation of certain databases such as indexation systems. The court, however, found that the structure would not constitute such an indexation system. 66 For an analysis see Köhler (2010) in Köhler & Bornkamm (eds), UWG—Kommentar, § 4, paras 9.1–9.89. On the competition problems arising from such protection against imitation under unfair competition law see Ohly (2009), ‘Nachahmungsschutz versus Wettbewerbsfreiheit’ in Lange et al (eds), Geistiges Eigentum und Wettbewerb, pp 99–116, in particular pp 114–16. 67 See Henning-Bodewig (2006), Unfair Competition Law—European Union and Member States, pp 135–36, who also provides for an overview of protection against misappropriation and slavish imitation under Community law and the other Member States’ national laws against unfair competition. 68 OLG Frankfurt aM, Judgment of 17 September 2002 (Docket No 11 U 67/00, IMS-Health II), 2003 Multimedia und Recht 45: ‘Die Beklagte kann sich demgegenüber nicht darauf berufen, dass es sich bei der von der Klägerin entwickelten Struktur um einen “Industriestandard” handele. Die weite Verbreitung der Struktur infolge des besonderen wirtschaftlichen Erfolgs der Klägerin bewirkt nicht, dass die Struktur zum Allgemeingut wird, sondern dass sie sich—wie dargelegt—zu einem besonders schützenswerten Besitzstand entwickelte, in den Dritte jedenfalls nicht durch unmittelbare Übernahme im Wege der Raubkopie eingreifen dürfen.’

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and postal code district and for that reason comprise more or less the same number of bricks. … In particular, the defendant or third parties cannot be expected to produce a data structure that does not sufficiently satisfy the practical requirements simply in order to keep as much distance as possible from the plaintiff ’s product. Instead, variations cannot be demanded where the overlaps are based on material technical requirements and, taking into account ‘the need of market space’ for competitors, the appropriate performance of the technical task depends on these features. (emphasis added)69

Third, the Frankfurt court highlighted that even a valid counterclaim under Article 102 TFEU would not render a slavish imitation legal and would thus not hinder the claim for injunctive relief against slavish imitation.70 The court’s latter findings are both inconsistent and unsound from an economic point of view. On the one hand, to prevent monopolisation of the database market, the judgment—correctly—rejects sui generis protection as foreseen under Article 7 of the Database Directive for the regional segmentation. It emphasises that a competitor cannot be expected to produce a data structure that does not sufficiently satisfy the practical requirements simply in order to keep as much distance as possible from the plaintiff ’s product. At the same time, however, the court reconstructed such sui generis protection under unfair competition law. From an economic perspective, in such database markets, there may be strong economies of scale in demand (network effects) which lead to an adoption of a de facto standard for the underlying structure. In these situations, using the same—in this case rather basic—structure may be commercially necessary in order to participate in the market. Additional backdoor protection under unfair competition laws in these scenarios further cements an already existing economic barrier to entry. Competition in these cases may often centre on the quality of the underlying data. Protection of the underlying structure may not be necessary to recoup the underlying investment in establishing the structure as a de facto standard. Therefore, in such scenarios, a narrow interpretation of sui generis protection for databases as well as more limited protection against imitation of the structure of databases under unfair competition laws are warranted.

69 Ibid (English translation from Case COMP D3/38.044—NDC Health/IMS Health, Commission Decision 2003/741/EC, OJ 2003 L268/69). In the German original: [D]er Beklagten oder Dritten die freie, selbständige Entwicklung einer Segmentstruktur, die ebenfalls auf der Einteilung nach Landkreisen, kreisfreien Städten und Postleitzahlbezirken beruht und deshalb ggfs. aus einer annähernd gleichen Anzahl von Segmenten besteht, nicht ohne weiteres untersagt werden könnte. … Insbesondere könnte es der Beklagten oder Dritten nicht zugemutet werden, eine den praktischen Anforderungen nur unzulänglich gerecht werdende Datenstruktur zu erstellen, nur um einen möglichst weiten Abstand von dem Produkt der Klägerin zu halten. Vielmehr können Abweichungen nicht verlangt werden, wo die Übereinstimmungen auf sachlich-technischen Anforderungen beruhen und unter Berücksichtigung des Freihaltebedürfnisses der Wettbewerber in diesen Merkmalen die angemessene Verwirklichung der technischen Aufgabe liegt.’ 70 Ibid: ‘Dem auf § 1 UWG gestützten Unterlassungsanspruchs steht die—vom Gerichtshof aufgehobene— Entscheidung der Europäischen Kommission vom 3. Juli 2001 nicht entgegen. Die Geltendmachung eines wettbewerbsrechtlichen Unterlassungsanspruches aus § 1 UWG wegen wettbewerbswidriger Behinderung ist unter Mißbrauchsgesichtspunkten nicht zu beanstanden. Zwar ist der Einwand der “unclean hands” gegenüber der Durchsetzung wettbewerbsrechtlicher Individualansprüche nicht grundsätzlich ausgeschlossen. Der Anspruch aus § 1 UWG beruht indes gerade auf dem anstößigen Verhalten der Beklagten. Kein Wettbewerber muss jedoch eine wettbewerbsrechtlich anstößige, unmittelbare Leistungsübernahme hinnehmen. Selbst wenn die Klägerin—wie die Europäische Kommission meint—ggfs. zwangsweise zur Erteilung von Lizenzen verpflichtet wäre, berechtigte dies die Beklagte nicht zur Herstellung von Raubkopien.’

8.2

8.1.3

LIMITS TO REFUSALS TO SUPPLY

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German Trade Secret Protection and Conclusion

Trade secrets are protected under § 17 and § 19 of the German Act against Unfair Competition against unauthorised procurement, disclosure and exploitation.71 German trade secret law does not provide a misuse doctrine or other specific levers to account for follow-on innovation or competition concerns. The only potential way to account for these concerns within trade secret law would be the requirement of a ‘legitimate economic interest’ to keep the relevant fact secret. However, this condition has been interpreted very widely by the courts, effectively only barring from protection facts which are arbitrarily kept secret.72 Accordingly, German trade secret law—like copyright law—relies on (EU and German) competition law with regard to follow-on innovation and competition concerns. In sum, only German patent law, with its research exemption and its mandatory and dependency licences, provides for explicit levers to grant access to original innovation within the term of protection to allow for follow-on innovation. The scope of the compulsory licensing provisions, however, is very limited. Limitations on innovators’ or creators’ exclusive rights do not match US patent and copyright misuse doctrines with regard to broadness, discretion for courts and thus flexibility. Accordingly, German patent law and, even more, copyright and trade secret law very much rely on competition law to balance original innovators’ and creators’ rights against the need to keep open markets for follow-on innovation and creation. It is likely that the Federal Court of Justice, following the explicit recognition under patent law of a compulsory licensing defence based on national competition law and Article 102 TFEU in its recent Orange-Book-Standard judgment, will also recognise such a defence under copyright law.

8.2

LIMITS TO REFUSALS TO SUPPLY BASED ON IP UNDER ARTICLE 102 TFEU

The above analysis of German IP laws is to some extent paradigmatic for EU Member States’ national IP laws. The analysis has shown that IP levers that could address competition concerns on innovation and product markets are limited. It has also demonstrated that German IP laws in that regard rely heavily on competition law, in particular abuse of dominance rules on refusals to supply based on IP. Similar to the Colgate doctrine under § 2 of the Sherman Act, albeit less pronounced, the starting point for the assessment of refusals to supply under Article 102 TFEU (ex Article 82 EC) is the recognition that general freedom of contract also applies to dominant undertakings.73 In its Guidance Paper

71

See above at 2.2.1.2. See Harte-Bavendamm (2005) in Gloy & Loschelder (eds), Handbuch des Wettbewerbsrechts, § 48, para 13. Even for facts which are related to illegal behaviour, a legitimate interest in their secrecy may exist. See Brammsen (2006) in Heermann & Hirsch (eds), Münchener Kommentar zum Lauterkeitsrecht, § 17, paras 17–22; Rengier (2005) in Fezer (ed), Lauterkeitsrecht, § 17, paras 20–21. 73 See eg the Opinion of AG Jacobs in Case C-7/97, Oscar Bronner v Mediaprint Zeitungs- und Zeitschriftenverlag, Mediaprint Zeitungsvertriebsgesellschaft and Mediaprint Anzeigengesellschaft [1998] ECR I-7791, para 56. 72

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on its ‘enforcement priorities in applying Article 82 EC’ (now Article 102 TFEU), the Commission summarised this no duty to deal rule, stating that … generally speaking, any undertaking, whether dominant or not, should have the right to choose its trading partners and to dispose freely of its property. The Commission therefore considers that intervention on competition law grounds requires careful consideration where the application of Article 82 would lead to the imposition of an obligation to supply on the dominant undertaking.74

In cases where the potentially abusive conduct was based on an intellectual (as opposed to a tangible) property right and the exclusive right belonged to the ‘specific subject matter’ of IP rights—such as the exclusive right of reproduction which translates into the right to refuse to license—the Court has emphasised even further the general no duty to deal rule. It has held that a refusal to license ‘cannot in itself constitute an abuse of a dominant position’ and has required ‘exceptional circumstances’ to find an abuse.75 This stance is similar to immunity or per se legality approaches of US courts.76 In its Volvo judgment, however, the ECJ provided examples of such potential ‘exceptional circumstances’.77 From the Court’s jurisprudence and the Commission’s decisional practice78 as well as guidelines, several rules and scenarios may be identified which may lead to a duty to deal to prevent the foreclosure of competition by follow-on innovation:79 (1) the essential facilities (type of) rule under Article 102 lit. b TFEU, which, in refusal to license cases, includes the additional ‘new product’ criterion (established in the ECJ’s Magill, Bronner and IMS judgments); (2) the refusal to deal as part of a price squeeze strategy (as decided upon by the CFI in Deutsche Telekom);

74 Communication from the Commission, ‘Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’, OJ 2009 C45/7, para 75. 75 The notion of ‘exceptional circumstances’ was first used in Magill (Joined Cases C-241/91 P and C-242/91 P, Raidió Teilifís Éireann (RTÉ) and Independent Television Publications (ITP) v Commission [1995] ECR 743), para 50, where the Court refers to its Volvo judgment. See above in the context of the general relationship between (national) IP rights and EC competition law at 2.3.2.1.2. Summarising the Court’s jurisprudence in its Microsoft judgment (para. 331), the CFI stated: ‘It follows from the case-law … that the refusal by an undertaking holding a dominant position to license a third party to use a product covered by an intellectual property right cannot in itself constitute an abuse of a dominant position within the meaning of Article 82 EC. It is only in exceptional circumstances that the exercise of the exclusive right by the owner of the intellectual property right may give rise to such an abuse’ (emphasis added). 76 See above at 7.2.1. For an analysis of the general relationship between IP rights and (EU) competition law see above at 2.3. 77 Case 238/87, AB Volvo v Erik Veng [1988] ECR 6211, para 9: ‘It must however be noted that the exercise of an exclusive right by the proprietor of a registered design in respect of car body panels may be prohibited by Article 86 (now Art 102 TFEU) if it involves, on the part of an undertaking holding a dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation, provided that such conduct is liable to affect trade between Member States’ (emphasis added). See also Case 53/87, CICCRA and Maxicar v Renault [1988] ECR 6039, para 16. For an analysis of IP-related abuses under all four examples mentioned in Art 102 TFEU see Anderman & Schmidt (2007), ‘EC Competition Policy and IPRs’ in Anderman (ed), The Interface between Intellectual Property Rights and Competition Policy, pp 37–124, at pp 39–76. 78 For an overview see Whish (2009), Competition Law, pp 687–702. 79 A refusal to supply a product on the basis of IP rights, in particular an ‘arbitrary’ refusal by a proprietor of a registered design in respect of car body panels to supply independent repairers or a constructive refusal at an ‘unfair’ price as established by the ECJ in its Volvo judgment (Case 238/87, AB Volvo v Erik Veng [1988] ECR 6211) will not be addressed here again in detail; see above at 4.8. For an analysis of the similar US Xerox and Kodak cases see above at 7.2.1.2 and 7.2.1.3.

8.2

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(3) the refusal to deal as an instrument, in particular to prevent a (potential) purchaser from engaging in parallel trade (as decided upon by the ECJ in GlaxoSmithKline); and (4) discriminatory refusals to deal under Article 102 lit. c TFEU. All these rules require that the undertaking that refuses to supply has, at least, a dominant position on the relevant (input) market.80 With regard to the definition of such an (upstream) market, the standard methodology as outlined in chapter six applies.81 It is also clear from the Commission’s decisions that the notion of ‘refusal’ captures both naked and constructive refusals to deal.82 When liability under these rules leads to a duty to deal, the undertaking seeking supply may invoke a defence or raise a counterclaim based on this duty in IP infringement proceedings. The focus here will be on the first test, the essential facilities doctrine, as the main rule to prevent the foreclosure of competition by follow-on innovation.

8.2.1

Essential Facilities Test

Although the ECJ still does not use the notion of ‘essential facilities’,83 the ECJ’s judgments in Magill, Bronner and IMS Health established an essential facilities test.84 According to these 80 For an analysis see Monti (2006), ‘The Concept of Dominance in Article 82’, 2 European Competition Journal 31. 81 See above at 6.1.1, in particular the references to the Commission Notice on the definition of the relevant market for the purposes of Community competition law and the ‘Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings’. Contrary to US law, no market power presumption in IP cases had developed under EU law. For an analysis of the concept of dominance under Art 102 TFEU see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 107–73; Geradin et al (2005), ‘The Concept of Dominance’, GCLC Research Papers on Article 82 EC, pp 6–37; in the context of IP see Anderman (1998), EC Competition Law and Intellectual Property Rights, pp 168–85. 82 See eg Deutsche Post AG—Interception of cross-border mail, OJ 2001 L331/40, para 103: ‘[T]he concept of refusal to supply covers not only outright refusals but also situations where dominant firms make supply subject to objectively unreasonable terms.’ See also the DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 225, and now the Guidance Paper, para 79: ‘[I]t is not necessary for there to be actual refusal on the part of a dominant undertaking; “constructive refusal” is sufficient. Constructive refusal could, for example, take the form of unduly delaying or otherwise degrading the supply of the product or involve the imposition of unreasonable conditions in return for the supply.’ 83 Similar to the US Supreme Court, the ECJ (contrary to the CFI) has not used the notion of ‘essential facilities’. The first explicit references to the essential facilities doctrine in EU competition law appear in two interim decisions of the Commission: Case IV/34.174, B&I Line plc v Sealink Harbours Ltd & Sealink Stena Ltd (B&I), Commission Decision of 11 June 1992, (1992) 5 Common Market Law Review 255, and Case IV/34.689, Sea Containers v Stena Sealink (Sea Containers), Commission Decision 94/19/EC of 21 December 1993, OJ 1994 L15/8, both of which involved access to a port. 84 From the vast literature on the essential facilities doctrine under Art 102 TFEU see, in particular, Temple Lang (1994), ‘Defining Legitimate Competition: Companies’ Duties to Supply Competitors and Access to Essential Facilities’, 18 Fordham International Law Journal 437, and Temple Lang (2000), ‘The Principle of Essential Facilities in European Community Competition Law—The Position Since Bronner’, 1 Journal of Network Industries 375. In the German literature see: Schwintowski (1999), ‘Der Zugang zu wesentlichen Einrichtungen’, Wirtschaft und Wettbewerb 842; Haas (2000), Essential Facilities Doktrin und offene Netze; Stollhoff (2000), Der Ausschluss von Marktrisiken durch Essential Facilties unter Art 82 EGV; Beckmerhagen (2002), Die essential facilities doctrine im US-amerikanischen und europäischen Kartellrecht; Scheuffele (2003), Die Essential Facilities-Doktrin. Particularly with regard to IP: Ezrachi (2011), ‘Competition Law Enforcement and Refusal to Licence—The Changing Boundaries of Article 102 TFEU’ in Anderman & Ezrachi (eds), Intellectual Property and Competition Law—New Frontiers, pp 95–112; Bartl (2005), Immaterialgüterrecthliche Marktzutrittsschranken im System des Art 82 EG; Zimmermann (2005), Die Zwangslizenzierung von Immaterialgüterrechten nach Art 82 EG; Jovanovic (2007), Die kartellrechtlich unzulässige Lizenzverweigerung—Immaterialgüter als Essential-Facilities: Tatbestandsmerkmale und Rechtsfolgen; Käller (2006), Die Verweigerung einer immaterialgüterrechtlich geschützten Leistung und das Missbrauchsverbot des

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judgments, a refusal supply violates Article 102 TFEU under the following—intertwined and partially overlapping—conditions:85 (1) the undertaking that refuses to supply is dominant on a (hypothetical) (upstream) market (see below at 8.2.1.1); (2) the product or service is indispensable for carrying on a particular business activity in a downstream or neighbouring segment (8.2.1.2); (3) there are the following ‘exceptional circumstances’: (a) the refusal must be likely to exclude any competition in the secondary market (8.2.1.3), (b) in the case of a refusal to license: the refusal prevents the emergence of a new product for which there is potential consumer demand (8.2.1.4), and (c) the refusal is not justified (8.2.1.5). 8.2.1.1

Necessity vs Sufficiency of the Conditions

The above test is the same for refusals based on tangible and intellectual property rights, except for the additional ‘new product’ condition in IP cases. What is still unclear, however, is (i) whether the Bronner conditions—ie all conditions except the ‘new product’ requirement— are necessary in refusal to supply scenarios, and (ii) specifically to what extent the additional ‘new product’ requirement is a necessary condition. With regard to the first question whether the Bronner essential facilities requirements are necessary conditions in all refusal to deal cases, the Guidance Paper states that the Commission will dispense with the conditions and instead apply its general foreclosure standard where ‘imposing an obligation to supply is manifestly not capable of having negative effects on the input owner’s and/or other operators’ incentives to invest and innovate upstream, whether ex ante or ex post’.86 According to the Guidance Paper, this would notably be the case, first, ‘where regulation compatible with Community law already imposes an obligation to supply on the dominant undertaking and it is clear, from the considerations underlying such regulation, that the necessary balancing of incentives has already been made by the public authority when imposing such an obligation to supply’, or, second, ‘where the upstream market position of the dominant undertaking has been developed under the protection of special or exclusive rights or has been financed by state resources’.87 Neither of the two exceptions has been mentioned by the Court. In respect of the jurisprudence so far, it would be fair to conclude that the Bronner conditions are indeed necessary in refusal to supply situations. From a normative policy point of view, the second exception mentioned in the Guidance Paper highlights the problem of the current Bronner test: it does not ask whether the dominant firm would have invested in the creation of the upstream facility or technology if it had known about the obligation to supply (ex ante efficiency defence).88

Art 82 EG; Kaestner (2005), Missbrauch von Immaterialgüterrechten; and Westernhagen (2006), Zugang zu geistigem Eigentum nach europäischem Kartellrecht. 85 See Cases C-2441 and 242/91, Magill [1995] ECR I-743, paras 53–56; Case C-7/97, Bronner [1998] ECR I-7791, para 40; Case C-418/01, IMS Health [2004] ECR I-5039, paras 37–38, 52. 86 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 82. 87 Ibid. 88 See above at 6.2.2.

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However, it would be unsound to ask this question only in those cases where the answer is presumably affirmative, such as in the case of facilities financed by state resources. And even in the latter cases, a new owner may have paid for the investment through the purchase price and should therefore be allowed to invoke this payment as a defence.89 The second question—the extent to which the additional ‘new product’ requirement is a necessary condition—has been subject to debate. As we saw earlier,90 requiring harm to dynamic competition in the case of conduct based on IP rights makes sense, in particular given the levers under IP law to reduce static distortions. In its IMS decision, the Commission read the judgments in Magill, Ladbroke and Bronner such that it could apply the Bronner test—ie the test without the ‘new product’ condition—to the copyrighted data structure in the case.91 In his first Order, however, the President of the CFI suggested that IMS had made a prima facie case that the Commission had misapplied the case law. In his second Order, he re-iterated, in essence, that the case law may also be interpreted as seeing the Magill conditions as cumulative and thus the ‘new product’ condition as necessary in cases in which the refusal is based on IP (as opposed to tangible property). The President of the CFI, however, avoided answering the question, finding that the question would merit full consideration by the CFI in the main action.92 In its preliminary judgment, the ECJ held that … the refusal by an undertaking in a dominant position to allow access to a product protected by an intellectual property right, where that product is indispensable for operating on a secondary market, may be regarded as abusive only where the undertaking which requested the licence does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the intellectual property right, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential consumer demand. (emphasis added)93

Ultimately, however, the ECJ avoided answering the question fully, stating that [i]t is clear from that case-law that, in order for the refusal by an undertaking which owns a copyright to give access to a product or service indispensable for carrying on a particular business to be treated as abusive, it is sufficient that three cumulative conditions be satisfied, namely, that that refusal is preventing the emergence of a new product for which there is a potential consumer demand, that it is unjustified and such as to exclude any competition on a secondary market. (emphasis added)94

In its Microsoft judgment, the CFI put the ‘new product’ condition in the broader context of the requirement under Article 102 lit. b TFEU that the conduct is abusive if it limits technical development to the prejudice of consumers.95 However, despite interpreting the notion

89

See above at 6.2.2. See above at 2.5.3, 2.6 and 6.1.3. 91 For an analysis of the Commission’s decision and the order of the President of the CFI see Derclaye (2003), ‘Abuses of Dominant Position and Intellectual Property Rights: A Suggestion to Reconcile Community Courts Case Law’, 26 World Competition 685. See also Dolmans et al (2007), ‘Are Article 82 EC and Intellectual Property Interoperable? The State of the Law Pending the Judgment in Microsoft v Commission’, 3 Competition Policy International 107. 92 Case T-184/01 R, IMS Health v Commission [2001] ECR II-3193, in particular paras 100–06. 93 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039 (‘IMS Health’), para 49. 94 Ibid, para 38. 95 Case T-201/04, Microsoft v Commission [2007] ECR II-4463, paras 643–65. The literature on the case is legion. See eg Eklöf (2009), ‘The Microsoft Case—at the Heart of the IP/Antitrust Intersection’ in Ezrachi (ed), Article 82 EC: Reflections on its Recent Evolution, pp 99–120; Anderman (2009), ‘The Epithet that Dares Not Speak its Name: The Essential Facilities Concept in Article 82 EC and IPRs after the Microsoft Case’ in Ezrachi (ed), 90

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of ‘new product’ extensively,96 the CFI accepted the condition as such. In the context of the question whether Microsoft’s communication protocols or the specifications of those protocols were covered by IP rights, the CFI stated that the Commission had proceeded on the assumption that … the conduct at issue in the present case might not be a mere refusal to supply a product or a service indispensable to the exercise of a specific activity but a refusal to license intellectual property rights, and thus chose the strictest legal test and therefore the one most favourable to Microsoft. (emphasis added)97

From the case law, one may conclude that the ECJ has reserved for itself room for manoeuvre in future cases, in two ways: First, the ‘exceptional circumstances’ defined so far in the cases are not exhaustive. Second, the conditions of the essential facilities test, including the ‘new product’ condition, are merely sufficient. Given the multitude of types of refusals to deal based on (intellectual) property rights and the underlying overall strategies, even balanced against the need for legal certainty for dominant undertakings, the Court’s refusal to provide an exhaustive list of ‘exceptional circumstances’ is reasonable. The abovementioned essential facilities test should apply in the classic cases of input foreclosure of the downstream market. As stated above, however, there may be scenarios where, for example, a refusal to supply is part of or complements a tying or bundling strategy. In particular in the case of tying or bundling visà-vis a competitor, a specific anti-bundling rule is better suited to prevent foreclosure on adjacent markets.98 The second ‘backdoor’ of the ECJ—its refusal to establish the ‘new product’ requirement as necessary—will be further addressed in the context of the condition itself.99 8.2.1.2 Termination of Existing Supply vs De Novo Refusals According to the Court’s jurisprudence, the essential facilities test applies both to de novo refusals to supply and to the termination of an existing supply arrangement. The ECJ has not so far dealt with any case involving the termination of an existing licensing relationship.100 However, the Court appears to make a distinction between the scenarios of termination of existing product supply relationships and refusals to start supplying products (based on tangible property rights).101 In its recent judgment in GlaxoSmithKline, the ECJ stated that [t]he established case-law of the Court shows that the refusal by an undertaking occupying a dominant position on the market of a given product to meet the orders of an existing customer constitutes buse of that dominant position under Article 82 EC where, without any objective justification, that conduct is liable to eliminate a trading party as a competitor. (emphasis added)102

Article 82 EC: Reflections on its Recent Evolution, pp 87–98; Vickers (2008), ‘A Tale of Two EC Cases: IBM and Microsoft’, 4 Global Competition Policy 2; Lange (2009), ‘Europäisches Kartellrecht und geistiges Eigentum—der Fall Microsoft’ in Lange et al (eds), Geistiges Eigentum und Wettbewerb, pp 131–46; Madero Villarejo & Kramler (2011), ‘Intellectual Property Rights and Competition Rules, a Complex But Indispensable Coexistence’ in Anderman & Ezrachi (eds), Intellectual Property and Competition Law—New Frontiers, pp 61–72. 96

See in more detail below at 8.2.1.3.4. Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 284. 98 See above at 4.1. 99 See below at 8.2.1.3.4. 100 Only the CFI’s Microsoft judgment dealt with the situation of disruption to previous levels of supply. 101 For an analysis see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 458–61. 102 Joined Cases C-468/06 to C-478/06, Sot. Lélos kai Sia EE and Others v GlaxoSmithKline AEVE Farmakeftikon Proionton [2008] ECR I-7139. 97

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The Court’s statement might indicate that the liability threshold for the termination of existing supply relationships is lower than for de novo refusals. This would resemble the US Aspen Skiing jurisprudence. In its Guidance on its enforcement priorities, the European Commission suggests that an existing supply arrangement may make liability under the test more likely with regard to two factors:103 First, relationship-specific investments made in order to use the subsequently refused input may be taken into account when assessing the indispensability of the input in question. As has been argued, however, the protection of relationship-specific investment through antitrust is neither necessary nor desirable.104 Second, according to the Commission’s Guidance Paper, the fact that the owner of the essential input in the past has found it in its interest to supply is an indication that supplying the input does not imply any risk that the owner receives inadequate compensation for the original investment. It would therefore be up to the dominant company to demonstrate why circumstances have actually changed in such a way that the continuation of its existing supply relationship would put in danger its adequate compensation.105

This means that, within the assessment of the objective justification for a refusal, the burden of proof would partially change and fall upon the dominant undertaking concerned with regard to the question whether a duty to deal would endanger its incentives to invest and to innovate. Such a limited shift in the burden of proof is indeed the appropriate way to account for the dominant firm’s past decision to supply the input in question. 8.2.1.3 The Conditions of the Test The Commission’s decisions and the Court’s jurisprudence on refusals to deal have been subject to extensive review and debate.106 The focus here is on the following questions: (i) What room for interpretation do the conditions of the essential facilities test leave? (ii) What incentives does the test provide for initial and follow-on innovators? (iii) To what extent is the test functionally sufficient to prevent the foreclosure of competition by

103 See Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 84. The duty to continue to deal with an existing customer for a dominant firm under Art 102 TFEU has been established by the ECJ in Commercial Solvents (Joined Cases 6 & 7/73, 1974 ECR 223 [1974] 1 Common Market Law Review 309) and in United Brands (Case 27/76 [1978] ECR 207, (1978) 1 Common Market Law Review 429). 104 See above at 4.1.5. 105 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 84. 106 See in particular Temple Lang (2005), ‘The Application of the Essential Facility Doctrine to Intellectual Property Rights under European Competition Law’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyright—EU and US Perspectives, pp 56–84; Temple Lang (2004), ‘Mandating Access: The Principles and the Problems in Intellectual Property and Competition Policy’, 15 European Business Law Review 1087; Temple Lang (2006), ‘Anti-competitive Abuses under Article 82 involving Intellectual Property Rights’ in Ehlermann & Atanasiu (eds), European Competition Law Annual 2003: What is Abuse of a Dominant Position?, pp 589–658; Venit (2007), ‘Article 82 EC: Exceptional Circumstances: The IP/Antitrust Interface After IMS/Health’ in Ehlermann & Atanasiu (eds), European Competition Law Annual 2005, pp 609–32; Korah (2006), Intellectual Property Rights and the EC Competition Rules, pp 133–67; Anderman (1998), EC Competition Law and Intellectual Property Rights, pp 195–220; Ahlborn et al (2005), ‘The Logic and Limits of the “Exceptional Circumstances Test” in Magill and IMS Health’, 28(4) Fordham International Law Journal 1109; Körber (2004), ‘Geistiges Eigentum, essential facilities und “Innovationsmissbrauch”’, Recht der Internationalen Wirtschaft 881; Bulst (2010) in Bunte (ed), Langen/ Bunte—Kommentar zum deutschen und europäischen Kartellrecht, Art 82, paras 253–310. Wilhelmi (2009), ‘Lizenzverweigerung als Missbrauch einer marktbeherrschenden Stellung in der Gemeinschaftsrechtsprechung’, Wettbewerb in Recht und Praxis 1431.

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follow-on innovation and improvements? Both the CFI’s Microsoft judgment107 and the Commission’s Guidance on its enforcement priorities in applying Article 102 TFEU show that the room for interpretation which each of the conditions leaves has already been used and will likely be used in the future. 8.2.1.3.1

Dominant Position on a (Hypothetical or Potential) Upstream Market

With regard to the first condition—the existence of a dominant position on an upstream market—the ECJ, referring to its Bronner judgment and the Advocate General’s Opinion in IMS, clarified in its judgment in IMS Health that … for the purposes of the application of the earlier case-law, it is sufficient that a potential market or even hypothetical market can be identified. Such is the case where the products or services are indispensable in order to carry on a particular business and where there is an actual demand for them on the part of undertakings which seek to carry on the business for which they are indispensable. Accordingly, it is determinative that two different stages of production may be identified and that they are interconnected, inasmuch as the upstream product is indispensable for the supply of the downstream product. (emphasis added)108

This contrasts with the US Supreme Court’s argument in Trinko that the service sought by the plaintiff in that case existed ‘deep within the bowels’ of the defendant.109 The ECJ’s interpretation is welcome, since part of the very rationale of the essential facilities doctrine is to prevent foreclosure of downstream competition in the case of a vertically integrated monopolist. The doctrine would be largely redundant if confined to a situation of leveraging.110 In its Guidance Paper, the Commission thus states that it does not regard it as necessary for the refused product to have been already traded: it is sufficient that there is demand from potential purchasers and that a potential market for the input at stake can be identified.111

What is to some extent typical in interoperability cases is that the dominant position on the (hypothetical or potential) upstream market for the interoperability information is based on a strong position on an adjacent market. In its Microsoft judgment, the CFI confirmed the Commission’s finding that the work group server operating systems market was closely associated through commercial and technical links with the client PC operating systems market and that the overwhelming dominance in the latter market reinforced Microsoft’s position in the former.112 107 See Fox (2008), ‘Microsoft (EC) and Duty to Deal: Exceptionality and the Transatlantic Divide’, 4 Competition Policy International 25, rightfully arguing that the CFI in Microsoft stretched the conditions of the test set out by the ECJ in Magill and IMS Health. 108 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, paras 44, 45. Already in its interim decision, the Commission considered that two markets were not necessary for a duty to supply to arise (IMS Health/NDC— Interim Measures, OJ 2002 L59/18, para 184). For an analysis of the ECJ’s preliminary judgment see Derclaye (2004), ‘The IMS Health Decision: A Triple Victory’, 27 World Competition 397. See also the case annotation by Hatzopoulos (2004), 41 Common Market Law Review 1613; Stothers (2004), ‘IMS Health and its Implications for Compulsory Licensing in Europe’, 26 European Intellectual Property Review 467. 109 See above at 7.3.1.4. 110 See above at 6.1.1.1.2. 111 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 79. 112 Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, paras 526–41; Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 558.

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Indispensability

In order to preserve incentives to invest and to innovate, the second requirement of ‘indispensability’ must mean more than a high degree of dominance: First, circumvention as the more fundamental strategy than substitution to avoid the use of the input concerned must not be feasible at reasonable cost. Second, the upstream market must not tend towards competition in the medium term.113 In abstracto, the interpretation of the ‘indispensability’ condition by the ECJ is in line with such an understanding of essentiality. According to the judgment in Bronner, for a product to be considered indispensable it must be determined whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for any undertaking seeking to operate in the downstream segment to create the alternative products.114 As with the upstream segment, the downstream (or neighbouring) segment should at least constitute a hypothetical relevant market. According to Bronner and IMS Health, ‘in order to accept the existence of economic obstacles, it must be established, at the very least, that the creation of those products or services is not economically viable for production on a scale comparable to that of the undertaking which controls the existing product or service’.115 Neither in Magill nor in IMS did the ECJ point out in detail the extent to which the IP as a legal barrier must be unlikely to be circumvented. In IMS, however, the Court acknowledged that a high degree of participation by users may create a dependency on an industry standard protected by the IP. In the case, a copyright protected the ‘1860 brick structure’ for a database for the provision of German regional sales data on pharmaceutical products.116 According to the ECJ, such dependency may make it impossible for the competitor to set up an economically viable competing standard ‘on a scale comparable to that of the undertaking which controls the protected structure’.117 Strong consumer preferences or investments into building up such preferences themselves, however, should not count as barriers to entry within the indispensability assessment. Instead, the question must be whether the overall parameters of the upstream market would allow for a viable alternative ‘facility’. In that regard, the Commission’s Guidance Paper correctly identifies the typical factors that render an input indispensable, stating that [i]n general, an input is likely to be impossible to replicate when it involves a natural monopoly due to scale or scope economies, where there are strong network effects or when it concerns so-called ‘single source’ information. However, in all cases account should be taken of the dynamic nature of the industry and, in particular whether or not market power can rapidly dissipate.118

113

See above at 6.1.2. Case C-7/97, Oscar Bronner v Mediaprint Zeitungs- und Zeitschriftenverlag, Mediaprint Zeitungsvertriebsgesellschaft and Mediaprint Anzeigengesellschaft [1998] ECR I-7791, para 44. 115 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, para 28, paraphrasing Bronner, paras 45–46. Given the clear wording of the Bronner and IMS judgments, the statement of the former President of the CFI (Vesterdorf (2008), ‘Article 82 EC: Where do We Stand After the Microsoft Judgment?’, Global Antitrust Review 1, at 7) that the CFI’s Microsoft judgment, as compared to IMS and Bronner, broadened the concept from ‘almost physical’ to cover ‘economic indispensability’ is not correct. For a summary of the case law see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 440–42. 116 See above at 8.1.2.1. 117 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, para 29. 118 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, fn 58. 114

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One recent case in which the indispensability condition has been correctly applied in a stringent way was Virgin v Apple, decided by the French Competition Authority.119 Apple refused to license its digital rights management (DRM) technology (aptly called ‘FairPlay’) to Virgin, a competitor in the downstream market for music downloads. The underlying information technology that ensures the compatibility of Apple’s iTunes music download platform with its iPod music players consists, among other things, of patented application programming interfaces (APIs) and other secret specifications. Music downloaded from platforms other than Apple’s iTunes can be ‘read’ by an iPod only if it is provided with these interface information and specifications. Referring to Magill and IMS, the French Competition Authority rejected a duty to license this protected information under competition law. According to its analysis, Apple’s DRM was not indispensable for Virgin to compete in the download music market, particularly since only a relatively small percentage (around 15%) of music downloaded from the internet was currently transferred and used on portable players. Furthermore, music downloads from platforms other than Apple’s, including that of Virgin, could be made compatible with an iPod by means of a simple operation. While the indispensability condition encapsulates and thus overlaps with the question of dominance, it also implies the question ‘indispensable for what?’ and is thus intertwined with the sub-questions of (i) what degree and (ii) what type of competition the essential facilities rule protects. Therefore, the indispensability inquiry cannot be answered without an interpretation and assessment of the ‘elimination of competition’ (8.2.1.3.3) and the ‘new product’ (8.2.1.3.4) conditions of the test. 8.2.1.3.3

Elimination of Competition on a Neighbouring Segment

The indispensability condition essentially demands an inquiry into why there could be no viable downstream competition without a duty to supply. In this regard, the indispensability condition thus overlaps with the requirement that the refusal eliminates downstream competition.120 Under the latter condition—the linchpin of an effects-based competition rule—both the relevant downstream market and the necessary harm to competition on this market have to be determined. The CFI’s Microsoft judgment has clarified the two most important sub-questions: (i) What scope of foreclosure is required, or, in turn, what degree of competition does the essential facilities test protect? and (ii) What probability of harm is sufficient for liability? Especially in its Magill and IMS judgments, the ECJ consistently demanded that the refusal would eliminate ‘any’ or ‘all’ competition on the secondary market.121 In its

119 See Conseil de la Concurrence, Décision N° 04-D-54 du 9 novembre 2004 relative à des pratiques mises en oeuvre par la société Apple Computer, Inc dans les secteurs du téléchargement de musique sur Internet et des baladeurs numériques. For an analysis of the decision see Mazziotti (2005), ‘Did Apple’s Refusal to License Proprietary Information Enabling Interoperability with Its iPod Music Player Constitute an Abuse under Article 82 of the EC Treaty?’, 28 World Competition 253. 120 See also Le (2005), ‘What Does “Capable of Eliminating All Competition” Mean?’, 26 European Competition Law Review 6. 121 Joined Cases C-241/91 P and C-242/91 P, Raidió Teilifís Éireann (RTÉ) and Independent Television Publications (ITP) v Commission [1995] ECR 743, para 56; Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, in particular paras 38, 39, 52. See also Bronner, para 38, referring to Commercial Solvents, para 25, and CBEM, para 26.

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Microsoft decision, the Commission had found Microsoft liable under Article 102 TFEU for refusing to supply to Sun and other undertakings the specifications for the protocols used by Windows work group servers. These specifications would have enabled the provision of file, print, group and user administration services to Windows work group networks. Sun and others wanted to implement such specifications for the purpose of developing and distributing interoperable work group server operating system products.122 Both in the procedure leading to the decision and before the CFI, the necessary degree of interoperability had been a major contentious issue. Microsoft had argued that interoperability disclosures were not indispensable for its competitors in the work group server operating system market, due, inter alia, to the possibility of reverse engineering Microsoft’s products.123 Microsoft had also stipulated that the refusal would not eliminate ‘all’ competition and that the degree of interoperability demanded by the Commission was excessive.124 Referring to Magill and IMS Health, various commentators have argued that the denial of the interoperability information merely handicapped Microsoft’s competitors. According to these commentators, the interoperability information was thus not indispensable for competitors to carry on business. On this view, the refusal did not exclude all workgroup server operating system competition, but merely created the risk that competition would be excluded.125 In its submissions to the CFI, the Commission itself accepted that a certain degree of interoperability with the Windows domain architecture was already possible, but claimed that the degree of interoperability that can be achieved using the available methods would be too low to enable Microsoft’s competitors to remain viably in the market.126 In its judgment, the CFI clarified that [t]he expressions ‘risk of elimination of competition’ and ‘likely to eliminate competition’ are used without distinction by the Community judicature to reflect the same idea, namely that Article 82 EC [now Article 102 TFEU] does not apply only from the time when there is no more, or practically no more, competition on the market. If the Commission were required to wait until competitors were eliminated from the market, or until their elimination was sufficiently imminent, before being able to take action under Article 82 EC [now Article 102 TFEU], that would clearly run counter to the objective of that provision, which is to maintain undistorted competition in the common market and, in particular, to safeguard the competition that still exists on the relevant market …127

With regard to the degree of competition to be protected, the CFI held as follows: What matters, for the purpose of establishing an infringement of Article 82 EC [now Article 102 TFEU], is that the refusal at issue is liable to, or is likely to, eliminate all effective competition on the

122 Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, para 546. See above at 4.6.1. For an analysis of the decision see, amongst many others, Heinemann (2005), ‘Compulsory Licenses and Product Integration in European Competition Law—Assessment of the European Commission’s Microsoft Decision’, 1 International Review of Intellectual Property and Copyright Law 63–82; Lévêque (2005), ‘Innovation, Leveraging and Essential Facilities: Interoperability Licensing in the EU Microsoft Case’ in Lévêque & Shelanski (eds), Antitrust, Patents and Copyright—EU and US Perspectives, pp 103–26; Montagnani (2007), ‘Remedies to Exclusionary Innovation in the High-Tech Sector: Is there a Lesson from the Microsoft Saga?’, 30 World Competition 623. 123 Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, in particular paras 666–67. 124 Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 151. 125 See Fox (2008), ‘Microsoft (EC) and Duty to Deal: Exceptionality and the Transatlantic Divide’, 4 Competition Policy International 25, at 27. See similarly Vickers (2008), ‘A Tale of Two EC Cases: IBM and Microsoft’, 4 Competition Policy International 2. 126 Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, fn 712. 127 Case T-201/04, Microsoft v Commission [2007] ECR II-4463, para 561.

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market. It must be made clear that the fact that the competitors of the dominant undertaking retain a marginal presence in certain niches on the market cannot suffice to substantiate the existence of such competition. (emphasis added)128

Both clarifications favour a strong essential facilities rule. The factual question whether the facts in the Microsoft case fit the conditions of the test will not be further addressed here. But the CFI’s clarifications are welcome in abstracto, given the objective of EU competition rules to protect effective competition.129 In its Guidance Paper, the Commission accordingly pointed out that it … will consider whether the supply of the refused input is objectively necessary for operators to be able to compete effectively on the market. This does not mean that, without the refused input, no competitor could ever enter or survive on the downstream market. Rather, an input is indispensable where there is no actual or potential substitute on which competitors in the downstream market could rely so as to counter—at least in the long term—the negative consequences of the refusal. (emphasis added)130

With regard to the type of competition to be protected, the Commission in its Guidance Paper—albeit not explicitly in the context of constructive refusals to deal—states that it generally applies the equal efficiency benchmark.131 As has been argued here132 and by the Commission itself in a general context in its Guidance Paper,133 however, new entrants may be less efficient at the time of the conduct concerned than the incumbent, but may become equally or more efficient in the future, thus adding productive efficiency. Therefore, reasonable efficiency would generally be the preferable yardstick for a constructive refusal to deal. A final aspect of the problem is what competition the essential facilities type of rule does (and should) protect relates to the numbers of licences to be granted. The question is whether the likelihood that effective competition will be eliminated would no longer exist after a certain number of licences—potentially as a consequence of a remedy—had been granted. The non-discrimination principle under the FRAND (fair, reasonable and non-discriminatory) remedies used by the Commission implicitly answers this question in the negative. One could argue that, for instance, after one or two competitors have entered the downstream market, the risk of an elimination of competition would be banned and, accordingly, there would no longer be any duty to deal. Such an approach, however, would run counter to the underlying rationale of the ‘new product’ test. This rationale is not to restore static competition, but to protect dynamic competition by any new market option that satisfies the ‘new product’ condition. Therefore, the obligation to license should not cease to exist after a certain number of licences have been granted. Every potential licensee who satisfies the ‘new product’ condition should be able to receive a licence.

128

Ibid, para 563. See above at 6.1.3. 130 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 83. See also para 85 for the parameters which, in the Commission’s view, increase the likelihood of effective competition being eliminated. 131 Ibid, para 80. 132 See above at 3.3.3.2 and 5.1.6. 133 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 24. 129

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8.2.1.3.4 Refusal Prevents Emergence of New Product for which there is Potential Consumer Demand Of all the conditions of the essential facilities test, the ‘new product’ condition, first used by the ECJ in Magill, then re-iterated in IMS Health, has been the subject of fiercest debate amongst scholars and practitioners.134 Two elements have to be distinguished: (i) to what extent the ‘new product’ must be non-substitutable with the existing product(s), and (ii) to what extent it must already be clearly identifiable. The narrowest understanding with regard to both elements would demand that the refusal prevents the emergence of a clearly identifiable new product which is not substitutable with the dominant firm’s product. The widest approach would do away with the emergence of a clearly identifiable new product. Such an approach would understand the condition as only one specific case of, or as shorthand for, the much broader condition of ‘limitation of technical development’ or, more broadly, for consumer harm in the form of ‘lost’ potential innovation or even mere product differentiation. The case law reflects to some extent this potential range of approaches. In Magill, the ECJ merely endorsed the CFI’s decision to take into account as an ‘exceptional circumstance’ that the appellants’ refusal to provide basic information by relying on national copyright provisions thus prevented the appearance of a new product, a comprehensive weekly guide to television programmes, which the appellants did not offer and for which there was a potential consumer demand.135

Before the Irish publisher Magill offered a single, comprehensive television guide, the three owners of the copyright in programme listings for their respective programmes (RTÉ, BBC and ITP) had each published guides containing only their own individual programme listings. Thus Magill has indeed been the clearest ‘new product’ case so far. What is also clear, however, is that Article 82 EC (now Article 102 TFEU) in this case served to ‘repair’ a ‘broken’ IP law: Under UK and Irish law, copyright protects not only literary works which are the result of creative or intellectual endeavour, but also compilations of information resulting from ‘skill, judgment and labour’.136 The case became a catalyst for (limited) legislative change in the UK. The Broadcasting Act 1990 now

134 For a concurring view on the ‘new product’ requirement see eg Ahlborn et al (2005), ‘The Logic and Limits of the “Exceptional Circumstances Test” in Magill and IMS Health’, 28(4) Fordham International Law Journal 1109, 1127–28; O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 445–46; Wilhelmi (2009), ‘Lizenzverweigerung als Missbrauch einer marktbeherrschenden Stellung in der Gemeinschaftsrechtsprechung’, Wettbewerb in Recht und Praxis 1431, at 1438–44. Critical of the condition: Ridyard (2004), ‘Compulsory Access under EU Competition Law—A New Doctrine of “Convenient Facilities” and the Case for Price Regulation’, 25 European Competition Law Review 669, at 670; Schweitzer (2007), ‘Controlling the Unilateral Exercise of Intellectual Property Rights’, European University Institute Working Paper LAW No 2007/31, pp 15–17; Drexl (2007), ‘Abuse of Dominance in Licensing and Refusal to License: A “More Economic Approach” to Competition by Imitation and to Competition by Substitution’ in Ehlermann & Atanasiu (eds), European Competition Law Annual 2005, pp 647–64, at pp 653–55; Geradin (2004), ‘Limiting the Scope of Article 82 EC: What Can the EU Learn FROM the US Supreme Court’s Judgment in Trinko in the Wake of Microsoft, IMS, and Deutsche Telekom?’, 41 Common Market Law Review 1519, at 1531–32; Ullrich & Heinemann (2007) in Immenga & Mestmäcker (eds), Wettbewerbsrecht EG Teil II, Gewerblicher Rechtsschutz und Urheberrecht B para 63; Korah (2006), Intellectual Property Rights and the EC Competition Rules, p 145. For a comparative view see Patterson (2008), ‘The Peculiar “New Product” Requirement in European Refusal to License Cases: A US Perspective’ in Ehlermann & Marquis (eds), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC. 135 See Cases C-2441 and 242/91, Magill [1995] ECR I-743, paras 53–56, para 54. 136 This approach is sometimes referred to as the ‘sweat of the brow’ doctrine.

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provides that persons broadcasting television programmes must give information about the programme schedules to any person who wants to publish it. However, it would be desirable to generally have a higher bar for originality under copyright for similar collections of information.137 In its IMS interim decision, the Commission tried to abandon the ‘new product’ requirement by adopting the Bronner test for tangible property for a refusal to license.138 The decision explicitly states that ‘[a]s clarified in the Ladbroke judgement, there is no requirement for a refusal to supply to prevent the emergence of a new product in order to be abusive’.139 In the interim proceedings, however, the then President of the CFI rejected the Commission’s analysis in his Order, stating that … instead of seeking to exclude the emergence of a new service on a separate market, the applicant’s refusal to grant a copyright licence to NDC and AzyX appears, at first sight, to be designed to prevent the latter from furnishing regional sales-data services based on freely available data, provided on the same market and to the same potential clients and differing only as to detail from the services offered by the applicant. … In essence, the Commission’s analysis would appear to be that the prevention, by means of a refusal to license an intellectual property right, of the emergence of new competitors willing to offer, at most, new variations of the same services and on the same market as the dominant undertaking may amount to an abuse where those competitors cannot otherwise access the market in question because the protected work constitutes a de facto industry standard. (emphasis added)140

In its preliminary judgment in IMS, the ECJ, referring to AG Tizzano’s Opinion, based the ‘new product’ criterion on the argument that the interest in competition could only prevail against the need for exclusive IP rights if the latter would prevent the development of such a product.141 This legal balancing essentially mirrors the economic analysis as set out in chapter two.142 In respect of this underlying balance, the Court held that … the refusal by an undertaking in a dominant position to allow access to a product protected by an intellectual property right, where that product is indispensable for operating on a secondary market, may be regarded as abusive only where the undertaking which requested the licence does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the intellectual property right, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential consumer demand. (emphasis added)143

In its Microsoft decision, which was issued about a month before the judgment in IMS, the European Commission had attempted to push for a test broader than the Magill test, pursuing a three-prong strategy. First, it argued that … there is no persuasiveness to an approach that would advocate the existence of an exhaustive checklist of exceptional circumstances and would have the Commission disregard a limine other

137 In its submissions to the CFI in the Magill case ([1991] ECR II-485) the Commission (in para 59) stated that ‘copyright should not subsist in compilations of such banal information’. 138 See Case COMP D3/38.044—NDC Health/IMS Health: Interim measures, Commission Decision of 3 July 2001, in particular paras 70, 179–81. 139 Ibid, para 180. 140 Case T-184/01R, IMS Health v Commission, First order (provisional stay) of 10 August 2001, [2001] ECR II-2349, para 101. 141 See the introductory quotation at the beginning of this chapter (Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, para 48, referring to the Opinion of AG Tizzano in that case ([2004] ECR I-5042, para 62)). 142 See in particular above at 2.4–2.6. 143 Case C-418/01, IMS Health v NDC Health [2004] ECR I-5039, para 49.

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circumstances of exceptional character that may deserve to be taken into account when assessing a refusal to supply. (emphasis added)144

According to the Commission, a reading of the judgments in both Volvo and Micro Leader Business … indicate that the factual situations where the exercise of an exclusive right by an intellectual property right-holder may constitute an abuse of a dominant position cannot be restricted to one particular set of circumstances. (emphasis added)145

Second, in the Commission’s view, [t]he case-law of the European Courts … suggests that the Commission must analyse the entirety of the circumstances surrounding a specific instance of a refusal to supply and must take its decision based on the results of such a comprehensive examination. (emphasis added)146

Accordingly, the Commission took circumstances into account which would not be relevant under the Magill test. This is the case in particular for the statement that Microsoft‘s refusal to license its IP to Sun was part of a general pattern of conduct and that Microsoft’s conduct involved a disruption to previous levels of supply. Third, instead of the ‘new product’ condition, the Commission’s decision states very generally that Microsoft’s refusal to supply limits technical development to the prejudice of consumers within the meaning of Article 82 lit. b EC (now Article 102 lit. b TFEU),147 broadly concluding that Microsoft’s refusal to supply has the consequence of stifling innovation in the impacted market and of diminishing consumers’ choices by locking them into a homogeneous Microsoft solution.148

Attempting generally to broaden the ‘newness’ criterion and the essential facilities test, the European Commission in its 2005 Discussion Paper on Article 82 EC stated: A refusal to licence an IPR protected technology which is indispensable as a basis for follow-on innovation by competitors may be abusive even if the licence is not sought to directly incorporate the technology in clearly identifiable new goods and services. The refusal of licensing an IPR protected technology should not impair consumers’ ability to benefit from innovation brought about by the dominant undertaking’s competitors. (emphasis added)149

In his Order in Microsoft, the President of the CFI did not decide on substantive issues. However, he acknowledged that the Magill and IMS conditions were merely sufficient. Even more importantly, the ruling recognised the differences between Magill and IMS Health on the one hand (information was known, low value) and the case before it (secret information, high investment). The ruling highlighted that one of the major questions in the main proceedings would be whether and to what extent the underlying investment would have to be taken into account.150 In its judgment, the Grand Chamber of the CFI not only upheld the Commission’s

144

Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, para 555. Ibid, para 557. 146 Ibid, para 558. 147 Ibid, paras 693–708. 148 Ibid, para 782. 149 DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 240. 150 Case T-184/01R, IMS Health v Commission, First order (provisional stay) of 10 August 2001 [2001] ECR II-2349, para 207: ‘[T]his case raises the question whether, where the exercise of an intellectual property right is in issue, the nature of the protected information must be taken into account. … [If so] account must be taken 145

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decision, but essentially followed the Commission to some extent in its attempt to interpret broadly the relatively strict Magill and IMS newness test. The CFI applied the ‘strictest legal test’—ie the Magill and the IMS test151—and found that the Commission had addressed all the relevant conditions within its decision. Thereby, the CFI ‘immunised’ its own judgment as well as the Commission’s decision against an appeal. With regard to the ‘new product’ condition, the CFI found that in its examination of the circumstance relating to the appearance of a new product, the aim pursued by the Commission is to remove the obstacle for Microsoft’s competitors represented by the insufficient degree of interoperability with the Windows domain architecture, in order to enable those competitors to offer work group server operating systems which differ from Microsoft’s on important parameters such as, in particular, security, reliability, processing speed or the innovative nature of certain functionalities. (emphasis added)152

Furthermore, the CFI stated as follows: The Commission was careful to emphasise … that there was ‘ample scope for differentiation and innovation beyond the design of interface specifications’ (recital 698 to the contested decision). In other words, the same specification can be implemented in numerous different and innovative ways by software designers. Thus, the contested decision rests on the concept that, once the obstacle represented for Microsoft’s competitors by the insufficient degree of interoperability with the Windows domain architecture has been removed, those competitors will be able to offer work group server operating systems which, far from merely reproducing the Windows systems already on the market, will be distinguished from those systems with respect to parameters which consumers consider important. (emphasis added)153

At the same time, the CFI explicitly broadened the test, holding that consumer harm under Article 82 lit. b EC (now Article 102 lit. b TFEU) would not only arise ‘where there is a limitation not only of production or markets, but also of technical development’.154 According to the former President of the CFI, who was himself sceptical as regards this development, ‘it is no longer a conditio sine qua non that the refusal prevents the emergence of a new product in a strict sense: also the prevention of technical development may be abusive’.155 In the same vein, the European Commission treats the ‘new product case’ as one example of potential abuse in its Guidance Paper, stating that consumer harm may, for instance, arise where the competitors that the dominant undertaking forecloses are, as a result of the refusal, prevented from bringing innovative goods or services to market and/or where follow-on innovation is likely to be stifled. This may be particularly the case if the undertaking which requests supply does not intend to limit itself essentially to duplicating the

more generally of parameters such as the value of the underlying investment, the value of the information concerned for the organization of the dominant undertaking and the value transferred to competitors in the event of disclosure’ (emphasis added). 151 Case T-201/04, Microsoft v Commission [2007] ECR II-4463, paras 284, 332. For comments on the CFI judgment see eg the case note by Andreangeli (2008), 45 Common Market Law Review 862–94; and Howarth & Mcmahon (2008), ‘“Windows has Performed an Illegal Operation”: The Court of First Instance’s Judgment in Microsoft v Commission’, 29 European Competition Law Review 117. 152 Ibid, para 240. 153 Ibid, paras 656. 154 Ibid, para 647. See the introductory quotation at the beginning of this chapter. 155 Vesterdorf (2008), ‘Article 82 EC: Where Do We Stand After the Microsoft Judgment?’, Global Antitrust Review 1, at 8–9.

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goods or services already offered by the dominant undertaking on the downstream market, but intends to produce new or improved goods or services for which there is a potential consumer demand or is likely to contribute to technical development. (emphasis added)156

This broadening of the ‘new product’ criterion has been criticised by some.157 However, it is generally welcome, since firms already at the beginning of a development process may need access to the indispensable input technology or information or have the certainty that they will not be prevented from marketing their new or improved product later on. As we have seen, however, liability for foreclosure of innovation markets under competition law is inherently hard to determine. In order to avoid early problems of access to follow-on innovation markets, a duty to license under competition law can at best complement a research exemption and/or a compulsory research licence under IP laws.158 The broader notion of ‘prevention of technical development’, in the sense of prevention of follow-on innovation which is more remote in terms of time, is welcome. However, it is unclear what degree of innovation the Court will require in the future. As has been suggested here, future or new products or services should not merely bring about minor differentiation; they should add significant utility for consumers.159 Such a threshold would avoid creating competition by complete substitutes that would cut relatively deeply into the dominant firm’s profit from its product, thus preserving incentives to invest and to innovate to some extent. At the same time, the social benefits— avoiding foreclosure of dynamic competition—are relatively ample.160 One safeguard against potential abuse of the essential facilities rule by those who intend only to offer a clone product on the market is that the burden of proving ‘newness’ and ‘potential consumer demand’ is placed on the requesting party or the competition authority respectively. 8.2.1.3.5

No Objective Justification and Balancing

One of the main structural deficiencies of the Magill and IMS test has been that it was not intended to take into account the effects of an obligation to supply on incentives to innovate. According to the judgments in Magill and IMS, the dominant undertaking may invoke an objective justification under Article 102 TFEU for its refusal as a defence. In the past, however, this category has been limited in abuse of dominance cases to scenarios of objective necessity and ex post efficiencies. A typical example of the latter would be where an obligation to license would reduce the efficiency or value of a facility or IP right or interfere with its improvement, expansion or development.161 An explanation 156 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 87. 157 See eg Ahlborn and Evans (2009), ‘The Microsoft Judgment and its Implications for Competition Policy towards Dominant Firms in Europe’, 75(3) Antitrust Law Journal 887, who see the CFI’s judgment as a step back from modernisation and the broadening of the ‘new product’ condition as one of the elements in the interpretation of Art 102 TFEU where ordoliberalism has retained the upper hand over modern effects-based analysis. 158 See above at 4.4. 159 See above at 6.1.3. 160 In the same vein: Ahlborn et al (2005), ‘The Logic and Limits of the “Exceptional Circumstances Test” in Magill and IMS Health’, 28(4) Fordham International Law Journal 1109. 161 See above at 6.3 and Temple Lang (2002), ‘Compulsory Licensing of Intellectual Property in European Community Antitrust Law’, paper for the DoJ/FTC Hearings on Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy’, Washington, DC, May 2002, available at: www.ftc.gov/opp/

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could be that, implicitly, the Magill and IMS judgments generally placed a higher value on follow-on competition and additional consumer surplus by a new product than on the dynamic efficiencies reflected in the IP. As has been pointed out,162 however, without the initial innovation there would be no follow-on innovation. Therefore, under an essential facilities type of rule, the dominant firm should be allowed to demonstrate that it would not have invested in the creation of the upstream facility or technology given a duty to license. In its Guidance Paper, the Commission has broadened the category of efficiencies to provide for an Article 101(3) TFEU-like defence under Article 102 TFEU.163 These efficiencies also include dynamic efficiencies. Specifically with regard to refusals to deal, the Guidance Paper states that [t]he Commission will consider claims by the dominant undertaking that a refusal to supply 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. (emphasis added)164

As compared to the original understanding of the notion of ‘objective justification’, it is welcome that the European Commission is willing to take into account the effects of an obligation to supply on an ex ante incentive to innovate. However, the Commission’s approach as to how to do this suffers from three major and intertwined shortcomings: First, according to the Guidance Paper, ‘exclusionary conduct which maintains, creates or strengthens a market position approaching that of a monopoly can normally not be justified on the grounds that it also creates efficiency gains’.165 This limitation of the (dynamic) efficiency defence rests on a specific assumption regarding the relationship between the current structure of product markets and innovation incentives. As has been pointed out,166 such an assumption is problematic for various reasons. Therefore, the ensuing general limitation of a dynamic efficiency defence should be abandoned. Second, in its Microsoft decision the European Commission had already moved toward an open (incentives) balancing test.167 Analysing Microsoft’s justification for its decision to terminate licensing its IP, the Commission balanced the possible negative impact of an order to supply on Microsoft’s incentives to innovate against the positive impact on the level of

intellect/020522langdoc.pdf; and Temple Lang (2000), ‘The Principle of Essential Facilities in European Community Competition Law—The Position Since Bronner’, 1 Journal of Network Industries 375. 162

See above at 2.4–2.6 and 6.2. See above at 3.3.3.3.1. 164 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 89. 165 Ibid, para 30 and the explicit reference in para 90. See similarly DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 91. 166 See above at 2.4.1.3 and 3.3.3.3.1. 167 For the same interpretation see eg Vezzoso (2006), ‘The Incentives Balance Test in the EU Microsoft Case: A Pro-Innovation “Economics-Based” Approach?’, 27 European Competition Law Review 382. 163

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innovation in the whole industry.168 In its Guidance Paper the Commission focused on consumer welfare,169 stating that [i]n examining the likely impact of a refusal to supply on consumer welfare, the Commission will examine whether, for consumers, the likely negative consequences of the refusal to supply in the relevant market outweigh over time the negative consequences of imposing an obligation to supply. (emphasis added)170

While the CFI in Microsoft stretched the conditions of the IMS test, it chose the safe approach and framed the Commission’s decision under the IMS test.171 It has not given the Commission carte blanche to use an open balancing test in refusal to supply cases. More importantly from a normative point of view, and as has been argued generally here, conduct-specific competition rules have the task of reducing the uncertainty arising from a general standard like the net consumer harm balancing standard.172 This objective would not be met under a test which balanced the incentives to innovate of all players on the market. Furthermore, as we have seen, balancing, if feasible at all in such cases, would only make sense beyond the threshold that ensures that the dominant firm would again take its initial investment decision. In sum, instead of open-ended balancing, it would be preferable to allow the dominant firm to demonstrate that it would not have invested in the creation of the upstream facility or technology if it had known that it would have to share its input under the essential facilities rule.

8.2.2

Margin Squeeze

Another constraint on freedom to deal under Article 102 TFEU arises in margin (or price) squeeze cases. Such a squeeze may occur where a vertically integrated dominant firm not only uses the input itself, but also supplies competitors on the downstream markets. Three basic scenarios may be identified:173 First, the dominant firm raises the price for the input to a level at which competitors on the downstream market can no longer operate profitably. This strategy constitutes a constructive refusal to deal and is usually dealt with under the essential facilities type of rule. Second, the dominant firm sells its downstream product below cost to customers, while recouping profits in the future or remaining profitable overall through the sale of the upstream input. This strategy is usually addressed by rules on predatory pricing (and, potentially, cross-subsidisation). Under Article 102 TFEU, the

168 Case COMP/C-3/37.792—Microsoft, para 712, as cited above at 2.4.1.3. In its submission to the CFI, Microsoft accordingly criticised the Commission’s move towards such a balancing test as a ‘marked departure from [the test] recognised in previous case-law’. 169 For an analysis of the different paradigms—underlying investment, ex ante incentives to innovate and consumer welfare—see above at 6.2.1. 170 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 86. 171 In the same vein see Fox (2008), ‘Microsoft (EC) and Duty to Deal: Exceptionality and the Transatlantic Divide’, 4 Competition Policy International 25; Larouche (2008), ‘The European Microsoft Case at the Crossroads of Competition Policy and Innovation’, Tilburg Law and Economics Center Discussion Paper 2008-021, p 10; Vickers (2009), ‘Some Economics of Abuse of Dominance’ in Vives (ed), Competition Policy in the EU—Fifty Years from the Treaty of Rome, pp 71–94, at p 90. 172 See above, in particular 3.3.1. 173 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 303–09.

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European Commission assumes that a dominant firm sacrifices profits if its price is below average avoidable cost (AAC). Pricing below long-run average incremental cost (LRAIC) is supposed to be capable of foreclosing as-efficient competitors.174 In the third scenario, the dominant firm combines the two strategies: by raising the price of the upstream input and, at the same time, lowering the price of the downstream product to reduce the margin between them such that competitors cannot sustain a profit. The latter conduct blurs the distinction between structural strategies (ie those that change competitors’ payoff functions, here by raising their costs) and output strategies (ie those which, without changing a parameter of rivals’ payoff function, reduce their profits by lowering the price and stealing customers away).175 Output strategies differ in that they always have an immediate positive effect on consumer welfare. At the same time, the third strategy also demonstrates that one may see all three scenarios as one type of strategy: exclusion by making business downstream unprofitable for non-integrated rivals.176 However, there is a difference in that a rule on margin squeezes, like a rule on constructive refusals to deal, may also lead to a duty to assist competitors (by lowering the price for the input), whereas a rule on predatory pricing ‘merely’ imposes limits on the terms of trade vis-à-vis customers. It is particularly important in this context to clarify the relationship between the antitrust rules addressing these three scenarios, ie the essential facilities type of rule, the margin squeeze test and the predatory pricing test. As was confirmed by the CFI in Deutsche Telekom, there is a test for margin squeeze under Article 102 TFEU which is phrased differently than the predatory pricing test in a one-market scenario.177 According to the Commission’s decision in DT, cited with approval by the CFI in its judgment, there is an abusive margin squeeze if the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services ‘is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services on the downstream market’.178 According to the Commission’s decision, if DT had had to pay the wholesale access price as an internal transfer price for its own retail operations, it would not have been able to offer its retail services without incurring a loss.

174 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, paras 26, 63–74, in particular paras 64, 67. For an analysis of (the rules on) predatory pricing see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 235–302. For an analysis comparing the state of US and EU law see Emch & Leonard (2009), ‘Predatory Pricing after linkLine and Wanadoo’, Global Competition Policy. In its judgment in Wanadoo (Case C-202/07P, France Télécom SA v Commission [2009] ECR I-2369), the ECJ dismissed an appeal against the CFI judgment, which had confirmed the Commission’s decision that Wanadoo had engaged in illegal predatory pricing. The ECJ confirmed the predatory pricing test applied in previous judgments (AKZO, Tetra Pak), according to which proof of the possibility of recouping losses suffered by the dominant firm does not constitute a necessary condition for a finding of abusive pricing. However, the ECJ stated that this does not preclude the Commission from concluding that the possibility of recouping losses may be a relevant factor in assessing whether or not the pricing is abusive. 175 See above at 3.3.2.1. 176 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 303. 177 Case T-271/03, Deutsche Telekom v Commission [2008] ECR-II 477, para 167: ‘It is true that, in the contested decision, the Commission establishes only that the applicant has scope to adjust its retail prices. However, the abusive nature of the applicant’s conduct is connected with the unfairness of the spread between its prices for wholesale access and its retail prices, which takes the form of a margin squeeze. Therefore, in view of the abuse found in the contested decision, the Commission was not required to demonstrate in that decision that the applicant’s retail prices were, as such, abusive’ (emphasis added). The CFI’s judgment has been confirmed on appeal in Case C-280/08 P, Deutsche Telekom v Commission, Judgment of 14 October 2010, nyr. 178 Case COMP/C-1/37.451, 37.578, 37.579—Deutsche Telekom AG, OJ 2003 L263/9, para 107; approved in Case T-271/03, Deutsche Telekom v Commission [2008] ECR-II 477, para 173.

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Accordingly, rivals—even if they were as efficient as DT—could not operate profitably.179 In its Discussion Paper, the Commission stated that a margin squeeze occurs … when the upstream input owner is integrated downstream and thus competing with actual or potential buyers of the input, and the margin between the price for the upstream input charged to competitors on the downstream market and the downstream price charged by the input owner is insufficient to allow a reasonably efficient competitor to obtain a normal profit. The typical benchmark for a reasonably efficient competitor is the integrated input owner. A margin squeeze could therefore be demonstrated by showing that the input owner’s own downstream operations could not trade profitably on the basis of the upstream price charged to its competitors by its upstream operating arm. (emphasis added)180

In its Guidance Paper, the Commission returned to the (language of the) equally efficient competitor test, stating that … instead of refusing to supply, a dominant undertaking may charge a price for the product on the upstream market which, compared to the price it charges on the downstream market, does not allow even an equally efficient competitor to trade profitably in the downstream market on a lasting basis (a so-called ‘margin squeeze’). In margin squeeze cases the benchmark which the Commission will generally rely on to determine the costs of an equally efficient competitor are the LRAIC of the downstream division of the integrated dominant undertaking. (emphasis added)181

The margin squeeze test under Article 102 TFEU thus differs from the standard predatory pricing rule (only) to the extent that it compares the dominant firm’s upstream (wholesale) prices with its (product-specific) downstream (retail) costs. The standard predatory pricing rule compares the dominant firm’s price on the market with its overall input costs. This comparison underlines that, in a margin squeeze test, upstream and downstream products must be comparable, since, otherwise, comparing upstream prices with retail costs would be pointless.182 The underlying benchmark under both rules—that of the as-efficient competitor—is the same. An even more important factor in this context is the consistency between the essential facilities rule and the margin squeeze test. The main question that has arisen is whether the indispensability condition also applies to the margin squeeze test, ie whether there can be an illegal margin squeeze only with regard to an essential input product. With regard to § 2 Sherman Act, Areeda and Hovenkamp have argued that ‘it makes no sense to prohibit [margin squeeze] in circumstances where the integrated monopolist is free to refuse to deal’.183 This approach was endorsed by the US Supreme Court in its linkLine judgment. According to the judgment, margin squeeze does not constitute a distinct violation of § 2 Sherman Act which is independent of an antitrust duty to deal for essential inputs upstream and predatory pricing downstream.184 While the CFI, in its judgment in DT, mentioned the

179

Case COMP/C-1/37.451, 37.578, 37.579—Deutsche Telekom AG, OJ 2003 L263/9, paras 102, 140. DG Competition Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, para 220. 181 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 80. 182 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, p 319. 183 Areeda & Hovenkamp (2002), Antitrust Law IIIA, 767c5, pp 129–30. In the same vein for EU law: Humpe & Ritter (2005), ‘Refusal to Deal’, Global Competition Law Center Research Papers on Article 82 EC, pp 134–65. 184 See above at 7.3.4. 180

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indispensability of DT’s upstream service in the context of the necessary foreclosure effect, the judgment does not explicitly seem to require essentiality as a necessary condition under its margin squeeze test.185 In its Guidance Paper, the Commission stated that it will consider refusals to supply and margin squeezes as enforcement priorities only if the input product is indeed indispensable.186 However, in its judgment in TeliaSonera, the ECJ drew a clear distinction between naked and constructive refusals to deal by holding that the Bronner conditions—amongst other things indispensability of the input—do not necessarily apply in abusive constructive (or discriminatory) refusal to deal cases.187 Similarly, according to the judgment, the input does not have to be indispensable for a margin squeeze to be abusive; but if it is indispensable, the required anti-competitive effect is likely.188 Setting more stringent requirements for naked refusals to deal than for constructive refusals and margin squeezes is dubious in two regards: First, all three strategies may have the same foreclosure effect and should thus be treated in a similar way. Second, such asymmetry in liability may provide an incentive for dominant firms to opt for naked refusals. It should also be noted that the relatively broad concept of margin squeeze in DT and in TeliaSonera clearly differs from the US approach in linkLine and can thus be interpreted as a further sign of divergence in the field of monopolisation and abuse of dominance.189

8.2.3

Refusal to Deal as a Complementary Strategy

As we have seen,190 a refusal to deal may constitute not only a ‘stand-alone’ strategy; it may also be linked to another (‘main’) strategy. The above analysis has distinguished between refusals to supply which serve as (i) an instrument to force another firm into certain behaviour (as in the case of conditional refusals to deal), (ii) a corollary to profit from other previous or simultaneous conduct (as in the case of patent ambush or other strategies in the pharmaceuticals sector), and (iii) an instrument to prevent another firm from, or to

185 Case T-271/03, Deutsche Telekom v Commission [2008] ECR-II 477, para 237: ‘Having regard to the fact that the applicant’s wholesale services are thus indispensable to enabling a competitor to enter into competition with the applicant on the downstream market in retail access services, a margin squeeze between the applicant’s wholesale and retail charges will in principle hinder the growth of competition in the downstream markets. If the applicant’s retail prices are lower than its wholesale charges, or if the spread between the applicant’s wholesale and retail charges is insufficient to enable an equally efficient operator to cover its product-specific costs of supplying retail access services, a potential competitor who is just as efficient as the applicant would not be able to enter the retail access services market without suffering losses’ (emphasis added). 186 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 81 (‘these practices’ referring to both refusals to deal and margin squeezes). The exceptions mentioned in para 82 have already been criticised. 187 Case C-52/09, Konkurrensverket v TeliaSonera, Judgment of 17 February 2011, nyr, paras 55–56. 188 Ibid, paras 69–72. 189 See above at 7.3.4. The judgments in linkLine and Deutsche Telekom also differ in another aspect: the CFI in DT affirmed the parallel applicability of general competition law and sector-specific regulation. According to the CFI (para 128), DT could have, amongst other things, influenced its charges authorised by the German regulatory authority, the Federal Network Agency (Bundesnetzagentur), by application to the regulator. The CFI held that DT had sufficient scope to increase its retail prices, so as to end or reduce the margin squeeze. This stance on the relationship between competition law and sector-specific regulation contrasts with the Supreme Court’s approach in Trinko and linkLine. For a comparative analysis see Vickers (2009), ‘Competition Policy and Property Rights’, University of Oxford, Department of Economics Discussion Paper No 436. 190 See above at 4.1.6.

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punish it for, undermining this ‘main’ strategy. As has been discussed, in all these cases relevant exclusionary effects usually arise due to the ‘main’ strategy. If this ‘main’ strategy is illegal, the refusal to deal should be illegal as part of this ‘main’ strategy or, as in the second scenario, as a continuing wrong. The Commission’s policy is very much in line with this analysis. While confining itself to dealing with the ‘classic’ stand-alone refusal to deal which may lead to vertical foreclosure, the Commission stated in its Guidance Paper that [o]ther types of possibly unlawful refusal to supply [than stand-alone refusals], in which the supply is made conditional upon the purchaser accepting limitations on its conduct, are not dealt with in this section. For instance, halting supplies in order to punish customers for dealing with competitors or refusing to supply customers that do not agree to tying arrangements, will be examined by the Commission in line with the principles set out in the sections on exclusive dealing and tying and bundling. Similarly, refusals to supply aimed at preventing the purchaser from engaging in parallel trade or from lowering its resale price are also not dealt with in this section. (emphasis added)191

Conversely, if the ‘main’ strategy is legal under the competition rules, such legality may render legal, or at least feed into a more favourable assessment of, the refusal to deal. In GlaxoSmithKline,192 the ECJ was faced with the Greek court’s question of how to apply Article 82 EC (now Article 102 TFEU) to GSK’s refusal to continue to supply certain medical products to wholesalers which were involved in parallel exports of those products to other Member States. The ECJ pointed to its jurisprudence, according to which a refusal by a dominant undertaking to meet the orders of an existing customer, even if it eliminates the trading party as a competitor, may be objectively justified if the refusal would be reasonable and proportionate to the need to protect its own legitimate commercial interest.193 However, the ECJ made clear that the prevention or restriction of parallel exports would fall foul of Article 81 EC (now Article 101 TFEU). The ECJ’s main argument was that, due to the existence of patents on medicines, the only price competition until the expiry of the respective patent takes place between the producer and its distributors and between parallel traders and national distributors.194 Since the prevention or limitation of parallel trade as the ‘main’ strategy was considered to be illegal, the interest in preventing such parallel

191 Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, para 77. Similarly, in its Discussion Paper (para 208), the Directorate General for Competition had pointed out that ‘[r]efusals to supply or threats of refusals to supply by dominant companies may, however, be anti-competitive. Examples include halting supplies to punish buyers for dealing with competitors and refusing to supply buyers that do not agree to exclusive dealing or tying arrangements. In such circumstances the refusal to supply is best viewed as an instrument to achieve another purpose, such as exclusive dealing or tying, and should therefore be analysed as part of a single branding or tying practice. Such practices are normally not aimed at excluding the buyer but rather a competitor of the dominant company’ (emphasis added). 192 Joined Cases C-468/06 to C-478/06, Sot. Lélos kai Sia EE and Others v GlaxoSmithKline AEVE Farmakeftikon Proionton [2008] ECR I-7139. For an analysis of the judgment see Graf & Hallouet (2009), ‘Dominant Companies May Not Refuse Ordinary Orders with the Aim of Restricting Parallel Trade: The European Court of Justice Judgment in GlaxoSmithKline AEVE’, 30 European Competition Law Review 194; O’Donoghue & Macnab (2009), ‘Dominant Firms’ Duties to Deal with Pharmaceutical Parallel Traders Following Glaxo Greece’, 5 Global Competition Policy; Siragusa (2008), ‘Is there an Independent/Additional (European, International) Open-Market Criterion for Determining Abuse?’ in Govaere & Ullrich (eds), Intellectual Property, Market Power and the Public Interest, pp 97–117. 193 Joined Cases C-468/06 to C-478/06, Sot. Lélos kai Sia EE and Others v GlaxoSmithKline AEVE Farmakeftikon Proionton [2008] ECR I-7139, in particular paras 39, 40, 69. 194 Ibid, paras 64–66.

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trade could not be legitimate.195 While in this case the refusal to stop supplying thus had to be judged under the standard United Brands test, the Court’s assessment shows that it is willing to take into account the legality of the underlying ‘main’ strategy within the analysis of the legitimacy of the interest in the refusal.196 In sum, so far both policy statements and the case law have confirmed the need to assess a complementary refusal to deal in conjunction with the ‘main’ strategy.197 This conforms to the analysis and recommendation put forward here.198

8.2.4

Discriminatory Refusal to Deal Based on IP

Under Article 102 TFEU, a refusal to supply may amount to more than an abusive limitation of output or technological development; it may also constitute a form of discriminatory conduct.199 ‘Primary-line’ discrimination aims to affect competition among competitors of the dominant discriminating firms (and is thus captured by Article 102 lit. b TFEU). ‘Secondary-line’ discrimination has effects on the dominant discriminating firm’s customers,200 including cases of discriminatory charging of excessive prices (which would also be captured by Article 102 lit. a TFEU).201 The most relevant type of discrimination in this context occurs where a dominant supplier of an essential input applies discriminatory conditions with regard to access to the input. Article 102 lit. c TFEU,202 as interpreted by the Court, essentially sets out a two- or three-element test: First, the dominant undertaking must have discriminated, ie it must have applied (i) ‘dissimilar conditions’ (ii) ‘to equivalent transactions’ (iii) ‘with other trading parties’. This encompasses situations where the dominant firm sets different prices for (groups of) comparable customers. Second, the discriminatory conduct must place the trading partners ‘at a competitive disadvantage’. Efficiency considerations could either be read into the notion of ‘dissimilar conditions’ or into a third element of ‘objective

195 Para 66 of the judgment reads: ‘In the light of the abovementioned Treaty objective [of the integration of national markets] as well as that of ensuring that competition in the internal market is not distorted, there can be no escape from the prohibition laid down in Article 82 EC for the practices of an undertaking in a dominant position which are aimed at avoiding all parallel exports from a Member State to other Member States, practices which, by partitioning the national markets, neutralise the benefits of effective competition in terms of the supply and the prices that those exports would obtain for final consumers in the other Member States’ (emphasis added). 196 Para 70 of the judgment, referring to para 182 of the United Brands judgment, states: ‘[I]n order to appraise whether the refusal by a pharmaceuticals company to supply wholesalers involved in parallel exports constitutes a reasonable and proportionate measure in relation to the threat that those exports represent to its legitimate commercial interests, it must be ascertained whether the orders of the wholesalers are out of the ordinary’ (emphasis added). 197 The recent EU case against IBM may be a test for this approach since IBM has allegedly engaged in both refusals to deal and tying vis-à-vis customers (see in more detail above at 7.3.2). 198 See above at 4.1.6. 199 See Bellamy & Child (2008), European Community Law of Competition, at 10.144. With regard to IP see also Keeling (2003), Intellectual Property Rights in EU Law, vol I, pp 397–98. 200 One example of alleged discrimination vis-à-vis customers would be the Micro Leader case (see Case T-198/98, Micro Leader Business v Commission [1999] ECR II-3989). 201 See also above at 4.1.4. 202 For an analysis in the IP context see Geradin (2008), ‘Abusive Pricing in an IP Licensing Context: An EC Competition Law Analysis’ in Ehlermann & Marquis (eds), European Competition Law Annual 2007: A Reformed Approach to Article 82, pp 671–703, at pp 698–702.

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justification’. So far, however, both the Commission and the Court have interpreted the notion of ‘dissimilarity’ rather widely (and the notion of ‘objective justification’ in such cases rather strictly).203 With regard to the second element, the wording of Article 102 lit. c TFEU (‘competitive disadvantage’) would suggest that a foreclosure effect has to be shown. However, the Court has interpreted this element differently. In its Clearstream judgment, the CFI, referring to the ECJ’s judgment in British Airways, held that discriminatory conduct is only anticompetitive ‘if it tends to distort that competitive relationship, in other words to hinder the competitive position of some of the business partners of that undertaking in relation to others’.204 However, the Court further pointed out that … there is nothing to prevent discrimination between business partners who are in a relationship of competition from being regarded as abusive as soon as the behaviour of the undertaking in a dominant position tends, having regard to the whole of the circumstances of the case, to lead to a distortion of competition between those business partners. In such a situation, it cannot be required in addition that proof be adduced of an actual quantifiable deterioration in the competitive position of the business partners taken individually. (emphasis added)205

The Court’s approach may be interpreted as allowing a foreclosure effect to be inferred from the totality of circumstances or even a presumption of foreclosure in the case of discriminatory conditions.206 Given this interpretation by the Court of the general elements of Article 102 lit. c TFEU—ie of ‘dissimilar conditions’, the foreclosure effect and objective justification—as well as bearing in mind that this test would not ask for ‘indispensability’, the general anti-discrimination rule would place rather strict constraints on a dominant firm’s strategy. The decisive issue in this context is the extent to which Article 102 lit. c TFEU is used to prevent foreclosure of competition by follow-on innovation. This also touches on the relationship between Article 102 lit. c TFEU, the essential facilities type of rule under Article 102 lit. b TFEU, the non-discrimination principle within the Commission’s usual FRAND remedy, and the incentive function of IP. The problem is essentially threefold: The first question is whether Article 102 lit. c TFEU obliges a dominant firm to conclude (further) licensing contracts irrespective of the essential facilities conditions under Article 102 lit. b TFEU. The second—interlinked—question is the extent to which Article 102 lit. c TFEU constrains the pricing strategy of a dominant licensor outside the scope of the essential facilities rule under Article 102 lit. b TFEU. The third question that arises is whether Article 102 lit. c TFEU may serve as a basis for the non-discrimination obligation under a FRAND remedy. This third question will be addressed in the context of potential remedies.207 None of these questions has been explicitly analysed by the Commission or the Court in refusal to license cases. With regard to the first question of whether Article 102 lit. c TFEU obliges a dominant firm to grant further licences once it has concluded a first contract, there are two basic

203 See Gerard (2005), ‘Price Discrimination under Article 82(c) EC: Clearing up the Ambiguities’, Global Competition Law Center Research Papers on Article 82 EC, pp 105–33, at pp 119–33. See also O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 552–602. 204 Case T-301/04, Clearstream v Commission, Judgment of 9 September 2009, nyr, para 192. 205 Ibid, para 193. 206 O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 570–71. 207 See below at 8.3.1.

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potential approaches.208 First, one may argue that, once the dominant firm has granted a first licence, it has a duty under Article 102 lit. c TFEU to deal with any other firm that is in a similar position to the first licensee, ie the refusal merely satisfies the general discrimination test set out above. Alternatively, and more strictly, one may require that the dominant undertaking only needs to grant a subsequent licence if all conditions for a first compulsory licence under Article 102 lit. b TFEU are met,209 ie if the IP is indispensable and if the refusal eliminates effective competition on the downstream market and prevents the emergence of a new product. To date, neither the Commission nor the Court has answered this question. Generally, outside the context of discrimination on the basis of nationality (in particular in the case of market partitioning) and exclusionary (loyalty) discount schemes, the use of Article 102 lit. c TFEU has been rare. But given the Court’s rather wide interpretation of the non-discrimination principle as set out above, it would be reasonable to assume that it would adopt the first approach and regard Article 102 lit. c as independent of the obligations arising under Article 102 lit. b TFEU, including its essential facilities rule. The same holds with regard to the second question of whether the non-discrimination principle also applies to pricing outside the context of IP indispensable for follow-on innovation. Given the potentially output-enhancing effects of price discrimination in general and the incentive function of IP in particular, such a wide-ranging application of Article 102 lit. c TFEU would be unfortunate. As has been argued here, normatively, it would be preferable to allow for differentiated pricing according to the ability to pay of potential licensees in order to account for the incentive function of IP and allow for the recoupment of R&D costs.210 For licensing outside the context of IP indispensable for follow-on innovation, it would thus be better to confine the application of Article 102 lit. c TFEU from the outset to situations of collective refusals to license (which would also be caught under Article 101 TFEU) and scenarios of arbitrary, selective refusals to license to specific (potential) rivals. Even assuming that Article 102 lit. c TFEU also applies outside the context of IP indispensable for follow-on innovation, however, it may be possible to take into account the specifics of IP. One approach might be to consider the necessity of recoupment of R&D costs through differentiated pricing within the objective justification. In this regard, it would be helpful if the Commission would complement its current Guidance on exclusionary abuses, which does not provide guidelines on discriminatory behaviour, with further guidance on its policy vis-à-vis discriminatory conduct.

8.3

THE REMEDY

If a refusal to license is illegal under Article 102 TFEU, the European Commission, a national competition authority or a national court may require the infringing firm to put

208 209

O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 454–58. This approach is favoured by O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC,

p 456. 210

See above at 4.1.4 and 5.1.6.

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an end to the breach by ordering it to grant a licence to third parties. The legal basis for the European Commission’s ability to issue such a decision is provided for in Article 7(1) of Regulation 1/2003, which gives it the power to require an undertaking to terminate an infringement. Sentence 2 states that ‘[f]or this purpose, the Commission may impose on such undertaking any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end’.211 The remedy must thus be both effective and proportionate.212 Where the abuse consists of a refusal to act, the ECJ has confirmed in several judgments that the Commission’s power to impose behavioural remedies extends to affirmative orders requiring an undertaking to behave in a certain way.213 Regulation 1/2003, in its Article 8(1), also provides for the power to adopt such measures on an interim basis. The legal basis for national competition authorities and courts to remedy refusals to license rests on national law. The application of national law to implement Article 102 TFEU must respect the principles of equivalence (non-discrimination) and effectiveness.214 Focusing on the Commission’s practice in duty to license cases, past decisions suggest that the Commission follows some loose substantive principles when imposing such a duty. In its Magill decision, the Commission ordered the holders of the IP right, ITP, BBC and RTÉ, to put an end to their abusive refusal, in particular ‘by supplying … third parties on request and on a non-discriminatory basis with their individual advance weekly programme listings and by permitting reproduction of those listings by such parties’.215 It was also provided that, if the three organisations chose to grant reproduction licences, any royalties requested should be reasonable. In its decision to adopt interim measures in IMS, the Commission stated: ‘IMS is hereby required to grant a licence without delay to all undertakings currently present on the market for German regional sales data services, on request and on a non-discriminatory basis, for the use of 1860 brick structure, in order to permit the use of and sales by such undertakings of regional sales data formatted according to this structure’ (emphasis added). Additionally, the Commission held that the ‘royalties to be paid for these licences shall be determined by agreement between IMS and the undertaking requesting the licence’ and that ‘if an agreement has not been reached within two weeks of the date of the request for a licence, appropriate royalties will be determined by one or several independent experts’. According to the decision, ‘the expert(s) will make a determination on the basis of transparent and objective

211 For an overview of the remedies available in Art 102 TFEU cases see the European Commission’s contribution to the 2007 OECD Report Remedies and Sanctions in Abuse of Dominance Cases, DAF/COMP(2006)19, pp 181–88. 212 For a legal analysis of these two principles of effectiveness and proportionality see O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 680–83. 213 See eg Joined Cases 6–7/73, Istituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission [1974] ECR 223, para 45: Art 3 of Regulation 17/63 (the precursor to Art 7(1) of Regulation 1/2003) ‘must be applied in relation to the infringement which has been established and may include an order to do certain acts or provide certain advantages which have been wrongfully withheld as well as prohibiting the continuation of certain action(s), practices or situations which are contrary to the Treaty’. 214 In the context of Art 101 TFEU see the judgments in Case C-453/99, Courage v Crehan [2001] ECR I-6297, and Joined Cases C-295/04 to C-298/04, Manfredi et al [2006] ECR I-6619. 215 Magill TV Guide, Decision 89/205/EEC of 21 December 1988, OJ 1989 L78/43.

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criteria (emphasis added)’.216 However, due to the suspension of the decision by the CFI and its later withdrawal by the Commission, no licence was awarded. In its Microsoft decision in Article 5, the Commission stated that ‘Microsoft … shall, within 120 days of the date of notification of this Decision, make the Interoperability Information available to any undertaking having an interest in developing and distributing work group server operating system products and shall, on reasonable and non-discriminatory terms, allow the use of the Interoperability Information by such undertakings for the purpose of developing and distributing work group server operating system products’ (emphasis added).217 In addition, the decision imposes duties to keep the interoperability information updated, to set up an evaluation mechanism which will enable interested undertakings to stay informed about the scope and terms of use of this information and to communicate all measures, intended and taken, to the Commission.218 The decision has also provided for the establishment of a monitoring mechanism, including an independent monitoring trustee, whose role should be to provide expert advice to the Commission on Microsoft’s compliance with the interoperability remedy.219 The Commission’s decision and its subsequent implementation (including three penalty payment decisions based on Article 24 of Regulation 1/2003)220 as well as the CFI’s judgment shed some light on the substantive (8.3.1) and procedural (8.3.2) problems221 that a duty to license may raise as a remedy.

8.3.1

Substantive Criteria

With regard to the ‘reasonableness’ of the royalty, the Commission’s 2004 Microsoft decision and subsequent decisions based on Article 24 of Regulation 1/2004 have provided several broad guidelines. According to the main principle set out in the decision, [the] remuneration should not reflect the ‘strategic value’ stemming from Microsoft’s market power in the client PC operating system market or in the work group server operating system market.222

This central guideline was further defined by the Commission in its first penalty payment decision (based on Article 24(1) of Regulation 1/2003).223 According to this decision, Microsoft can only receive remuneration for the supply of protocols if they

216 Case COMP D3/38.044—NDC Health/IMS Health, Commission Decision 2002/165/EC, OJ 2002 L59/18, Arts 1 and 2. 217 Case COMP/C-3/37.792—Microsoft, Decision 2007/53/EC, OJ 2007 C32/23, Art 5(a). 218 Ibid, Art 5(b)–(e). 219 Ibid, Art 7. The Commission adopted a decision on the monitoring trustee (C(2005) 2988 final, decision of 28 July 2005). For a comparative analysis of the remedies in the US and EU Microsoft cases see Apon (2007), ‘Cases against Microsoft: Similar Cases, Different Remedies’, 28 European Competition Law Review 327. 220 For overviews of the difficult implementation of the licensing remedy see the Commission’s website at ec.europa.eu/competition/antitrust/cases/microsoft/implementation.html; O’Donoghue & Padilla (2006), The Law and Economics of Article 82 EC, pp 724–25. 221 On the implementation problems see also Ridyard (2004), ‘Compulsory Access under EC Competition Law—New Doctrine of “Convenient Facilities” and the Case for Price Regulation’, 25 European Competition Law Review 669. 222 Case COMP/C-3/37.792—Microsoft, Commission Decision 2007/53/EC, OJ 2007 C32/23, para 1008. 223 Case COMP/C-3/37.792—Microsoft, Commission Decision of 10 November 2005 imposing a periodic penalty payment pursuant to Art 24(1) of Regulation No 1/2003 on Microsoft Corporation.

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are Microsoft’s own creation (ie not taken from the public domain) and innovative. Furthermore, remuneration must be in line with a market valuation for technologies deemed comparable to any innovations identified by Microsoft.224

Initially, Microsoft demanded a royalty rate of 3.87% of a licensee’s product revenues for a patent licence (the ‘patent licence’) and 2.98% for a licence granting access to the secret interoperability information (the ‘information licence’). The Commission, however, rejected Microsoft’s proposals as unreasonable, based on the lack of innovation in a large proportion of (unpatented) interoperability information and based on a comparison with the pricing of similar interoperability technology. The royalty was finally settled following a very complex negotiation process between Microsoft and the Commission, assisted by its Monitoring Trustee, and two penalty payment decisions based on Article 24(2) of Regulation 1/2003. According to the second penalty payment decision, Microsoft was considered to be in compliance with the original decision taken in March 2004 only from October 2007 onwards. In accordance with the final penalty payment decision, Microsoft has now provided a licence granting access to the interoperability information for a flat fee of €10,000 and an optional worldwide patent licence for a reduced royalty of 0.4% of licensees’ product revenues. Microsoft has initiated an action at the CFI against the second Article 24(2) Decision, which imposed a penalty payment of €899 million.225 The future judgment of the General Court may give further guidance on the ‘reasonableness’ of a royalty in the case of a duty to license. The Microsoft case demonstrates that the European Commission appears to favour market-based pricing as the main methodology to prevent the dominant firm using its pricing power over the indispensable input (including its ‘strategic value’).226 As we have seen, this pricing methodology risks constraining the dominant firm unnecessarily, since it goes beyond allowing for entry on the downstream market. What may prove to be a model for future cases is the use of royalty rates which are tied to licensees’ product revenues, as in the US Rambus case.227 Such royalty rates based on licensees’ revenues would also be compatible with the pricing methodology suggested here, which would use the ability to pay of a reasonably efficient licensee as the basis.228 With regard to the second substantive pricing condition—the non-discrimination principle—the Microsoft case has shown that the European Commission interprets the principle as obliging the dominant firm to provide a licence to all parties requesting one under the same pricing methodology. This narrow interpretation thus prevents

224

Ibid, paras 103–07. Action brought 9 May 2008—Microsoft v Commission (Case T-167/08) to annul the Decision of the European Commission C(2008)764 final of 27 February 2008 fixing the definitive amount of the periodic penalty payment imposed on Microsoft Corporation by Commission Decision C (2005)4420 final (OJ 2008 C171/80). For a description of the Commission’s decision see Banasevic et al (2006), ‘Commission Imposes a Penalty Payment Pursuant to Article 24(2) of Regulation 1/2003 on Microsoft’, Competition Policy Newsletter 27–29. 226 See above at 5.1.3. 227 See above at 7.4.3. 228 See above at 5.1.6. The Commission’s proceedings against Qualcomm because of potentially exploitative pricing, which could have brought additional clarification what the Commission’s understanding of FRAND conditions are, have been closed. The probe had focused on whether Qualcomm set unreasonably high royalty rates for patents after they had been adopted as part of Europe’s 3G mobile telephony standard (see the Commission’s MEMO/07/389 of 1 October 2007, ‘Commission Initiates Formal Proceedings against Qualcomm’). 225

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systematic price discrimination. Such an application of the non-discrimination principle is understandable for practical reasons. As has been pointed out, the use of royalty rates based on each licensee’s revenues allows for differentiated pricing within the same pricing method and can therefore to some extent reconcile the non-discrimination principle with pricing based on licensees’ ability to pay.229 The recent European IBM case illustrates another application of the non-discrimination principle. Here the Commission investigated whether IBM had discriminated between competing suppliers of maintenance services for IBM mainframe computers and foreclosed the maintenance services market, specifically by restricting or delaying access to spare parts and technical information of which IBM was the only source and by imposing unreasonable conditions for supplying such inputs.230 IBM had offered commitments under Article 9 of Regulation 1/2003 under which it would supply third party maintainers with replacement parts and technical information including machine code updates under reasonable and non-discriminatory terms. Non-discriminatory in this case meant that IBM would provide the spare parts to competing services suppliers at the same price as it offered them to self-maintaining customers. With a view to increasing legal clarity and certainty regarding the ‘non-discrimination element’ of the FRAND remedy, it would be helpful if the Commission and the Court could clarify the legal basis for the non-discrimination principle. This question has not been explicitly addressed in decisions and judgments so far. In its Magill decision, the Commission merely argued that ‘[t]o confine an order for the supply of these listings to ITP, BBC and RTÉ, inter se, would discriminate against third parties wishing to produce a comprehensive weekly guide in a manner which would not be compatible with Article 86’.231 In a similarly brief statement, the Court has merely confirmed the non-discrimination obligation as ‘the only means of bringing that infringement to an end’.232 One candidate for the legal basis would be Article 102 lit. c TFEU.233 In that case, the obligations on a dominant firm to avoid liability both for discriminatory conduct and under a remedy (irrespective for which type of abuse) would be symmetrical. It has been argued here that a remedy does not have to mirror, and generally may be more demanding than, the constraints on the undertaking concerned under a liability rule.234 However, specifically the non-discrimination obligations as arising under Article 102 lit. c TFEU are generally sufficient to restore effective competition. Therefore, indeed Article 102 lit. c TFEU may serve as the basis for necessary non-discrimination obligations under a FRAND remedy.

229

See above at 5.3. Case COMP/C-3/39.692—IBM (maintenance) services. See the Commission’s press releases of 26 July 2010 and of 20 September 2011, the Market Test Notice in OJ 2011 C275/8 and the proposed commitments at ec.europa.eu/competition/antitrust/cases/dec_docs/39692/39692_1181_5.pdf. A second investigation into the alleged tying by IBM of mainframe hardware to its mainframe operating system has been closed. This inquiry had been triggered by complaints from vendors of IBM-compatible hardware and emulator software. The latter allows mainframe operating systems and applications to run other operating systems such as Windows and Linux as the host environment, thereby making dispensable IBM’s proprietary mainframe software. Similar allegations had been made in the US See above at 7.3.2. 231 Magill TV Guide, Decision 89/205/EEC of 21 December 1988, OJ 1989 L78/43, para 27. 232 Cases C-2441 and 242/91, Magill [1995] ECR I-743, para 98. 233 See above at 8.2.4. 234 See above at 5.2. 230

8.4

8.3.2

FUTURE TENDENCIES AND CONCLUSION

247

Procedure

The Microsoft case shows that vague guidance given with regard to the royalty provides room for strategic manoeuvring by the addressee of a decision to protract implementation of the remedy. According to the European Commission’s final penalty payment decision, Microsoft had complied with the obligation to supply interoperability information on ‘reasonable’ terms a full three and a half years after the initial decision. Given the dynamics of the markets in question, enforcement of the remedy obviously had not been sufficiently timely. Clearer guidance on the ‘reasonableness’ of the royalty in the initial decision on liability may help to minimise such difficulties in the future. In that regard, substantive guidance and procedural efficiency are intertwined. A second, purely procedural aspect highlighted by the European Microsoft case is the Commission’s legal authority to delegate to a private individual—here an independent monitoring trustee—the enforcement powers conferred on it by Regulation 1/2003. In its appeal against the Commission’s decision, Microsoft had sought annulment of the monitoring mechanism (as set out in Article 7 of the decision). Microsoft argued that the delegation of the Commission’s powers of investigation and enforcement to a third party appointed by the Commission to assist its task of monitoring compliance with the remedies ordered in an infringement decision had no legal basis in EU law. Concurring with these arguments, the CFI’s judgment has limited the future role of independent monitoring trustees to reporting to the Commission on the actions of an addressee of a remedy.235 As a consequence of the judgment, the Commission adapted the nature of the monitoring by reducing the role of the trustee.236 For future cases, it is necessary to increase the resources in the Directorate General for Competition to monitor and enforce remedies. Third, and finally, a comparison of the decisions in Magill, IMS and Microsoft shows that the Commission does not follow a consistent procedural model in compulsory licensing cases. To provide for legal certainty and in order to increase the efficacy of such remedies, it would be helpful if the Commission could adopt a consistent policy.

8.4

FUTURE TENDENCIES AND CONCLUSION

The above analysis of German IP laws has shown that national IP laws in Europe may lack the potential flexibility of US misuse doctrines as an additional ‘internal’ IP policy lever to prevent undue expansionist use of IP rights. At the same time, harmonisation at the EU level has provided doubtful protection, particularly for databases. The conditions for granting mandatory and dependency licences under German patent law are extremely narrow. German IP laws thus rely almost entirely on competition law to prevent the foreclosure of competition by follow-on innovation. Recent judgments have paved the way for a broader use of an antitrust compulsory licensing defence. With regard to Article 102 TFEU, the Microsoft judgment has shown that the CFI (now the ‘General Court’) is willing to adopt a broad interpretation of the Magill and IMS 235

Case T-201/04, Microsoft v Commission [2007] ECR II-4463, in particular para 1269. On 4 March 2009, the Commission adopted a decision which removes the trustee provision from its 2004 Decision and repeals its trustee decision from 28 July 2005 which provided for the modalities of the monitoring mechanism and the appointment of a monitoring trustee (see press release IP/09/349). 236

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essential facilities type of test for refusals to license by dominant firms, in particular by reading the broad notion of ‘technical development’ into the ‘new product’ condition. The judgment has thus opened up room for manoeuvre for the Commission, which it may make use of in future cases. It is unclear, however, whether the ECJ will be willing to follow the CFI’s wide reading of Magill and IMS. While the ‘reasonableness’ element of the Commission’s FRAND remedies currently lacks sufficient contours, the future judgment of the Court on the action brought by Microsoft against the penalty imposed on it may provide some much needed clarification.

9 Comparison and International Dimension The old adage ‘seeing is believing’ contains a double measure of truth, for there is also much merit in the notion that ‘believing is seeing’. Facts must be placed into a system of belief before they yield to interpretation … Economic facts also require a system of belief before they can be interpreted. There is an impression that economists share a common system of belief about monopoly and competition … But this is not so … Harold Demsetz1 Nations have incentives to adopt higher-protection rules when an already innovative domestic sector demonstrates a need for stronger rules to enable firms to recoup R&D investments, or when nations believe that doing so will spur investments and economic development in that field of innovation. Nations have incentives to adopt lower-protection rules if they are predominantly users or net importers of products of that kind, if they aspire to incentivize investments in follow-on innovation, or if they believe that a lower-protection rule will induce more investments than a higher-protection rule. Pamela Samuelson2

The two previous chapters analysed the IP/antitrust frameworks for cumulative innovation in the US and the EU. This chapter first summarises the main differences between the two approaches (9.1). It then attempts to explain these differences on the basis of different underlying beliefs, interests and constitutional frameworks (9.2). Finally, it addresses the question whether the differences cause conflicts which need to be resolved by an international ‘antitrust law of IP’ (9.3).

9.1

DIFFERENCES BETWEEN THE US AND EU APPROACHES

The analysis of IP and competition rules that may prevent foreclosure of follow-on innovation and dynamic competition has highlighted the various interdependent policy levers in both sets of laws, such as: — —

the bar for protection under the respective IP law, the scope3 and length of protection,

1 Demsetz (1974), ‘Two Systems of Belief about Monopoly’ in Goldschmid et al (eds), Industrial Concentration: The New Learning, pp 164–84, at p 164. 2 Samuelson (2004), ‘Intellectual Property Arbitrage: How Foreign Rules can Affect Domestic Protections’, 71 University of Chicago Law Review 223, at 224. 3 For an analysis of how far IP rights can be construed to limit their anti-competitive potential see Sheehan (2008), ‘Can Intellectual Property Rights be Construed by the Courts to Limit their Use for Anti-Competitive Purposes?’ in Govaere & Ullrich (eds), Intellectual Property, Market Power and the Public Interest, pp 241–74.

250 — — — — — — — —

COMPARISON AND INTERNATIONAL DIMENSION

the exhaustion principle,4 limits and exemptions to protection such as research exemptions, the degree of protection and the legal consequence of an infringement respectively, the legality of additional or alternative means of protection such as technical devices, the right to decompile and reverse engineer software, fair use and misuse doctrines, compulsory licensing regimes to grant (dependency) licences, and competition rules.

As we saw in chapters two, seven and eight, in the past decade US antitrust agencies and courts have been more reluctant than the European Commission and the Court of Justice to apply competition rules to IP rights, particularly in the area of monopolisation.5 Following the Supreme Court’s Trinko judgment, holders of IP rights who refuse to deal based on their exclusive rights are very likely to escape liability under § 2 Sherman Act. It is striking, and regrettable, that the US as the jurisdiction that has successfully ‘exported’ the essential facilities doctrine to other antitrust jurisdictions has essentially abandoned the doctrine.6 Exceptions to the no duty to deal principle under § 2 Sherman Act may arise in cases involving concerted refusals and additional leveraging.7 Leveraging is also captured by IP misuse doctrines, which national IP laws in the EU do not generally provide.8 One major strand of argumentation for the pronounced reluctance to apply § 2 Sherman Act in cases of unilateral exercise of IP rights has been that IP reform would be the better solution to problems arising from ‘over-shooting’ IP than ‘fine-tuning’ of property rights through antitrust policy.9 With regard to patents, there have been policy discussions about IP reform in the US and some judgments by the Supreme Court acknowledging the risk of impeding follow-on innovation through ‘too strong’ protection for first-generation innovators.10 However, the recent 2011 ‘Leahy-Smith America Invents Act’ has merely expanded opposition procedures. Signs of fundamental copyright reform are even harder to find.11 In the EU, harmonising legislation in the past has usually increased the (minimum) protection of first-generation innovators and creators. Except for the failure of the EC

4 The US doctrine of exhaustion has been touched upon above in ch 7, n 51. According to the principle of exhaustion under EU law, ‘[o]nce a product incorporating an intellectual property right has been put on the market inside the EEA by the holder or with his consent, the IP right is exhausted in the sense that the holder can no longer use it to control the sale of the product’ (Commission Notice Guidelines on the application of Article 81 of the EC Treaty to technology transfer agreements, OJ 2004 C101/2, para 6). 5 For comparisons between the US and EU position on the refusal to license IP see Drexl (2004), ‘IMS Health and Trinko—Antitrust Placebo for Consumers Instead of Sound Economics in Refusal-to-Deal Cases’, 35 International Review of Intellectual Property and Copyright Law 788; Kanter (2006), ‘IP and Compulsory Licensing on Both Sides of the Atlantic—An Appropriate Antitrust Remedy or a Cutback on Innovation?’, 27 European Competition Law Review 351; Conde Gallego (2008), ‘Unilateral Refusal to License Indispensable Intellectual Property Rights—US and EU Approaches’ in Drexl (ed), Research Handbook on Intellectual Property and Competition Law, pp 215–38; Maggiolino (2011), Intellectual Property and Antitrust: A Comparative Economic Analysis of US and EU Law, pp 141–79. 6 In the same vein see Weber Waller & Tasch (2010), ‘Harmonizing Essential Facilities’, 76 Antitrust Law Journal 741, which provides an overview of the application of the doctrine in several antitrust jurisdictions. 7 See above at 7.3.3 and 7.3.6. 8 See above at 7.1.1.2 and 7.1.2.2. 9 See above at 2.5.1. 10 See above at 7.5. 11 See Bohannan & Hovenkamp (2009), ‘IP and Antitrust: Reformation and Harm’, University of Iowa Legal Studies Research Paper No 09-16.

9.2

POTENTIAL EXPLANATIONS FOR THE DIFFERENCES

251

Directive on the patentability of computer-implemented inventions, there have been no major signs of a stronger consideration of the incentives for follow-on innovators in the legislative arena. However, EU competition policy—without being barred by the European legislator—has generally been less deferential to IP rights than US antitrust authorities and courts. In particular, the ECJ’s judgments in Magill and IMS Health have established an essential facilities rule for IP under Article 102 TFEU to prevent foreclosure of competition by follow-on innovation on product markets, which the Commission and the CFI interpreted extensively in the Microsoft case.12

9.2

POTENTIAL EXPLANATIONS FOR THE DIFFERENCES

Over the past decade there has been considerable ‘hard’ and ‘soft’ adjustment of EU competition policy towards US antitrust policy, in particular in the areas of Article 101 TFEU and merger control. This alignment has come under the banner of a ‘more economic approach’ in the EU. The European Commission has embraced consumer welfare as the benchmark and its enhancement as the primary objective of its competition policy. At the same time, the integration goal has been subsumed within this goal to some extent.13 Against this general trend, the differences between the two jurisdictions in the area of monopolisation and abuse of dominance law, particularly with regard to refusals to supply, appear even more pronounced. These differences may be explained to some extent by different constitutional frameworks (9.2.1), by different underlying beliefs with regard to (intellectual) property and competition (9.2.2), and by different economic interests (9.2.3).14

9.2.1

Constitutional Frameworks

Looking at the constitutional frameworks and their effects on the IP/antitrust interface in the US and the EU, two variables may go some way to explaining the existing differences: first, the competence allocation with regard to IP legislation, and second, the degree of political influence on competition policy. In the US, the fact that IP and antitrust legislator are one and the same and that the Supreme Court is the ultimate arbiter in both fields allows for an ‘integrated’ legislative and judicial view on the intricate problem of providing sufficient incentives for initial as well as follow-on innovation, while at the same time not unnecessarily stifling the dissemination of innovation as well as competition. One advantage of such an ‘integrated’ approach to

12

See above at 8.2.1. See above at 2.3.3.2. 14 For a discussion of why laws in different jurisdictions do and should differ see Kerber (2000), ‘Rechtseinheitlichkeit und Rechtsvielfalt aus ökonomischer Sicht’ in Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts, pp 67–98, at p 73; Kirchner (2000), ‘Ein Regelungsrahmen für Rechtseinheitlichkeit und Rechtsvielfalt in der Gemeinschaft’ in Grundmann (ed), Systembildung und Systemlücken in Kerngebieten des Europäischen Privatrechts, pp 99–114, at p 103; Schmidtchen (2002), ‘Lex Mercatoria und die Evolution des Rechts’ in Ott & Schäfer (eds), Vereinheitlichung und Diversität des Zivilrechts in transnationalen Wirtschaftsräumen, pp 1–31, at p 27. 13

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COMPARISON AND INTERNATIONAL DIMENSION

innovation and competition is that antitrust policy does not have to be used as a corrective tool in scenarios where a change in interpretation or reform of IP law would be the best solution to prevent foreclosure. Such an ‘integrated’ approach would require a specific allocation of tasks between agencies and courts on the one hand and the legislator on the other: antitrust agencies and courts need to alert the legislator if they conclude that the underlying problem—in addition to or instead of the application of antitrust rules—calls for IP reform. As Calabresi has pointed out, the ‘appropriate technique’ of courts in such a situation ‘will be to enter into a dialogue, to ask, cajole, or force another body (usually the legislature but sometimes the agencies) to define the new rule or reaffirm the old’.15 Such a dialogue on IP rules may occur in the future if antitrust authorities and courts in the US become more receptive to problems of follow-on innovation and input foreclosure than they have been in the last decade. This is to some extent likely, given the policy statements of the new administration.16 As for example the withdrawal of the 2008 Report on Single-Firm Conduct Under § 2 of the Sherman Act shows, political influence in this area and in general on antitrust policy is greater in the US than in the EU, due to both the more immediate political influence on the DoJ and the FTC17 and the appointment of Supreme Court Justices. In the EU, the relationship between national IP laws and EU competition policy has been more complex due to the latter’s additional goal of market integration and due to the lack of harmonisation in some IP areas. The ECJ’s Magill judgment may be interpreted as a correction of over-shooting national IP law18 and thus perhaps as a form of negative integration in the field of IP through competition policy. In such cases, the Court (and the Commission in similar cases) should, at least parallelly to a ‘corrective decision’, ask in the Calabresian sense for IP reform at the national and/or EU level. However, such corrective legislation at the EU level may prove more difficult than in the US due to the diverse interest of EU Member States and the need for a legislative majority in the Council.

9.2.2

Beliefs

US scepticism towards both enforcement of § 2 Sherman Act and enabling access to (intellectual) property under antitrust and (intellectual) property rules may to some extent be explained by deep-rooted US socioeconomic values. The Trinko judgment, delivered by Justice Scalia, may be regarded as a focal point of these values which together form a ‘system

15 Calabresi (1999), A Common Law for the Age of Statutes, pp 165–66. In Calabresi’s view, the—what he calls— ‘common-law function’ ‘to be exercised by courts [in the US] today … is no more and no less the critical task of deciding when a retentionist or revisionist bias is appropriately applied to an existing statutory or common law rule. It is the judgmental function … of deciding when a rule has come to be sufficiently out of phase with the whole legal framework so that, whatever its age, it can only stand if a current majoritarian or representative body reaffirms it’ (ibid, p 164). 16 See above at 7.5. 17 The policy positions of the Directorate General for Competition cannot be explained along partisan political lines. 18 See above at 8.2.1.3.4. In the same vein see Czapracka (2007), ‘Where Antitrust Ends and IP Begins—On the Roots of the Transatlantic Clashes’, Yale Journal of Law & Technology 44, at 79–80 and fn 176.

9.2

POTENTIAL EXPLANATIONS FOR THE DIFFERENCES

253

of belief about monopoly and competition’, as alluded to by Harold Demsetz in the epigraph to this chapter. The main components of this system are: —

a belief in the sufficiency of strong property rights and markets and, consequently, the unfettered exercise of property rights, as suggested by property rights theory; — as a corollary, the belief that the ‘successful competitor, having been urged to compete, must not be turned upon when he wins’;19 and — scepticism towards the knowledge of public entities as compared to the informationdisseminating function of markets. This belief system with its Chicago, Schumpeterian and Hayekian elements, which to some extent may be regarded as forming part of the wider and controversial label of ‘American exceptionalism’, today goes a long way to explaining some antitrust judgments of the current Supreme Court, particularly in § 2 Sherman Act cases. Even taking into account the US antitrust institutions’ openness toward new economic insights, potential future developments from post-Chicago new industrial or behavioural economics may find it difficult to modify this belief system. By contrast, even given the move in EU competition policy in the last decade towards a ‘more economic approach’, scepticism about (economic) power is still more pronounced in Europe. One foundational intellectual influence on the competition provisions in the EC Treaty (and now the TFEU) came from the German ordoliberal Freiburg School, whose core idea is to restrain both public and private power by subjecting it to an economic constitution.20 According to some commentators, the main aim of the European economic constitution is indeed to constrain power.21 These differences in beliefs between the US and the EU, by their very nature, have the strongest repercussions in the area of unilateral conduct of innovative (Schumpeterian) firms with power in dynamic markets and partially explain why, despite an overall convergence on new industrial economics insights, the interpretation of § 2 Sherman Act and Article 102 TFEU differ on refusals to supply.22

9.2.3

Interests

In addition to the above belief-based explanation, the political economy dimension may offer an additional rationale for the strong protection of initial innovation in the US. Through much of the 1990s, the US was a net exporter of advanced technology products.23

19

See above at ch 3, n 89. See Böhm (1928), ‘Das Problem der privaten Macht—Ein Beitrag zur Monopolfrage’, 3 Die Justiz 324. Eucken (1989), Die Grundlagen der Nationalökonomie, pp 196–205. For an analysis of the influence of the Freiburg School on European competition policy see Gerber (1998), Law and Competition in Twentieth Century Europe: Protecting Prometheus, pp 232–65. 21 Basedow (1992), Von der deutschen zur europäischen Wirtschaftsverfassung, pp 10, 60. In the same vein in an even more general historic context, see Albert (1986) Freiheit und Ordnung, Walter Eucken Institut—Vorträge und Aufsätze, pp 17–32. 22 See similarly Fox (2006), ‘Monopolization, Abuse of Dominance, and the Indeterminacy of Economics: The US/EU Divide’, Utah Law Review 725, in particular at 739–40. 23 Beginning in 2001 and coinciding with the end of the ‘dot-com’ boom, however, the trade balance for US technology products began to erode. By 2002, US imports of advanced technology products exceeded exports, resulting in the first US trade deficit in this market segment. See the Science and Engineering Indicators 2008 of the National Science Foundation, available at www.nsf.gov/statistics/seind08/c6/c6h.htm. 20

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COMPARISON AND INTERNATIONAL DIMENSION

The US continues to be a net exporter of intellectual property, primarily in manufacturing technology know-how and licensing of computer software, although its intellectual trade margins are declining.24 Microsoft, Apple and Google are obviously all US firms. As the introductory quote to this chapter from Samuelson makes clear, an already innovative nation may have a greater incentive to adopt higher-protection rules to prevent spillovers from innovative activity than a nation which has been less innovative so far,25 even given the potentially stifling effects on ‘domestic’ follow-on innovation. Indeed, as a net importer of intellectual assets for the first century of its existence, the US refused IP protection of works coming from abroad.26 Similarly, recent extensions of IP rights under US law27 and US pressure for enhanced protection of IP rights on an international level28 have been analysed under this perspective. The underlying political economy rationale may be extended from higher protection for (initial) innovation to a more deferential antitrust policy. Indeed, the different outcomes in the Microsoft case have been framed around the hypothesis that the US would be willing to tolerate consumer harm in the US in order to uphold Microsoft’s dominant position in some global software markets.29 Such a political economy argument applies most strongly to legislators and agencies, and to a lesser extent to courts. In that sense, such an argument cannot fully explain the reluctance of courts to interfere with IP on antitrust grounds.

9.3

THE INTERNATIONAL ANTITRUST LAW OF IP

Different approaches to refusals to license lead to (private and public) costs. Shortly after the CFI released its judgment in the Microsoft case, the DoJ’s Assistant Attorney General for Antitrust issued a statement noting that the DoJ was ‘concerned that the standard applied to unilateral conduct by the CFI, rather than helping consumers, may have the unfortunate consequence of harming consumers by chilling innovation and discouraging competition’. Highlighting the differences between the EU and the US approach, he emphasised that US-EU ‘cooperation [in this area] is particularly important given the global nature of many markets, including in the high technology sector’.30 Indeed, one of the costs of such diverse approaches, at least from the less ‘interventionist’ jurisdiction’s perspective,

24

See Goldstein (2007), Intellectual Property, p 204, and the data presented there. For an analysis of the consequences of different IP protection see Samuelson (2004), ‘Intellectual Property Arbitrage: How Foreign Rules can Affect Domestic Protections’, 71 University of Chicago Law Review 223. For a game-theoretic model—which does not account for the blocking effects of IP—see Grossman & Lai (2004), ‘International Protection of Intellectual Property’, American Economic Review 1635. According to Grossman and Lai, it is a rational strategy for an open economy with a relatively large market and relatively more human capital to provide for relatively strong IP protection, assuming equal treatment protection. 26 See Goldstein (2007), Intellectual Property, p 180. 27 See Landes & Posner (2003), The Economic Structure of Intellectual Property Law, ch 15. 28 See eg Goldstein (2007), Intellectual Property, pp 177–84; Maskus (2000), Intellectual Property Rights in the Global Economy; Ryan (1998), Knowledge Diplomacy, pp 67–90; May (2009), The Global Economy of Intellectual Property Rights. 29 Following such a political economy rationale, it will be interesting to see the development of China’s stance towards the application of its Anti-Monopoly Law (which entered into force 1 August 2008) to IP rights. Art 55 of the Anti-Monopoly Law states that it applies to business operators’ ‘conduct that eliminates or restricts competition by abusing their intellectual property rights’. See Harris & Ganske (2008), ‘The Monopolization and IP Abuse Provisions of China’s Anti-Monopoly Law: Concerns and a Proposal’, 75 Antitrust Law Journal 213. 30 See the press release of 17 September 2007, available at www.justice.gov/opa/pr/2007/September/07 _at_725. html. 25

9.3 THE INTERNATIONAL ANTITRUST LAW OF IP

255

would be spillovers which could arise due to the ‘leaking’ of technology across borders as a consequence of remedies in refusal to license cases.31 The DoJ’s stance in the Microsoft case at that time highlights the potential costs of an allegedly over aggressive competition policy. However, it has to be noted that the risks of spillovers, for example due to the leakage of protected information across borders as a consequence of remedies, can be limited to some extent through appropriate protection mechanisms within a remedy procedure. On the other hand, there are also potential costs of a ‘minimalist’ antitrust policy such as the foreclosure of dynamic competition by firms operating in a jurisdiction which follows a deferential policy towards (intellectual) property rights. Irrespective of whether one jurisdiction follows an ‘overly aggressive’ or a ‘minimalist’ antitrust approach, the fact that antitrust regimes differ and even conflict implies costs for global companies that have to comply with the different regimes. With regard to the costs of different national or supranational competition laws, the question of which rule and which institution can be used to avoid or minimise such potential conflicts has been extensively discussed.32 With regard not only to abuse of dominance, but to competition cases in general, theoretical approaches to allocating competences in multilevel systems of competition institutions have been developed.33 Most of the debate focuses on suggesting intermediate solutions between the polar approaches of extreme decentralism (no substantive or institutional internationalisation) on the one hand and extreme centralism (a unified global competition regime plus a global enforcement institution) as well as on analysing existing intermediate solutions such as the bodies and (hard or soft) laws within the International Competition Network (ICN) and the World Trade Organization (WTO). Specifically in this context, the question is whether the current TRIPS rules are sufficient to de-conflict antitrust enforcement in different jurisdictions which has an impact on the exercise of IP rights, or whether a new international framework for the IP/antitrust interface is needed.

9.3.1

The Current TRIPS Approach

The WTO Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) requires its Members to provide minimum levels of protection for IP rights. However, the TRIPS Agreements also explicitly recognises the need to limit IP rights under the laws of Member States in the light of follow-on innovation and competition concerns, which are, in a general manner, acknowledged as objectives under Article 7 TRIPS.34 TRIPS, particularly as stated at Article 8(2),35 gives its Members a significant degree of freedom to

31 See Anderson (2008), ‘Competition Policy and Intellectual Property in the WTO: More Guidance Needed?’ in Drexl (ed), Research Handbook on Intellectual Property and Competition Law, pp 451–70, at pp 460–62, 467. 32 For a legal analysis see Basedow (1998), Weltkartellrecht. 33 See eg Kerber (2003), ‘International Multi-Level System of Competition Laws: Federalism in Antitrust’ in Drexl (ed), The Future of Transnational Antitrust: From Comparative to Common Competition Law, pp 269–300. 34 Article 7 states: ‘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 obligations’ (emphasis added). 35 Article 8(2) states: ‘Appropriate measures, provided that they are consistent with the provisions 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.’

256

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determine their own levels of IP protection and to restrict the exercise of IP rights through, amongst other things, competition law. Some provisions place substantive and procedural constraints on limitations or exceptions to IP rights foreseen by its Members. In the case of Article 13 on copyrights36 and Article 30 on patents,37 however, these constraints are vague and loose. In respect of Article 30 on patents, Article 31 states:38 Where the law of a Member allows for other use [than that allowed under Article 30] of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected: … (b) such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. … (c) the scope and duration of such use shall be limited to the purpose for which it was authorized, and in the case of semi-conductor technology shall only be for public non-commercial use or to remedy a practice determined after judicial or administrative process to be anticompetitive; … (f) any such use shall be authorized predominantly for the supply of the domestic market of the Member authorizing such use; … (k) 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 … (emphasis added)

In the context of liability under German competition law and Article 102 TFEU for a refusal to license, which had been invoked as a compulsory licensing defence against a patent claim, the German Federal Court of Justice (correctly) confirmed the compatibility of an antitrust duty to license with Article 31 of the TRIPS Agreement in its Orange-BookStandard judgment.39 This judgment also shows that Article 31 provides for minimum obligations on WTO Members with regard to the use of patents by third parties. Article 31 prevents the expropriation of patent holders through both patent and antitrust laws and thereby also prevents Members from circumventing the minimum requirements for protection through competition policy. Therefore, Article 31 can be interpreted as a limitation on an overly aggressive competition policy, albeit as a rather weak constraint. However, Article 31—similar to Articles 13 and 30—does not provide any guidance on the specific antitrust conditions that may lead to the licence. Similarly, the Section of TRIPS on control of anti-competitive practices in contractual licences—and in particular its Article 40—provides no substantive guidance. On the contrary, Article 40(1) and (2)—referring also to Article 8(2)—reserves the right of WTO

36 Article 13 holds: ‘Members shall confine limitations or exceptions to exclusive rights to certain special cases which do not conflict with a normal exploitation of the work and do not unreasonably prejudice the legitimate interests of the right holder.’ 37 Article 30 holds: ‘Members may provide limited exceptions to the exclusive rights conferred by a patent, provided that such exceptions do not unreasonably conflict with a normal exploitation of the patent and do not unreasonably prejudice the legitimate interests of the patent owner, taking account of the legitimate interests of third parties.’ 38 With regard to the conditions on dependency licences under Art 31 lit l see above at 8.1.1.2. For an analysis of Art 31 see Pires de Carvalho (2008), The TRIPS Regime of Antitrust and Undisclosed Information, pp 137–48. 39 See above at 8.1.1.3.

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Members to adopt and enforce their antitrust laws.40 Article 40(2) sets out a non-exhaustive positive list of measures a Member State may adopt. It also provides that antitrust laws need to be consistent with the other provisions of the TRIPS Agreement. With the exception of the latter requirement, however, Article 40 does not contain substantive limitations on Members’ competition policy; it provides only a procedural obligation at Member State level to grant an opportunity for consultation.41 In sum, the current TRIPS Agreement provides some protection (in the sense of a maximum boundary) against an overly aggressive competition policy towards IP rights by its Members. It does not comprise a ‘minimum boundary’ against a laissez faire antitrust policy which is deferential towards IP. It should be noted that, even if there were such limitations on competition policy towards IP in the TRIPS Agreement, such provisions would not have direct effect under either US or EU law. The reason is that both jurisdictions, in essence, follow the dualist approach with regard to WTO law.42

40

Arts 40(1) and 40(2) provide: ‘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’ (emphasis added). See also Arts 8(2), 30 and 31(k) of the TRIPS Agreement. For an analysis in particular of Arts 8(2) and 40 see Ullrich (2004), ‘Expansionist Intellectual Property Protection and Reductionist Competition Rules: A TRIPS Perspective’, 7 Journal of International Economics Law 401. 41 Art 40(4) provides: ‘A Member whose nationals or domiciliaries are subject to proceedings in another Member concerning alleged violation of that other Member’s laws and regulations on the subject matter of this Section shall, upon request, be granted an opportunity for consultations by the other Member under the same conditions as those foreseen in paragraph 3.’ Art 40(3) states: ‘Each Member shall enter, upon request, into consultations with any other Member which has cause to believe that an intellectual property right owner that is a national or domiciliary of the Member to which the request for consultations has been addressed is undertaking practices in violation of the requesting Member’s laws and regulations on the subject matter of this Section, and which wishes to secure compliance with such legislation, without prejudice to any action under the law and to the full freedom of an ultimate decision of either Member. The Member addressed shall accord full and sympathetic consideration to, and shall afford adequate opportunity for, consultations with the requesting Member, and shall cooperate …’ For an analysis see Fox (1996), ‘Trade, Competition, and Intellectual Property—TRIPS and its Antitrust Counterparts’, 29 Vanderbilt Journal of Transnational Law 481, at 484–91. 42 In the US, s 102(a)(1) of 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. Regarding EU law, the CFI reiterated the Court’s stance towards the relationship between WTO and EU law in its Microsoft judgment, stating: ‘The Court holds that the principle of consistent interpretation thus invoked by the Court of Justice applies only where the international agreement at issue prevails over the provision of Community law concerned. Since an international agreement, such as the TRIPS Agreement, does not prevail over primary Community law, that principle does not apply where, as here, the provision which falls to be interpreted is Article 82 EC. … It is settled case-law that, given their nature and structure, 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. … As the circumstances of the present case clearly do not correspond with either of the two situations described in the preceding paragraph, Microsoft cannot rely on Article 13 of the TRIPS Agreement.’ Case T-201/04, Microsoft v Commission [2007] ECR II-4463, paras 798–803.

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Attempts to agree on substantive rules regarding the IP/antitrust interface have failed.43 Due to the different strategic interests of IP net exporters and importers and diverse competition cultures, the probability of future success of such multilateral attempts seems limited, even taking into account ‘bargaining chips’ from other areas. It would be beyond the scope of this book to address the question whether the WTO would be the best forum from both a substantive and an institutional point of view to provide international competition rules (and, if so, which).44 It may be particularly difficult to anchor rules on the IP/antitrust interface within the WTO, since such rules would need to balance not only the IP and competition dimensions, but also the WTO’s main objective of facilitating trade. Another potential forum for providing (soft) guidance would be the ICN, which has issued a report on the different approaches to refusals to supply in its Members’ jurisdictions.45

9.3.2

Is Stronger Harmonisation of the Antitrust Law of IP Needed?

Even if a consensus on more coordination and/or guidance regarding the IP/antitrust interface could be reached, the normative question remains whether harmonisation, international rules or, the least improbable, broad minimum and maximum principles for competition policy which go beyond the current TRIPS approach and would at least mitigate the costs of conflict are desirable. When attempting to answer this question, the costs of conflicting laws and/or decisions are not the only factor that has to be taken into account. Generally for antitrust (and even broader regulatory) matters, several other major parameters have been discussed which would have to be considered and traded off within the ultimate governance question of competence allocation for antitrust, ie on what level a final decision on a matter should be taken (and thus a potential conflict resolved). These parameters, which may differ between the different levels (in particular national vs supranational), include: efficiencies in terms of ‘production’ of decisions and judgments; transaction and administrative costs; the preferences of citizens in a jurisdiction; and institutional evolution and adaptability, including mutual learning under a competition of competition laws.46

43

Eg the Draft International Antitrust Code. See above at 2.3.2.1.3. See eg Guzman (2003), ‘International Antitrust and the WTO: The Lesson from Intellectual Property’, 43 Virginia Journal of International Law 933 (preferring the WTO as forum for international competition rules); Fox (1999), ‘Competition Law and the Millenium Round’, 2 Journal of International Economics Law 665 and Fox (2000), ‘Antitrust and Regulatory Federalism: Races Up, Down, and Sideways’, 75 NYU Law Review 1781 (preferring to include only trade-related competition rules under the WTO, ie those competition rules which address access to markets). 45 ICN Unilateral Conduct Working Group (2010), Report on the Analysis of Refusal to Deal with a Rival under Unilateral Conduct Laws. The ICN has also issued reports on other potentially anti-competitive unilateral conduct than refusals to supply, such as predatory pricing as well as Recommended Practices for Dominance/Substantial Market Power Analysis. The IP/antitrust interface has been addressed by the OECD Committee on Competition Law Policy and the UNCTAD Intergovernmental Group of Experts on Competition Law and Policy (see the 1998 OECD Report on Competition Policy and Intellectual Property Rights and the 2002 UNCTAD publication on Competition Policy and the Exercise of Intellectual Property Rights). 46 Budzinski (2008), The Governance of Global Competition—Competence Allocation in International Competition Policy, pp 95–115. See also in particular Kerber (1998), ‘Zum Problem einer Wettbewerbsordnung für den Systemwettbewerb’, 17 Jahrbuch für Neue Politische Ökonomie 199; Kerber (2003), ‘International Multi-Level System of Competition Laws: Federalism in Antitrust’ in Drexl (ed), The Future of Transnational Antitrust: From Comparative to Common Competition Law, pp 269–300, and the comment by Kirchner (pp 301–10); Kerber & Budzinski (2003), ‘Towards a Differentiated Analysis of Competition of Competition Laws’, Journal of Competition 44

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As regards competition policy in terms of IP rights, substantive harmonisation is unlikely. The only solution that has some—albeit small—likelihood of seeing a consensus would be more binding limits on overly intrusive and (with an even lower probability) on minimalist competition policies. For example, Fox has argued that ‘TRIPS does not invite an international antitrust law of intellectual property nor is one needed or advisable’, but ‘[i]n view of TRIPS … and in order to perfect TRIPS, it will be necessary to develop law at the interface of competition law and intellectual property law to ensure that overly aggressive competition law does not undermine the obligations under TRIPS’.47 With regard to overly intrusive competition policies, one may indeed argue that Articles 31 and 40(2) of the TRIPS Agreement allows for the development of a line of case law which may provide sufficient protection against an expropriation of IP holders through antitrust. With regard to overly lax antitrust policies towards IP rights, there is a gap in international law. One might counter-argue that such an overly lax policy would be rare. Indeed, it may often be in the best interests even of net exporters of IP not to adopt a competition policy that is utterly deferential to IP rights, particularly if there is a binding (multilateral) non-discrimination obligation (akin to the WTO’s national treatment rule). However, there may be situations where a net exporter of IP with a large domestic market and a dominant ‘national’ technology owner may find such a deferential approach attractive, not only at the expense of domestic competition, but also with negative effects on competition in other jurisdictions. An international minimum obligation for antitrust jurisdictions to adopt appropriate measures against IP misuse would mitigate this problem. Since net exporter positions of nations and economic blocks shift over time, such a minimum boundary on competition policy might be in the long-term interest of today’s net exporters of IP. Within such minimum and maximum boundaries, competition of competition policies is beneficial due to the learning benefits and regulatory innovation it creates. Testament to this is the cross-fertilisation of ideas which the transatlantic discussion on the best approach to the IP/antitrust interface in general and refusals to supply based on IP rights in particular have sparked. This book has attempted to contribute to that debate.

Law (ZWeR) 411; Kerber & Budzinski (2004), ‘Competition of Competition Laws: Mission Impossible?’ in Epstein & Greve (eds), Competition Laws in Conflict: Antitrust Jurisdiction in the Global Economy, pp 31–65. 47 Fox (1996), ‘Trade, Competition, and Intellectual Property—TRIPS and its Antitrust Counterparts’, 29 Vanderbilt Journal of Transnational Law 481, at 505.

10 Summary 10.1

IP AND ANTITRUST AS THE FRAMEWORK FOR CUMULATIVE INNOVATION

Innovation is often cumulative, and IP protection of initial innovation may thus come at the cost of impeding follow-on innovation and improvements. The global expansion of IP rights, their increasingly strategic use by firms and the need for more specialised inputs as technologies become more complex, have aggravated the problem of access to protected information and works. By defining the bargaining positions of initial and follow-on innovators, improvers and competitors, IP and antitrust rules constitute the main elements of the legal framework for cumulative innovation. Both have the common task of providing sufficient ex ante incentives for initial innovation, while at the same time minimising distortions of competition on the markets in the innovation chain, ie innovation, technology and product markets. This includes minimising impediments to follow-on innovation and to the marketing of improvements.

10.2

THE RELATIONSHIP BETWEEN IP AND ANTITRUST LAWS

Purely legal(istic) attempts to answer the question regarding the relationship between IP and antitrust are doomed to fail. The now prevalent assumption, particularly in the US, that IP and antitrust share the same primary objective of enhancing consumer welfare is an over-simplification. Rather than making such an assumption of normative complementarity, a positive economic analysis of the effects of IP and antitrust on the incentives of initial and follow-on innovators, improvers and competitors may provide guidance to legislators, competition authorities and courts on how to define the interplay and division of tasks between IP and antitrust. Neither can IP laws provide ‘optimal barriers to entry’, and nor should they. Nor can competition policy ‘fine-tune’ incentives to innovate on a case-by-case basis, and nor should it. Per se rules under antitrust laws as well as antitrust rules of reason which take into account the incentive function of IP are the preferable way to define the relationship between the two sets of laws. Potential parameters for the allocation of tasks could be the type of harm caused by the exercise of IP and the markets affected: IP laws in particular provide suitable levers to minimise static distortions due to unilateral exploitative strategies and to keep open innovation markets. Competition policy is particularly well suited to preventing harm to competition on technology and product markets and to complementing IP laws in preventing harm to dynamic competition caused by the exercise of IP rights on product markets.

10.3

10.3

MONOPOLISATION AND ABUSE: THE CORRECT TEST

261

MONOPOLISATION AND ABUSE: WHAT IS THE CORRECT TEST?

The differences between § 2 Sherman Act and Article 102 TFEU do not prevent crossfertilisation with regard to the standard that serves to determine what constitutes ‘monopolisation’ or an ‘abuse’. Such a standard should provide for coherence across all conduct-specific rules, including the rule(s) on refusals to supply. The most promising candidate for such a standard is the consumer harm test. This test balances all relevant static and dynamic costs and benefits of potentially anti-competitive conduct. In both the US and the EU, this test has emerged as the most general heuristic structure in antimonopolisation and abuse of dominance law. The assumption that the error costs of false positives are generally greater than losses due to false negatives is flawed: not only may (antitrust) limits on exclusionary conduct chill incentives for (initial) innovation; the lack of such limits may enable firms to block follow-on innovation.

10.4

REFUSALS TO DEAL WHICH MAY IMPEDE FOLLOW-ON INNOVATION

Refusals to supply based on IP may foreclose (i) innovation markets, if the firm seeking the licence wants to do research, and (ii) product markets, if the firms seeks the licence to market a—potentially new or improved—product. Antitrust innovation market analysis is inherently difficult. Therefore, research exemptions and a stringent compulsory licensing regime under IP laws are generally preferable to liability under antitrust anti-monopolisation and abuse of dominance rules. If a refusal to license prevents the marketing of a potentially new or improved product, an antitrust essential facilities type of test should at least complement IP rules. Antitrust rules on refusals to supply should not differentiate between different types of protected information or different types of IP. In particular, antitrust rules should not treat interoperability information or information protected as trade secrets different from other potentially essential inputs.

10.5

THE LICENSING FEE: DETERMINING LIABILITY AND THE REMEDY

Determining liability for a refusal to supply based on IP as well as the remedy under § 2 Sherman Act and Article 102 TFEU requires determination of a maximum licensing fee. This royalty must on the one hand ensure that efficient competitors are not foreclosed from the market for which the IP in question is an indispensable input. On the other hand, the liability price cap and the remedy should not unnecessarily decrease incentives to innovate. The most promising way of solving this task would be to approximate the maximum ability to pay of the competitor seeking access. Such a rival has to be at least reasonably efficient. If liability has been found, competition authorities and courts should give precise guidance on both the pricing question and the procedural steps to limit the costs of strategic manoeuvring by the IP holder and the firm seeking a licence.

262

SUMMARY

10.6

AN ESSENTIAL FACILITIES TEST

Under an essential facilities type of rule against anti-competitive refusals to supply, a product or IP should only be considered essential if a firm seeking supply can neither circumvent the input’s use nor substitute it, either by self-production (‘duplication’ of the input) or by using another source. With regard to the relevant harm caused by the refusal, an essential facilities test should differentiate between refusals based on tangible and intellectual property: In the latter case, a firm should only be liable if such a refusal prevents the marketing of a new or improved product and thus causes harm to dynamic competition. An essential facilities rule must also ensure—in the sense of an ex ante efficiency defence— that a dominant firm that would be obliged to supply the essential input would again take its decision to invest in the creation and supply of this input.

10.7

CUMULATIVE INNOVATION UNDER US IP AND ANTITRUST LAWS

The reductionist approach of US agencies and courts to the interpretation and enforcement of § 2 Sherman Act in general and to refusals to supply in particular culminated in Trinko. The Supreme Court’s judgment has at least cast strong doubts on the essential facilities doctrine. Unilateral refusals to deal are not likely to give rise to liability, even less so when the refusal is based on IP. The only exceptions to the general ‘no duty to deal’ principle that appear to have ‘survived’ Trinko are a continued duty to deal under the Aspen doctrine and a rule against concerted refusals to deal. This minimalist antitrust stance has not been generally counter-balanced by an interpretation of IP laws which accounts for the need for competition by follow-on innovation. On the contrary, with regard to innovation markets, the room for application of the research exemption under patent law has been limited even further. However, this approach of ‘strong IP rights for initial innovators plus small antitrust’ may already be changing to some extent: in the antitrust area due to a more active enforcement of § 2 Sherman Act by the agencies, and in the IP area due to the Supreme Court’s acknowledgement that the unfettered exercise of the growing number of IP rights may stifle follow-on innovation.

10.8

CUMULATIVE INNOVATION UNDER EUROPEAN IP LAWS AND EU COMPETITION LAW

The analysis of German IP laws shows that national IP laws in Europe may lack the potential flexibility of US misuse doctrines, which would be an additional ‘internal’ IP policy lever to prevent the undue expansionist use of IP rights on adjacent markets. At the same time, harmonisation at the EU level has provided doubtful protection, particularly for databases. The conditions for mandatory and dependency licences under German patent law are unduly narrow. German IP laws thus rely almost entirely on competition law to prevent the foreclosure of competition by follow-on innovation, and judgments have paved the way for a broader use of an antitrust compulsory licensing defence based on German and EU abuse of dominance provisions. With regard to Article 102 TFEU, the Microsoft judgment shows that the CFI is willing to adopt a broad interpretation of the Magill and

10.9

COMPARISON AND INTERNATIONAL DIMENSION

263

IMS essential facilities type of test for refusals to license by dominant firms, in particular by reading the broad notion of ‘technical development’ into the ‘new product’ condition. Microsoft has thus secured some flexibility for the Commission, which it may make use of in future cases. The ‘reasonableness’ element of the Commission’s FRAND remedies continues to lack sufficient contours.

10.9

COMPARISON AND INTERNATIONAL DIMENSION

The differences between US and EU approaches to refusals to supply based on IP rights may be explained by different constitutional frameworks, beliefs and economic interests. As the Microsoft case has shown, such differences may entail public and private conflict costs. The current TRIPS Agreement provides some protection (in the sense of a maximum boundary) against an overly aggressive competition policy towards IP rights by its Members. However, it does not comprise a ‘minimum boundary’ against a laissez faire antitrust policy that is deferential towards IP.

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Index abuse of dominance/monopolisation: categories of abuses, 71 conduct tests as-efficient competitor, 87–90 consumer harm, 90–4 no economic sense, 87 profit sacrifice, 86–7 suggestions, 85–95 correct test, 68–95, 261 cost-error approach false negatives, 82–3 false positives, 83–4 heuristic, 81–5 relative size of costs, 84–5 dominant position, 150–7, 224 substitutability, 157–8, 159 essential facilities see essential facilities test EU law refusal to supply IP, 217–48 ex ante investment defence, 160–3 exclusionary conduct, 71, 74, 86, 87 harm to competition adjacent markets, 158–60 refusal to deal, 150–60 IPR practices, 21–2 margin squeezes, 73, 193–4, 235–8 potential standards analysis, 79–94 conduct standards, 85–95 cost-error approach, 81–5 standards v conduct specific rules, 80–1 refusal to deal see refusal to deal US and EU tests, 70–2 exploitative abuses, 73 legislative differences, 74–5 leveraging, 75–6 market structure v consumers, 76–9 obstacles to cross-fertilisation, 72–9 Aghion, Philippe, 54, 56 Alchian, Armen, 9 anti-competitive agreements, IPR practices, 20–1 antitrust/IP interface see IP/antitrust interface antitrust law see competition Areeda, Phillip, 91, 136, 149, 181, 237 Arrow, Kenneth, 53–4, 57, 58, 59 AstraZeneca: market structure, 78 misleading patents, 108 parallel imports, 109 refusal to deal, 108–9 Ayres, Ian, 19

Baker, Jonathan, 57 Barnett, Jonathan, 55 Barnett, Thomas, 114 Baumol, William, 53 Baxter, William, 26 Bessen, James, 96 biotechnology, 15 Bowman, Ward, 27 boycotts, 195 bundling, 100–1, 109 Bush, George W, 84 Calabresi, Guido, 252 car parts, 134 cellophane fallacy, 152–3 Chicago School: on false positives, 84 goal of antitrust law, 34 inherency approach and, 27 single monopoly profit theory, 99–100, 183 tying and bundling, 101 values, 253 vertical refusal to deal, 99–100 Coase, Ronald, 114, 121 commercialisation, IPRs, 58–9 comparative law, EU v US approaches, 249–54, 263 competition: allocative and dynamic efficiency, 2–3 discovery procedure, 1 European Union see EU competition law evolutionary economics, 3 harm, refusal to deal, 150–60 imitation, 12–13, 47–58 IP interface see IP/antitrust interface origins of law, 8–9 principles, 149–50 remedies, 147–8 static v dynamic, 2–3, 20, 67 United States see US antitrust law compulsory licensing: anti-competitive strategy and, 106–9, 238–40 assessment, 122–4 dependency licensing, 122–3 discrimination see discrimination essential facilities see essential facilities test EU IPRs, 217–48 Germany copyright, 213–16 IMS Health, 213–16 patents, 206, 208–12 innovation and, 55–6

294

INDEX

IPR mergers and, 23 pharmaceuticals, 55 research licences, 116–17, 168–9, 203 royalties see licensing fees scenarios, 6 TRIPS, 209 US, 168, 173, 186, 196–201, 203 conflict of laws, IPRs, 43–4 consumer welfare: abuse of dominance, 89 balancing costs and benefits, 90–4 essential facilities test and, 229–33 IP/antitrust interface, 7, 32–46 Microsoft (EU), 94, 205, 254 US antitrust law, 34–5 copyright: anti-competitive potential, 20 blocking cumulative innovation, 13–14 German law, 16, 212–16 incentive theory, 49 objectives, 12 protected period, 62–3 software, 126 US law, 16, 18, 172–5 cost-benefit analysis, IP/antitrust interface, 63–5 cost-error approach: abuse of dominance, 81–5 false negatives, 82–3 false positives, 83–4 relative size of costs, 84–5 cumulative innovation: blocking by IPRs, 13–14 economic analysis, 47 EU/IP interface, 217–48, 262–3 incentive theory and, 56–7 incremental cumulative innovation, 110 IP/antitrust interface and, 4–5, 260 IP cases for reform, 112–14 IP refusal scenarios impeding marketing, 119–25 impeding research, 116–19 interoperability information, 125–32 standard-protecting IP, 6, 132–3, 214 supply of input products, 133–5 typology, 115–16 IPR practices, 22 Microsoft, 56–7 need to account for, 4–5 overview, 109–15 radical cumulative innovation, 110 refusal to deal and, 96–135, 261 European Union, 217–48, 262–3 United States, 176–204 self-correction theory, 114–15 US IP/antitrust interface copyright, 172–5 future, 201–3 initial v cumulative innovation, 165–75 overview, 165–204, 262 patents, 165–72 refusal to deal, 176–203 remedies, 196–201

trade secrets, 175 Trinko see Trinko case databases: anti-competitive potential, 20 German copyright, 212–16 protection, 18, 133 defensive leveraging, 21 Demsetz, Harold, 58, 60, 114, 249, 253 discrimination: non-discriminatory pricing, 146–7 primary-line, 240 refusal to deal, 103–4 EU IPRs, 240–2 United States, 194–5 secondary-line, 240 dominant position: assessment of market power, 154–7 cellophane fallacy, 152–3 EU IPRs, refusal to deal, 224 hypothetical markets, 153–4 IP cases, 156–7 meaning, 150–7 potential markets, 153–4 relevant markets, 151–4 SSNDP test, 153 SSNIP test, 151–2 Draft International Antitrust Code (DIAC), 30–1 Easterbrook, Frank, 3 economics, IP/antitrust interface, 46–60 economies of scale, 17, 53, 145, 146, 154, 188, 216 effects doctrine, 40–2, 43, 44 efficient component pricing, 138, 141–2 Elhauge, Einer, 68, 70, 88, 89, 104 entry barriers, defining, 155–6 essential facilities test: dominant position, 150–7 EU IPRs, 219–35 balancing, 233–5 conditions, 223–35 consumer harm, 229–33 de novo refusals, 222–3 elimination of competition, 226–8 Guidance, 220, 223, 224, 225, 228, 232–5 indispensability, 225–6 necessity v sufficiency, 220–2 new product condition, 221–2, 229–33 objective justification, 233–5 termination of supply, 222–3 ex ante investment defence, 160–3 ex post efficiency defence, 163 harm to competition, 150–60 adjacent markets, 158–60, 226–8 horizontal refusal, 102 incentive theory and, 97 interoperability information, 130–1 leveraging test or, 124–5 meaning of indispensability, 157–8 objectives, 137, 154 overview, 149–64, 262 scope, 106

INDEX

substitutability, 157–8, 159 supply of input products, 134 United States, 182–6, 202 IP as essential facilities, 184–5 EU: competence, IPRs, 27–8 competition see EU competition law database protection, 18 dualism, 257 enforcement of IPRs, 24 free movement of goods, 28–9 licensing fees, 138–9, 143 software protection, 17–18 values, 253 EU competition law: abuse of dominance concept, 68–95 consumer harm, 91–4 enforcement mechanisms, 79 essential facilities doctrine, 125, 160–2 Guidance, 88, 89, 91–2 interoperability information, 125–31 leveraging, 75–6, 125 market structure v consumer harm, 76–9 potential tests, 80–94 price discrimination, 103–4 refusal to deal, 96–7 refusal to license cases, 6–7 special responsibility, 107 US differences, 70–9 block exemptions research and development, 205 technology transfer, 21, 33–4, 118, 206 dominant position cellophane fallacy, 152 super-dominance, 151 economic approach, 205, 253 effects-based approach, 6–7 entry barriers, definition, 156 essential facilities test balancing, 233–5 conditions, 223–35 consumer harm, 229–33 de novo refusals, 222–3 elimination of competition, 226–8 Guidance, 220, 223, 224, 225, 228, 232–5 indispensability, 225–6 IPRs, 219–35 necessity v sufficiency, 220–2 new product condition, 229–33 objective justification, 233–5 termination of supply, 222–3 goals, 35–40 competition goals, 35–7 non-competition goals, 37–9 implementation doctrine, 42–3 IP/antitrust interface, 3–4 abuse of dominance, 22 approaches, 24, 27–33, 44–6 car parts, 134 collision scenarios, 40 competence, 27–8

consumer welfare, 33, 35–40 efficiency defence, 53 immunity, 27, 28–9 incentive theory, 48, 52 inherency approach, 27–32 mergers, 22–3 Microsoft see Microsoft (EU) US differences, 249–54, 263 vertical and horizontal agreements, 21 margin squeezes, 235–8 Guidance, 237–8 parallel imports, 28 protecting competitors not competition, 77–9 refusal to deal anti-competitive strategy, 238–40 discrimination, 240–2 essential facilities test, 219–35 future, 247–8 Guidance, 217–18, 220, 223, 224, 228, 232–5, 237–8, 239 IPRs, 217–48, 262–3 margin squeezes, 235–8 remedies, 136–8, 242–7 remedies current practice, 243–7 procedure, 247 proportionality, 137 refusal to deal, 136–8, 242–7 substantive criteria, 244–6 territorial jurisdiction, 42–3 European Union see EU evolutionary economics, 3 exhaustion principle, 5, 250 false negatives, 82–3 false positives, 83–4 First, Harry, 1 follow-on innovation see cumulative innovation forum non conveniens, 43 Fox, Eleanor, 90, 187, 259 France: compulsory licensing, 122 essential facilities test, 226 research exemptions, 116 Virgin v Apple, 226 FRAND terms, 137, 228, 241, 246, 248, 263 free-riding, 13, 47–58 Freiburg School, 68, 253 Georgia-Pacific factors, 142–3, 200 Germany: abuse of dominance compulsory licensing, 210, 211–12 discrimination, 210 compulsory licensing, 122 abuse of dominance, 210, 211–12 copyright, 213 databases, 213 dependency patents, 209 Orange-Book-Standard, 211–12, 256 patents, 206, 208–12

295

296

INDEX

public interest, 208, 209–10 royalties, 208–9, 211–12 copyright, 16, 212–16 compulsory licensing, 213 databases, 212–16 IMS Health, 213–16 rights, 212–13 software, 213 cumulative v innovative innovation, IPRs, 206–17 database protection, 212–16 Freiburg School, 68, 253 IP/competition interface, inherency doctrine, 27 ordoliberalism, 253 patents, 15 compulsory licensing, 206, 208–12 cumulative v innovative innovation, 206–12 dependency patents, 209, 217 doctrine of equivalents, 206–7 protection period, 206 remedies, 207 research exemptions, 116, 207–8, 217 rights, 206 trade secrets, 16, 217 unfair competition, 215, 216 GlaxoSmithKline: consumer welfare, 37 essential facilities test, 222–3 prevention of parallel imports, 219, 239–40 globalisation, 85 granularity, 113 Hart, Oliver, 99 Hayek, Friedrich, 7, 84, 253 Hovenkamp, Herbert, 91, 171, 186, 188, 190, 237 IMS Health: consumer harm, 205 de facto standard, 6, 132, 133, 214 essential facilities test, 124, 159 dominant position, 224 indispensability, 225 new product condition, 221, 229, 230 German database protection, 213–16 incentives to innovate and, 233 interim measures, 243–4 incentive theory: behavioural caveats, 50–1 countervailing effects, 52–5 empirical evidence, 55–6 IP/antitrust interface, 12–13, 47–58 lessons, 56–8 patents, 11 preventing competition by imitation, 12–13, 47–58 strong and weak forms, 55 theoretical minimum threshold, 48–50 information: asymmetries, 59–60 cumulative, 10 disclosure and IPRs, 59 economic good, 10 excludability, 10–11

free-riding, 13, 47–58 interoperability information, 125–32 inherency doctrine, 26–32 innovation: compulsory licensing and, 55–6 cost-reducing innovations, 54 follow-on see cumulative innovation free riding, 13, 47 incumbency and, 54–5 initial innovation empirical evidence, 55 previous focus, 1–4 IP/antitrust interface, 1 cumulative innovation and, 4–5, 260 incentive theory, 47–58 regulatory problems, 5–6 market power and, 53 oligopolies, 53 replacement effects, 53–4 sunk costs, 11 innovation markets: competition, 116–19 concept, 118 input foreclosure, meaning, 96 intellectual property rights see also specific rights anti-competitive potential, 19–24 conflict of laws, 43–4 entry barriers, 19, 155–6 essential facilities, 184–5 exclusive rights, 14–18 functions, 10, 58–60 blocking cumulative innovation, 13–14 commercialisation, 58–9 incentive function, 11, 47–58 incentives to create markets, 10–12 information disclosure, 59 invention motivation theory, 11 non-incentive functions, 58–60 preventing competition by imitation, 12–13, 47–58 protecting market integrity, 10, 12 reward theory, 11, 47–58 signalling mechanisms, 59–60 meaning, 9 refusal to deal see refusal to deal International Competition Network (ICN), 255, 258 interoperability information see also Microsoft elimination of competition, 227 gatekeepers, 125–31 network effects, 127–31 trade secrets, 131–2 IP/antitrust interface: anti-competitive potential entry barriers, 19 exclusive rights, 14–18 horizontal/vertical agreements, 20–1 mergers, 22–3 monopolistic/abusive practices, 21–2 overview, 19–24 unrelated scenarios, 23–4

INDEX

approaches absolute antitrust, 24 absolute IP domination, 24–6, 60–1 balance, 24–5, 32–46 consumer welfare, 7, 32–46 economics, 31–2 essential function, 31–2 inherency doctrine, 26–32 meta rules, 60–5 overview, 24–46 territoriality, 40–4 utilitarianism, 44–5 cumulative innovation and, 4–5, 260 Draft International Antitrust Code (DIAC), 30–1 English origins, 8 EU v US approaches beliefs, 252–3 constitutional frameworks, 251–2 interests, 253–4 overview, 249–54, 263 reasons, 251–4 foreclosing effect, 12–13 incentive theory, 12–13, 47–58 behavioural caveats, 50–1 countervailing effects, 52–5 empirical evidence, 55–6 lessons, 56–8 theoretical minimum threshold, 48–50 innovation and, 1 cumulative innovation, 4–5, 260 focus on initial innovation, 1–4 regulatory problems, 5–6 international law, 254–9 stronger harmonisation, 258–9 TRIPS, 4, 255–8 market power, 156–7 meta rules cost-benefit analysis, 63–5 fine-tuning, 61–3 principles, 65–7 pure IP solution, 60–1 objectives, 10–14 overview, 8–67 positive economic analysis functions of IPRs, 58–60 incentive theory, 12–13, 47–58 overview, 46–60 preventing competition by imitation, 12–13, 47–58 relationship, 260 territoriality EU law, 42–3 US law, 40–2 US v EU approaches, 249–54, 263 Kaplow, Louis, 19 Kitch, Edmund, 46 Klemperer, Paul, 19 Landes, William, 55 Lemley, Mark, 119, 167, 173, 174, 209, 212 Lerner index, 157 leveraging:

abuse of dominance, 21 defensive leveraging, 21, 103 dynamic competition and, 67 EU and US competition laws, 75–6 test, 124–5 United States, 75–6, 125, 189–93 misuse doctrine and, 191, 250 vertical leveraging, 98–9 Levin, Richard, 55 licensing: bargaining rules, 109–15 compulsory see compulsory licensing cross-licensing, 20–1 fees see licensing fees limited licence theory, 25–6 refusal see refusal to deal territorial division, 20–1 transaction costs, 112 licensing fees: cost-based pricing, 139–40 efficient component pricing, 141–2 EU refusal to deal, 244–5 fixing, 138–45, 196–201, 261 Germany, 208–9, 211–12 hypothetical bargaining, 142–3 liability and remedy pricing, 145–6, 261 market-based pricing, 140, 245 maximum ability to pay, 143–5 maximum willingness to pay, 141–3 negotiations, 147 non-discriminatory pricing, 146–7 overview, 136–49 procedures, 147 profit comparison, 140–1 royalty-free access, 138–9 same firm price comparison, 140 stacking, 113–14 United States Kodak II, 196–7 Microsoft, 197–9 overview, 197–201 Rambus, 199–201 Lowe, Philipp, 68 margin squeezes: EU IPRs, 73, 235–8 Guidance, 237–8 United States, 193–4, 237 market correction approach, 84 market power: abuse of dominance and, 70, 76–9 dominant position, 150–7, 224 assessment, 154–7 consumer welfare or, 76–9 defining, 157 dominant position, 150–7 hypothetical markets, 153–4 potential markets, 153–4 relevant markets, 151–4 innovation and, 53 IP cases, 156–7 Maskin, Eric, 96

297

298

INDEX

maximum ability to pay, 143–5 maximum willingness to pay, 141–3 mergers: EU effects doctrine, 42 IPR anti-competitive potential, 22–3 unilateral effects, 152 US/EU alignment, 251 meta-rules, 60–5 methodology, 6–7 Microsoft (EU): burden of proof, 94 consumer harm, 205, 254 cumulative innovation and, 56–7 essential facilities test balancing exercise, 161, 234–5 dominant position, 224 elimination of competition in secondary markets, 226–7 new product condition, 221–2, 230–3 incentive theory, 52–3 interoperability information, 125–6, 128–9 lessons from, 56–7 leveraging, 128–9 licensing fees, 138, 244–5 procedure, 247 market-based pricing, 140 market structure, 78 remedies, 244–5 single monopoly profit, 100 US official response, 254–5 Microsoft (US): burden of proof, 94 compulsory licensing, 197–9 cost-error approach, 82 licensing fees, 138, 198 monopolisation tests, 91 remedies, 197–201 remedy pricing, 145–6, 200–1 middleware, 197–9 monopolisation see abuse of dominance Nelson, Philip, 152–3 neoclassical economics, 2–3, 13, 19 network effects, 20, 101–2, 105–6, 127–33, 154, 199, 216, 225 NYMEX case, essential facilities, 192–3 OECD, 157 oligopolies, 53, 54 one monopoly profit theory, 99–100, 183 ordoliberalism, 253 Ordover, Janusz Aleksander, 86 output strategies, 82 parallel trade, 28, 106, 109, 219, 239–40 patents see also compulsory licensing breadth, 61–2, 111 clustering, 107 conflict of laws, 43 cumulative innovation, 4–5, 96 defensive patenting, 108

European patents, 17 exception to competition, English origins, 8 fraud, 23 German law, 15, 206–12 holdup, 113–14 illegal applications, 109 information asymmetries, 59–60 information disclosure, 59 objectives, 11 pharmaceuticals, 123 pooling, 19, 20–1 United States, 195–6 reform, 113–14 secondary patenting, 108 signalling mechanisms, 59–60 splitting, 107 thickets, 112–13 trade secrets or, 11 TRIPS, 4, 256 US law, 15, 17, 166–72, 195–6 pharmaceuticals: compulsory licensing, 55, 123 IMS Health, 213–16 parallel imports, 239–40 Posner, Richard, 55, 87–8, 156 predatory pricing, 82, 86, 193, 235, 237 pricing: liability and remedy pricing, 145–6 non-discrimination, 146–7 royalties see licence fees squeezes see margin squeezes Priest, George, 130 private international law, IPRs, 43–4 Rambus case, royalties, 199–201, 245 RAND terms, 137, 188, 199–201 refusal to deal: antitrust liability, 19–20, 22 complementary products, 100–1 concerted refusals, 102 conditional refusals, 102–3 constructive refusal, 98, 102–3, 136 margin squeezes, 193, 235–8 costs of regulating, 97 cumulative innovation and bargaining rules, 109–15 essential facilities doctrine, 124–5 impeding marketing, 119–25 impeding research, 116–19 interoperability information, 125–32 IP cases for reform, 112–14 leveraging test, 124–5 mandatory rules, 111–12 overview, 95–135, 261 self-correction theory, 114–15 standard-protecting IP, 132–3 supply of input products, 133–5 discrimination, 103–4 EU, 103–4, 240–2 United States, 103, 194–5 essential facilities see essential facilities test EU cases, 6–7

INDEX

EU Guidance, 217–18, 220, 223, 224, 225, 228, 232–5, 237–8, 239 EU IPRs, abuse of dominance, 217–48 ex ante investment, 160–3 ex post efficiency defence, 163 foreclosure effects, 5 Germany see Germany harm to competition, 150–60 horizontal refusal, 101–2 input foreclosure, 96 IP scenarios impeding marketing of cumulative innovation, 119–25 impeding research, 116–19 input products, 133–5 interoperability information, 125–32 overview, 115–16 preventing clones, 115 standard protection, 132–3 licence fees, fixing, 138–45 overall anti-competitive strategy, 106–9, 238–40 remedies, 136–8 European Union, 136–8, 242–7 liability and remedy pricing, 145–6 licence fees, 138–45 United States, 136–8, 196–201 single monopoly profit, 99–100, 183 termination of supply, 105–6, 188 trade secrets and, 10 tying and bundling, 100–1 typology, 98–109 US right to refuse, 166, 172 exceptions, 181–96 future, 201–3 overview, 176–203 vertical forceclosure, 98–100 remedies: competition remedies, 147–8 European Union, 136–8, 242–7 Germany, 207 liability and remedy pricing, 145–6 licence fees, 138–45 United States, 136–8, 171–3, 196–201 replacement effect, 53–4 research and development: compulsory research licences, 116–17, 168–9, 203 EU block exemption, 205 French exemptions, 116 German exemptions, 116, 207–8, 217 impeding, 116–19 UK exemptions, 116 US exemptions, 116, 168–9, 203 Rey, Patrick, 96 royalties see licensing fees

software see also databases; Microsoft anti-competitive potential, 20 copyright protection, 126 German copyright, 213 interoperability information, 125–32 laws, 17–18 middleware, 197–9 network effects, 127–31, 154 patent protection, 15 termination of supply, 188–9 trade secrets, 131–2 SSNDP test, 153 SSNIP test, 151–3 standards: de facto and de jure, 132–3 IMS Health, 6, 132, 133, 214 refusal to license standard-protecting IP, 132–3 substitutability, 157–8, 159

Samuelson, Pamela, 249, 254 Scherer, Frederic, 55 Schumpeter, Joseph, 1, 4, 53, 57, 58, 84, 253 Scotchmer, Suzanne, 61, 96 Segal, Ilya, 54–5 Shapiro, Carl, 98, 101, 146 single monopoly profit, 99–100, 183

United Kingdom: broadcasting information, 229–30 English Statute of Monopolies, 8 research exemptions, 116 United States: antitrust see US antitrust law constitutional framework, 251–2

technology markets, 156–7 technology transfer, TTBER, 21, 33–4, 118, 206 telecommunications, 139, 143, 158, 180, 186 territorial jurisdiction: EU law, 42–3 US antitrust law, 40–2 Tirole, Jean, 62, 96, 99 trade marks, 9, 12, 14 trade secrets: German law, 217 interoperability information, 131–2 laws, 15–16 nature of rights, 9–10 patents or, 11 protected period, 62–3 refusal to licence and, 10 US law, 175 tragedy of the anti-commons, 13, 112 Trinko case: American values, 252–3 cost of false positives, 82 dominant position, 224 effects, 203, 250 essential facilities, 186 incentives, 165, 180 leveraging, 76, 190 no duty to deal, 7, 136, 180–1 pre-Trinko position, 176–72 profit sacrifice, 87 TRIPS, 4, 209, 255–9, 263 TTBER, 21, 33–4, 118, 205 tying, 22, 71, 100–1

299

300

INDEX

copyright, 16, 18 compulsory licensing, 173 fair use defence, 173–4 independent creation defence, 173 initial v cumulative innovation, 172–5 minor improvements, 173 misuse defence, 174–5, 191–2 no duty to deal, 172, 176–7 remedies, 172–3 reverse engineering defence, 174 rights, 172 database protection, 18 dualism, 257 exceptionalism, 253 IPRs exports, 253–4 incentive theory, 57 misuse doctrine, 6, 169–70, 174–5, 190–2, 250 patents, 15, 17 compulsory licensing, 168 conflict of laws, 43 doctrine of equivalents, 167 fraud, 24 Georgia-Pacific factors, 142–3, 200 hypothetical bargaining, 142–3 initial v cumulative innovation, 166–72 minor improvements, 167 misuse defence, 169–70, 190–1 no duty to deal, 166, 177–8 pooling, 195–6 property v liability rule, 171–2 protection period, 166 remedies, 171–2 research exemption, 168–9, 203 Walker Process claims, 24 political economy, 253–4 royalty free access, 139 sham litigation, 24 software protection, 17, 126, 178–80 trade secrets, 15–16, 175 values, 252–3 US antitrust law: Chicago School see Chicago School compulsory licensing, 168, 173, 186 Kodak II, 196–7 Microsoft, 197–9 overview, 196–201 Rambus, 199–201 cumulative innovation initial v cumulative, 165–175 IP/antitrust, 165–204, 262 dominant position, cellophane fallacy, 152 duty to deal compulsory licensing, 168, 173, 186, 196–201 concerted refusals, 195–6 discrimination, 194–5 essential facilities, 125, 182–6, 202 future, 201–3 margin squeezes, 193–4, 237 misuse doctrine, 6, 169–70, 174–5, 190–2, 250 monopoly leveraging, 75–6, 125, 189–93

NYMEX case, 192–3 pricing, 196–201 scenarios, 181–96 termination of supply, 188 unjustified change in dealing patterns, 187–9 effect doctrine, 40–2 essential facilities, 182–6 future, 202 IP as essential facilities, 184–5 NYMEX case, 192–3 Sherman Act § 2, 183–4 goals, 34–5, 45 initial v cumulative innovation copyright, 172–5 overview, 165–75 patents, 166–72 trade secrets, 175 IP/antitrust interface, 3–4 approaches, 14–15, 24–7, 32–5, 44–6 assumptions, 260 constitutional framework, 251–2 consumer welfare enhancement, 34–5 cumulative innovation, 165–204 EU differences, 249–54, 263 Guidelines, 33–4, 57, 117, 156–7, 177, 182, 194, 195–6 inherency doctrine, 26–7 initial v cumulative innovation, 165–75 mergers, 22–3 monopolistic practices, 21–2 political influence, 252 pure IP solution, 24–6, 60–1 rethinking, 5 territorial reach, 40–2 Trinko see Trinko case vertical and horizontal practices, 21 margin squeezes, 193–4, 237 monopolisation concept, 68–95 consumer harm, 91, 94 enforcement mechanisms, 79 essential facilities doctrine, 125, 182–6, 202 EU differences, 70–9 leveraging, 75–6, 125, 189–93 market structure v consumer harm, 76–9 no economic sense test, 87 potential standards, 80–94 predatory pricing, 193 price discrimination, 103 monopoly leveraging, 75–6, 125, 189–93 no duty to deal Colgate doctrine, 176 copyright, 172 exceptions, 181–96 Kodak II, 178–80 overview, 176–203 patents, 166 pre-Trinko, 176–80

INDEX

research exemptions, 116, 168–9, 203 Trinko, 176, 180–1, 186 Xerox, 177–8, 190 refusal to deal ex ante investment, 160 future, 201–3 no duty to deal, 166, 172, 176–203 reductionism, 203–4 remedies, 136–8, 171–3, 196–201

technology markets, 156–7 territorial reach, 40–2 Waller, Spencer Weber, 149 Werden, Gregory, 156 Whinston, Michael, 54–5 White, Lawrence, 152–3 Williamson, Oliver, 85 Willig, Robert, 86 WTO, 4, 255–9

301