Competition law and intellectual property (II)
Ian S. Forrester Q.C.

Standardisation and IP rights

The Commission’s Guidelines on horizontal agreements deal with standard setting in the context of Article 81. The Guidelines developed a number of principles that companies should follow in all standard setting process to ensure compatibility with Article 81. Standards should not limit innovation. The Commission will examine the effects of standard on innovation on a case-by-case basis. Participation in standard setting should be open to all, unless such participation leads to inefficiency or some other mechanism exists for the collective representation of all interests. Finally, standards which exclude actual or potential competitors are contrary to Article 81(1) and will not be exempted if third parties cannot access the standard on fair, reasonable and non-discriminatory terms.

Although the Commission Guidelines do not specifically refer to standard setting involving IP rights, they would nevertheless apply to such cases by analogy. One of the critical issues in standard setting involving IP rights is the non-disclosure of proprietary technology (patent, patent applications, copyright, sui generis rights) to industry standard-setting groups.

This issue has been examined by the FTC in the Dell Computer case. In this case, the standard setting body established a rule requiring disclosure of any IP rights needed to practice a proposed standard. The standard setting participants came up with a new product which quickly became widely used and commercially successful. After the standard was adopted and new products based on the standard entered the market, Dell began to assert that these products infringed its patent, despite having twice certified during the standards development process that it had no intellectual property rights. If Dell had provided information on its patent claim up front, the participants could have made an informed choice whether to avoid the Dell technology and opt instead for a technology without any IP conflicts. The FTC alleged that Dell’s belated assertion of IP rights was an unfair method of competition in violation of US antitrust law. Dell agreed to a consent order, under which it would not assert its patent rights against the standard.

A similar issue was addressed by the European Telecommunications Standardisation Institute (“ETSI�) in its IPR policy, which received approval from the Commission. These rules required ETSI members (including the largest national telecommunication operators) to use “reasonable efforts� to inform ETSI in a timely manner when they became aware of IPRs in a given standard being developed. If the member was unwilling to grant licenses, ETSI was to seek a viable alternative technology which would not be blocked by that IPR; if no viable technology was found, work on that standard would cease. Members would merely be required to explain in writing their reasons for refusing to license the IPR in question, and the explanation would be sent inter alia to the Commission. If ETSI itself became aware of IPRs in a particular standard, it would ask whether the owner (member or non-member) was prepared to grant irrevocable non-exclusive licenses on fair, reasonable and non-discriminatory terms and conditions. A refusal would give rise to further consultations, possibly culminating in the non-recognition of the standard in question, to the extent it had already been adopted. The Commission approved ETSI’s policy on the basis that it did not involve a restriction of competition. It approved ETSI’s efforts to prevent one company from hijacking a standard.

In light of these cases, companies involved in the standard setting process should be encouraged to disclose up front any exclusive right to the technology which will eventually form the basis of the standard (similarly to ETSI’s IPR policy), lit is possible that the Commission, similarly to the FTC in Dell, would apply Article 82 to prevent companies from hijacking an open standard through a tardily-asserted IP right claim. In addition, if the standard is assigned to a body participated in by members of the industry, Article 82 may apply to a refusal to grant third parties access to the standard.

An unsettled issue is whether the Commission guidelines on horizontal agreements should also apply to standard setting between a company and the members of the industry in the downstream market. Once the standard is adopted, the industry will have difficulty switching to an alternative standard, since switching costs may be too high and represent an insurmountable barrier to entry for a new competing standard to be developed (“lock-in� effect). In addition, the company controlling the standard may invoke IP rights to protect its products from competition, ultimately to the detriment of future product innovation. As a matter of policy, Article 82 should not be prevented from applying to grant competitors access to the standard, particularly if the company did not disclose its IP rights up front during the standard setting process.

EU legislation

The Community legislation which creates IP rights has affirmed the principle that IP rights remain subject to competition rules.

The Software Directive

Despite the existence of a common international framework (the Beme Convention), copyright law used to have many disparities, notably in the protection of computer programmes. The Software Directive was the first Community measure harmonizing national copyright law. The Directive confirmed that Member States should protect computer programmes as literary works and required them to adopt a common originality test.

The Directive granted authors of software a bundle of exclusive rights. There was concern that these new rights were too broad, and that they could be used to prevent the emergence of competing products.

Recital 27 of the Directive states that

“the provisions of this Directive are without prejudice to the application of the competition rules under Articles 81 and 82 of the Treaty if a dominant supplier refuses to make information available which is necessary for interoperability as defined in this Directive.�
This competition law fallback was explicitly inserted to clarify that in the event that problems arose and the new rights were abused, the Commission would intervene.

The Database Directive

The Database Directive harmonised the copyright protection of databases and introduced a 15 year sui generis right to protect the contents of a database against improper extraction. One of the aims of the Directive was to harmonise the originality criterion to enable more works to benefit from copyright protection. In particular, the Commission considered that the originality criterion under German copyright law - which previously required a work to have qualitative or aesthetic merits before qualifying for protection - was unduly burdensome. The legislation was alert to the dangers presented by the possible misuse of the harmonised copyright and newly-created sui generis right. lit introduced an explicit competition law safeguard.

Recital 43 states that:

“in the interest 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; whereas therefore the provision of this Directive are without prejudice to the application of Community or national competition rules.�

In addition, Article 13 subjects the Directive provisions to the “laws on restrictive practices and unfair competition

Thus any rightholder who chooses to invoke copyright or sui generis rights based on the Directive knows that competition law can constrain that right.

Other EU legislation

Similar language can also be found in EU legislation concerning plant variety rights, biotechnological inventions and design. Draft legislation on a Community patent, includes provisions on compulsory licensing (Article 21). The explanatory memorandum to the proposal explains that the “system of compulsory licenses is designed to provide guarantees against abuses of the rights conferred by the patent. It is based on the requirements of Article 5 of the Paris Convention on the protection of industrial property and on the more recent requirements referred to in Article 2 7(1) and Article 31 of the TRIPS Agreement.� In particular, the Commission may grant compulsory licensing of a Community patent inter alia:
(i) when licensing is needed to use a second patent involving an important technical advance of considerable economic significance in relation to the invention claimed in the first patent, subject to an obligation to cross-license,
(ii) in times of crisis or extreme urgency, or to remedy a practice determined after judicial or administrative process to be anticompetitive.

According to Article 2 1(5) of the draft proposal, a license may be granted under (i) or (IP) only if the proposed user has made efforts to obtain authorisation from the patent holder on reasonable commercial terms and conditions, but such efforts have not been successful within a reasonable period of time. However, the Commission may derogate from this condition in situations under (IP).

A compulsory license must be non-exclusive, and may be cancelled when the circumstances which led to its granting cease to exist and are unlikely to recur. Member States may not grant compulsory licenses in respect of a Community patent. (Article 22)

The reservation in the above EU legislation ensures that the competition rules can intervene in exceptional circumstances like Magill.

Essential facilities cases: Ladbroke and Bronner

After Magill there were a number of cases relating to “essential facilities�. Initially, the cases concerned subjects such as access by a transport company to port facilities which were owned by its competitor on the particular route . Given that it would be impossible for the competing transport company to build a second port, the unjustified refusal to allow access to the port was considered abusive. In the Ladbroke case , an attempt was made to extend this jurisprudence to IP rights.

Ladbroke, which operates betting shops in which punters bet on horse races, brought the Commission before the CFI for having refused, Ladbrokes demand that the Commission should apply the Magill doctrine against its French competitor, the Part Mutuel International. Ladbroke requested PMJ to grant a license of its copyright on televised pictures and sound commentaries of French horse races. lit relied on Magill to argue that without access to the televised pictures and sound commentaries it was unable to compete on the horse-race betting market. lit would have been useful to have access to the pictures, but it was not essential. The Commission refused to pursue the complaint for various reasons. The CFI sided with the Commission while describing Magill as follows :

“The refusal to supply the applicant could not fall within the prohibition laid down by Article 86 unless it concerned a product or service which was either essential for the exercise of the activity in question, in that there was no real or potential substitute, or was a new product whose introduction might be prevented, despite specific, constant and regular potential demand on the part of consumers (see in that connection Joined Cases C-241/91 P and C-242/91 P RTE and ITP v Commission [1995] ECR 1-743, paragraphs 52, 53 and 54).�

This judgment finds that a refusal to license a national IP right may constitute an abuse not only when this refusal prevents the introduction of a new product (Magill) but also when the product or service in question is essential for the exercise of the activity in question.

The “essential facilities� doctrine were assessed by this Court in its Oscar Bronner judgment. Mr. Bronner, the owner of a small daily newspaper company, brought an action against Mediaprint, the dominant daily newspaper company in Austria seeking access to Mediaprint’s nation-wide home delivery scheme (having had a request to this effect refused). He claimed that Mediaprint’s refusal was contrary to Article 82. The European Court held :

“... it would still be necessary, for the Magill judgment to be effectively relied upon in order to plead the existence of an abuse within the meaning of Article 86 of the Treaty in a situation such as that which forms the subject-matter of the first question, not only that the refusal of the service comprised in home delivery be likely to eliminate all competition in the daily newspaper market on the part of the person requesting the service and that such refusal be incapable of being objectively justified, but also that the service in itself be indispensable to carrying on that person’s business, in as much as there is no actual or potential substitute in existence for that home-delivery scheme.�

The Court continued:

“Moreover, it does not appear that there are any technical, legal or even economic obstacles capable of making it impossible, or even unreasonably difficult, for any other publisher of daily newspapers to establish, alone or in cooperation with other publishers, its own nationwide home-delivery scheme and use it to distribute its own daily newspapers.

It should be emphasised in that respect that, in order to demonstrate that the creation of such a system is not a realistic potential alternative and that access to the existing system is therefore indispensable, it is not enough to argue that it is not economically viable by reason of the small circulation of the daily newspaper or newspapers to be distributed.

For such access to be capable of being regarded as indispensable, it would be necessary at the very least to establish, as the Advocate General has pointed out at point 68 of his Opinion, that it is not economically viable to create a second home-delivery scheme for the distribution of daily newspapers with a circulation comparable to that of the daily newspapers distributed by the existing scheme.�

The important feature of the Bronner case is the indispensability test. The test is not subjective (could Bronner replicate the network?), but objective (could a company with the same size as Mediaprint replicate the network?). lit is not material that a newspaper with a low circulation would not find it economic to establish a nation-wide distribution system. In applying the essential facilities doctrine, one must establish that the market could not sustain a competing system at all.

The Oscar Bronner judgment clarifies that under Article 82, a company should not lightly be required to assist its competitor. Levelling the playing field by regularly allowing competitors to use what they do not own can in fact harm the competitive process and consumer interests It confirms that the Magill doctrine is only available in exceptional cases.

Bronner is thus authority for the proposition that wanting to use another person’s assets is not the same as facing extinction if one is denied access to them. It also offers, in the Advocate General’s opinion, useful cautions to quell over-exuberance. But, the three cases — Magill, Labrdoke and Oscar Bronner — constitute a triptych which indicates the circumstances in which the law may be invoked under Article 82. The case on everyone’s IPs is, of course, NDC/IMS.

NDC v 1MS

The recent IMS case was only the second time the Magill doctrine has been applied, 12 years after that landmark initiative. IMS is the world leader in data collection on deliveries by wholesalers of pharmaceuticals and prescription sales. On the German market a geographic format for presenting this data had been developed by IMS and its customers (the pharmaceutical companies) which had become the de facto industry standard. This structure consists in a division of Germany into 1860 zones or so-called ‘bricks’ according to postcodes. When competitors appeared on the German market, IMS relied on copyright to prevent them using the industry standard 1860 brick structure. The competitors challenged before the German courts the use of copyright to prevent them competing , and also complained to the Commission.

The Commission found that there was no real or practical possibility for companies wishing to offer pharmaceutical sales data in Germany to employ another structure which would not infringe copyright. The Commission therefore considered that the refusal of access was likely to eliminate all competition and could not be objectively justified. The structure was indispensable for the competitors to carry on their business, as there were no actual or potential substitutes. The Commission found that IMS’ bringing of copyright infringement actions was an abuse of its dominant position. The Commission adopted an interim measures decision requiring IMS to embark on the process of negotiating a fee-generating license over the copyright on its brick structure.

The Commission’s legal analysis may be divided into three step process:

- First, it relied on Magill to state that compulsory licensing may be requested under “exceptional circumstances�;
- Second, it relied on Ladbroke to state that “exceptional circumstances� may be present where access concerns a product or service which is essential for the exercise of the activity in question;
- Third, it determined whether the circumstances of the case satisfied the Oscar Bronner test to determine whether access to a product or service is essential.
These are:

(i) the refusal to access the facility is likely to eliminate all competition in the relevant market;
(ii) such refusal is not capable of being objectively justified; and
(iii) the facility itself is indispensable to carrying on business, inasmuch as there is no actual or potential substitute in existence for that facility.

The IMS and Magill cases are highly comparable. First, there was an element of discrimination: IMS gave the rights to the 1860 structure away to other companies with which it was not in competition (as did the broadcast companies in Magill). Second, as with Magill, the subject matter of the right, namely German postcodes, is “difficult to justify in terms of rewarding or providing an incentive for creative effort� (in the words of Advocate General Jacobs in Bronner), particularly since pharmaceutical companies were also heavily involved in drawing up the relevant map. lit is clear that a map can enjoy copyright protection, but it is not clear (at least to my sceptical eyes) why conveying information about commercial activities in individual zones on that map should be a breach of copyright in the map. Third, as in Magill, the Commission found that the refusal to license would eliminate all competition. One additional factor present in the IMS case, but not in Magill, was that the 1860 brick structure was an industry standard which when created by IMS and its customers was an open standard, but on which IMS subsequently sought to rely to exclude competition. IMS could be said to have appropriated an open standard . On the other hand, the Commission did not find that a wholly new product would have emerged as a result of the granting of the licence (unlike Magill).

The Commission’s Decision to force IMS to license, for a fee, the copyright rights it enjoyed in its brick structure format is the subject of an appeal by IMS, which has won an interim injunction to have the Decision suspended until judgment in the main action . In granting the interim injunction, the President of the Court of First Instance voiced doubts about the Commission’s non-cumulative interpretation of the conditions regarded as constituting ‘exceptional circumstances’ in Magill. In particular, he was concerned that the Commission did not regard it as necessary that the refusal to license should prevent the emergence of a new product or service for which there is potential consumer demand on a market separate from that where the licensor is dominant. The merits of the Commission interim decision are likely to be resolved by the Court of First Instance when it gives judgment in the main action (or by the Court of Justice in parallel proceedings should it give judgment first).

In both Magill and IMS there was a clear imbalance between the creative effort of the rightholder and the economic advantages flowing from its exercise of the right. EC competition law is fact driven, and takes notice of such imbalances. IP rights are not religious icons. If the rights in question were patents, which were the result of years of expensive R&D in a technology-driven industry, I am confident the Commission would not have reached the same conclusion.

Finally, it is remarkable that both Commission decisions granting compulsory licensing, Magill and IMS, were suspended in interim measures by the European Courts. This shows that compulsory licensing measures are likely to take time to be effective, since they will certainly be appealed before the Courts, and the licensing terms and conditions will be subject to prolonged negotiations between the parties. Generally, a company will not have sufficient resources to wait two years — the average time to get a response from European Courts on the merits of a Commission decision — to know whether it can do business without infringing the IP rights of a dominant company.

The European case law on computer programs represents an interesting exception compared to other IP areas. Here the Commission has not been reluctant to grant compulsory licensing to ensure interoperability between a dominant software and third parties’ interoperable products. Some of the Commission findings in the IBM case have also influenced Community legislation in the areas of computer software and database. This seems to confirm that where IP rights cover utilitarian inventions, competition rules may intervene to allow innovation by competitors. This issue is at the core of pending Commission investigations against US computer giants Microsoft and lintel.

Conclusions

1. European companies are no different from American companies: they invest equally large sums in invention and R&D. European artists and authors engage in the same creative thought as their American counterparts. Europeans expect patent and copyright protection to be given for their invention. They do not expect that their rights will be limited except in the most exceptional of circumstances.

2. This is essentially the position taken by European law: it is only in the rarest cases that a rightholder who seeks to rely on his IP rights will be viewed as abusing a dominant position.

3. Intellectual property rights have presented policy and political problems for the European Union, particularly in that they have been used as a mechanism for hindering cross border trade between EU Member States, less problems having been created by the use of Article 82 to prevent their abusive invocation.

4. There have been only two cases in which the European Commission has actually found there to be an abuse of a dominant position when an IP rightholder refused to license his IP right. In neither case was the finding of an abuse of a dominant position based on the mere refusal to license. In both cases there were additional circumstances over and above the refusal to license.

5. Both cases involved national IP rights which are curious, surprising, arguably aberrant.
Neither is the typical case of a patent, copyright or trademark holder which seeks to rely on his
IP right to further his invention, artistic work, or brand image. I also submit that in each Article
82 case there will be an element of moral misconduct.

6. Predictions of dire consequences for IP rightholders due to the uncertainties created by Commission decisions have not been borne out in practice.