Antitrust Liability for Refusal to License Intellectual Property: A Comparative Analysis and the International Setting

Beginning of article

INTRODUCTION

I. LEGAL BACKGROUND: OVERLAPS AND DISTINCTIVENESS OF
      THE EUROPEAN UNION AND UNITED STATES ANTITRUST
      SYSTEMS
II. COMPARING THE ANTITRUST CASE LAW AND POLICY IN THE
      EUROPEAN UNION AND THE UNITED STATES
      A. The European Approach
         1. The Historic al Hostility Towards IP
         2. Antitrust Liability for Refusal to License in
            "Exceptional Circumstances" and Essential Facility
            Argument
         3. The 2005 Discussion Paper on the Application of
            Article 82 of the EC Treaty
      B. The American Approach
         1. The Cycles of Antitrust Applied to Intellectual
            Property
         2. IP Rights as Shield from Antitrust, but a Shifting Test
            Applies to Patents
         3. The 2007 DOJ--FTC Report on Antitrust
            Enforcement and IP Rights
III. OPEN ISSUES AND THE INTERNATIONAL SETTING
      A. The European and American Systems: A Summary
      B. Open Issues
      C. The International Setting
CONCLUSION

INTRODUCTION

Cyclically, with different ups and downs in time, antitrust and intellectual property ("IP") are perceived as complementary, rather than inconsistent, bodies of laws which share the same goals of promoting innovation and enhancing consumer welfare.

Whether this is true or not, potential for conflicts does exist, such as when unilateral refusals to license, sell, use, or share IP rights by dominant firms affect the dynamics of competition. Yet, if and under what conditions this might happen is one of the thorniest facets of the IP and antitrust interface, even though it is crucial in the knowledge-driven economy and global trade in a time of exorbitant IP growth.

On the one hand, the legal monopoly based upon IP laws gives the owner the right to exclude third parties from the protected asset, subject only to the exceptions established for various purposes by the relevant domestic and international laws (e.g., experimental use). On the other hand, when the legal monopoly impacts on market competition, antitrust enforcement can outlaw or limit the exclusivity and serve as the grounds for a compulsory license order.

Three outcomes may result from these conflicting situations: 1) antitrust trumps per se intellectual property, giving ground to an exception to the exclusivity based upon IP laws; 2) IP trumps per se antitrust, justifying anticompetitive behaviors and shielding them from antitrust scrutiny; or 3) antitrust and IP are balanced, the exclusivity being limited depending on specific circumstances to be ascertained case-by-case.

A comparative analysis of the current European and American systems--the two most mature for both antitrust and IP--shows that the former tends to downplay IP rights in favor of competition, whereas the latter tends to curtail the imperative of competition to preserve the exclusivity based upon IP rights. Yet these are only trends, and on the whole the two systems are still largely unsettled on the matter.

The underlying dilemma is that a broad antitrust intervention, also through a high rate of compulsory licensing orders, may reduce the incentives to invest and thus chill the scientific and technological innovation (a risk apparently more clear in the United States). At the same time, failure to scrutinize anticompetitive behaviors can result in foreclosure of markets to the detriment of consumers, competitors, and the efficiency of the economic system (a risk apparently more clear in the European Union).

Broadening the view to the international dimension, so far rather neglected, gives the occasion to wonder whether there is any bias for the one or the other solution, or simply to figure out alternative options to the classical ex-post antitrust enforcement.

Part I of this Article accounts for the legal background on monopolization claims involving IP rights. Part II provides an overview of the European and American case law and policy. Part III frames the key issues within the international setting, while making proposals on how to go ahead in this field.

I. LEGAL BACKGROUND: OVERLAPS AND DISTINCTIVENESS OF THE EUROPEAN UNION AND UNITED STATES ANTITRUST SYSTEMS

The relevant provisions governing antitrust scrutiny of unilateral refusal to license IP in the American and European systems are primarily those addressed to limit conduct by firms which hold (or attempt to gain in the United States) monopoly power (in the United States) or dominant position (in the European Union), subject to certain conditions. These provisions display a high degree of similarity in their wording and rationale, although some discrepancies do exist.

Article 82 (formerly 86) EC Treaty (1) prohibits abuses of dominant position by one or (rarely) more undertakings affecting trade among member states; [section] 2 of the Sherman Act (2) condemns any monopolization, or attempted monopolization, and conspiracy to monopolize any part of the trade or commerce among states by a firm with market power. (3)

Crucial, and often critical, for the enforcement of both provisions is the monopoly power or dominant position analysis, referred to concrete relevant (product and geographical) markets, (4) whereby a wide range of contending arguments are available to both parties based on the economic analysis. Yet the possession of monopoly power or dominant position is not unlawful per se, (5) since a "conduct" element is required: Article 82 EC Treaty lists, as examples, four categories of likely abuses of dominant position, (6) whereas Sherman Act [section] 2 only relies on precedent to capture anticompetitive behaviors.

As for the differences, relevant for this analysis (7) is that Sherman Act [section] 2 outlaws monopolization and attempted monopolization, i.e., behaviors intended to create or maintain monopoly power, whilst Article 82 EC Treaty only envisages abuses of an existing dominant position. Understandably, because any firm tends structurally towards gaining monopoly profits, the meaning of actual and attempted monopolization and the weight and length of the underlying intent have been the subject of much dispute since the origin of the Sherman Act. (8)

On the whole, both Article 82 EC Treaty and [section] 2 of the Sherman Act aim to regulate the market power concentration and pursue the goal of discouraging firms from engaging in anticompetitive conduct based upon monopoly power, resulting among others in competitors being driven out of the market, hindered in their activity, or discouraged from entering.

Besides specific differences based on monopolization laws, one must point out the "structural" distinctiveness of the E.U. and U.S. systems in the fields of antitrust and IP themselves. First and foremost, the nature of the laws and rights at stake must be emphasized. In the United States, both IP and antitrust are primarily matters for federal laws and enforcement, (9) while IP rights--at least patents and copyrights--enjoy constitutional grounds. (10) Here, moreover, patent and copyright misuse doctrines, (11) resulting from the common law and for patents also from statutory provisions, limit the improper use of exclusive rights when they are used to extend the "scope" beyond the exclusivity granted by the law. With direct relevance in this context, Congress cut back misuse doctrine as applied to patents with the Patent Misuse Amendment Act of 1988, exempting expressly the case of refusal to license from the area of misuse. (12) Even if the provision is internal to the IP system, it may affect antitrust claims, as it actually did in some cases.

In contrast, the E.U. system faces an inconvenient divergence: intellectual property is still in no small part a matter for national laws, especially for patents, (13) and IP rights are enforced mostly on a national basis, (14) while competition is primarily a matter of Community law and enforcement, especially in the modernization era entered into since Reg. (EC) 1/2003. Moreover, the EC Treaty does not endorse any appraisal for patents or other IP rights; rather, it only considers IP rights, in general, as "justified" restrictions or similar to free movements of goods and services among member states. (15) Lastly, not even a patent or copyright misuse doctrine (statutorily or judicially created) is available as an internal instrument of the IP system, beyond antitrust intervention. (16)

A second landmark difference is the nature of antitrust claims: normally private in the United States, (17) and likely involving infringement of IP rights, whereas generally public in the European Union, both at European and national levels. (18) Federal agencies in the United States undertake only "major" antitrust litigation, such as in the case brought against Microsoft in the nineties, (19) so that public antitrust enforcement is but a small part of the system. The European Commission ("Commission"), national antitrust agencies and courts and the European Court of Justice ("ECJ") and the Court of First Instance ("CFI") have been, so far, the main if not the only watchdog of European competition laws. Consequently, the enforcement of European competition law is centralized--so that the coherence is more easily pursued--whereas antitrust laws and policy in the United States are split amidst different courts (and residual agencies). Moreover, most private U.S. antitrust cases are settled confidentially among the parties, so that the terms of the agreement cannot be known. (20) In turn, the differences in the kind of enforcement reflect on important procedural issues affecting, for example, the burden of proof (plaintiff vis a vis antitrust agencies (21)), the interests being enforced (public vis a vis private), and may well determine the final outcome of cases. It may also affect the consistency and reliability of the comparison, because the figures of cases compared are not consistent.

Finally, in the United States antitrust claims that involve patents may end up, depending on the circumstances, before the Court of Appeals for the Federal Circuit, specifically empowered with appellate jurisdiction on patent litigation, (22) whereas no special forum is set up in the European Union for antitrust claims involving patents or other IP rights. In fact, the Commission, the CFI and the ECJ deal with both antitrust claims, general and special, involving IP rights. (23) The different "core business" of the two fora cannot be without meaning for the resolution of conflicts between antitrust and IP, as the analysis below will show.

II. COMPARING THE ANTITRUST CASE LAW AND POLICY IN THE EUROPEAN UNION AND THE UNITED STATES

As seen above, monopolization rules do not deal directly with refusals to share intellectual property rights: antitrust liability for those cases in the European Union and in the United States is solely based on the judge-made law. Therefore, the analysis of the case law is essential, while considering the development of the relationship between IP and antitrust laws from a historical standpoint may account for the reasons underlying the current outcomes and the rift between the compared systems.

The starting point for both the European and American experiences is that, as a matter of principle, IP owners have no duty to share their intangible assets, unless specific conditions occur and provided no objective justifications may be relied upon. However, what these conditions are, how broadly they may derogate from the exclusivity entailed by IP rights, and what are the relevant justifications, is still a matter of contention, domestically and comparatively. (24)

A. The European Approach

1. The Historical Hostility Towards IP

Historically, in the European experience, IP rights have been viewed suspiciously, due mainly to the national boundaries of their grant and scope. (25) Accordingly, they have been considered as barriers to entry restricting the production, partitioning off the common market, and raising prices. (26)

This view refers especially to early cases, during the sixties and seventies, when agreements containing provisions on IP rights were assessed in the light of Article 81 EC Treaty (27) and the same IP rights granted by national laws had to be balanced with the pillars of the European Community, such as the four freedoms of movement, the integration of the markets in the Community area, as well as the competition principles.

Grundig (28) for trademarks, Parke Davis (29) and Centrafarm (30) for patents, and Deutsche Grammophon (31) for copyright, among others, endorse the original hostility towards IP rights, while laying the foundation of establishing the Community exhaustion principle. (32)

Over the same period, and within the above quoted decisions, the ECJ took care to supply the distinction between the "existence" or "grant" of IP rights and the "exercise," crucial for the subsequent case law, whereby only the latter can be limited by the application of competition rules. Other key concepts are those of the "specific subject matter" of the IP right, intended to identify both the length of the admissible "derogation" from the principle of free movement of goods and the "improper use" of the IP right. (33)

Relying on these arguments, the ECJ could strike a balance between Community fundamental tenets with the respect of national IP systems, as required under Article 30 and Article 295 EC Treaty, (34) while laying down a powerful instrument for judicial law reform. (35)

2. Antitrust Liability for Refusal to License in "Exceptional Circumstances" and Essential Facility Argument

Starting from the mid-eighties onwards, the focus of the European antitrust bodies shifted from the Community exhaustion to the issue of antitrust liability for unilateral refusals to license IP rights, under Article 82 EC Treaty.

First in Volvo (36) and then in Renault, (37) the first two cases within this range, the ECJ had to determine, in a preliminary ruling, whether the refusal by car manufacturers to license design rights upon spare parts to independent manufacturers was abusive under Article 86 (now 82) EC Treaty. The court established that the exercise of an IP right, in form of refusal to license, does not amount in itself to an abuse of a dominant position. However, it obiter argued that certain anticompetitive conducts are possibly anticompetitive: "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." (38)

Only ten years later, in the mid-nineties, the ECJ issued Magill, (39) the leading case on refusal to license IP rights, which laid down the "exceptional circumstances" doctrine.

The factual elements of Magill are well known: RTE, ITV and BBC were three television stations operating within the Community that published their guide, each covering exclusively its own programs, protected under copyright. (40) Magill attempted to publish a comprehensive weekly television guide, in competition with separate guides published by each station, but was prevented from doing so by the three copyright owners. (41) Magill lodged a complaint with the Commission, which deemed the refusal as an abuse of dominant position and ordered a compulsory license of copyright on TV listings. (42) Both the CFI and the ECJ upheld the Decision. (43)

Although confirming the Volvo rule (i.e., a refusal to license IP is not in itself an abuse of dominant position), in Magill the ECJ shared the Commission's view that the concrete exercise of IP rights presented "exceptional circumstances" for which it was abusive, because: (a) the dominant firms' refusal to provide basic information in the upstream market impeded the emergence of a new product in a downstream market for which a potential demand existed; (44) (b) there was no justification for such a refusal; (45) and (c) by their conduct, the appellants reserved to themselves (46) the secondary market of weekly television guides by excluding all competition on that market, because they denied access to the basic information which was the raw material for the compilation of such a guide. (47)

Interestingly, both the CFI and ECJ dismissed the argument of one of the appellants (RTE), relying on the inconsistency of the Commission's compulsory license with the exclusivity entailed upon the TV programs by the Berne Convention for the Protection of Literary and Artistic Works, yet not on the merits, but only because the Convention was deemed not applicable to the case under appeal. (48)

Almost a decade later, (49) the ECJ issued the controversial IMS (50) decision. IMS Health tracked sales of pharmaceutical products in Germany and to this purpose it created, in cooperation with the pharmaceutical industry, a structure consisting of 1,860 bricks. This structure became the industry standard, although protected as a database under the German copyright law. A competitor tried to market a competing product using an alternative structure, but due to reticence showed by potential clients in using this alternative standard, it decided to use a structure very similar to that used by IMS. This decision gave rise to a judicial battle at the national (Germany) and Community level. (51) The ECJ had to decide whether the refusal by IMS to license the IP protected 1,860 brick structure was abusive since it was indispensable to operate in the downstream market.

IMS was the occasion for the ECJ to clarify that, according to the case law, for unilateral refusals to license copyright to be considered as abusive, "it is sufficient that three cumulative conditions be satisfied, namely, 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," (52) whereby this market was deemed to be also "potential" or "hypothetical" or merely consisting of two different stages of production. (53)

Remarkably, the court stated as sufficient, not necessary, that the three conditions exist, although when it is so they must be cumulative. Moreover, it apparently mitigated the new product test, qualifying the refusal as being abusive "only where the undertaking which requested the license does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the IP right." (54) It might be argued that the term essentially allows some kind of duplication by the newcomer, although it is ambiguous to what extent. (55) Conclusively, the court did not adjudicate on this point, but it left it to the referring national court to decide the existence of the listed conditions. IMS expressly applied the Magill and Bronner (56) rulings.

Even without involving IP, Bronner plays an important role in the case law on unilateral refusal to license IP, in that it unveiled and refined the European paradigm on the essential facility ("EF"), previously applied in Magill, although the words "essential facility" were never spoken by the Commission or the ECJ within these decisions. (57)

In Bronner, Mediaprint, an Austrian publisher with a large share of the daily newspaper market, operated the only nationwide newspaper home-delivery scheme in that Member State, consisting of delivering the newspapers directly to subscribers in the early hours of the morning. Mediaprint refused to allow Oscar Bronner, publisher of a rival newspaper, access to that scheme for an appropriate remuneration. Oscar Bronner lodged a complaint with the national antitrust court, which referred to the ECJ for a preliminary ruling.

This refusal did not trigger any antitrust liability upon Mediaprint, because the scheme was deemed not essential for the claimant publisher, since other methods of newspaper distribution were available, and thus the refusal was not likely to eliminate all competition on the part of the person requesting the service.

The ECJ came to this conclusion mostly by relying on Magill. It argued that, for the Magill judgment to be effectively relied upon, in order to plead the existence of an abuse of dominant position with reference to "the exercise of "any property right whatever"--i.e. not only IP--it would still be necessary that: (a) the refusal of the upstream input is "likely to eliminate all competition in the daily newspaper market on the part of the person requesting in the downstream …