Abuse of IPR is the exception and not the rule

Issue 23 By Thomas Pattloch,[Anti-Monopoly]

Thomas Pattloch, Intellectual Property Officer of the EU Delegation to China, attaches much importance to the adoption of the AML. In his opinion, although it has defined monopolistic activity, the new law fails to explain what constitutes an abuse of IPR and what “eliminates or restrains competition.”  The so-called abuse of IPR should not be used as a pretext or a standard weapon against the claims of Chinese or foreign right holders. As the EC case law shows, the abuse of IPR is an exception rather than the rule.

No fundamental conflict between IPRs and competition law

The wording of Article 55 of AML hints at a controversial relationship between competition law and IPRs: "…this law shall apply to the activities of undertakings which abuse their intellectual property rights and engage in activities that eliminate or restrict competition."

It is absolutely essential to stress that there is no fundamental conflict between IPRs and competition law. In China there on occasion seems to exist a misperception that confuses the mere ownership of IPRs such as patents as being equal to having market power and a dominant position, resulting easily in the likelihood of abuse of IP.

IPR and the competition law share the same goals. In the words of the 2005 discussion paper of the European Commission: "Intellectual property rights promote dynamic competition by encouraging 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."  1

So what constitutes an "abuse of IPR" under the AML? The AML itself defines "monopoly activities", but does not elaborate on how to define "eliminate or restrict competition".

For an abuse of IPR, Article 82 EC and European case law indicates that a dominant position is necessary in order to apply competition rules which may override IPRs. Typical scenarios may include a market standard which is dependant on IPR licensing, de facto monopolies, excessive pricing, abusive enforcement and abusive acquisition of IP, refusal to deal, refusal to license, and refusal to provide necessary information to enter a downstream market. It is important to note that all these scenarios are very narrowly defined, such as excessive pricing or refusal to license.

Article 81 and 82 EC provide the framework, together with examples of secondary legislation, such as blocking exemption regulations, notices and guidelines. Article 81 EC regulates technology transfers and licensing agreements, as well as standardization agreements. Mergers may sometimes also require compulsory licensing to competitors to avoid a monopoly created by a merger. In general, Article 82 EC will be of more relevance to the questions related to a possible abuse of IPR violating competition law rules.

IPRs can create problems in the area of competition law, especially where the IP right holder enjoys a dominant position in the relevant market. Whether there is a dominant position needs to be determined empirically and is not given just by the mere fact to own say a patent. In case of abuse, such as refusal to deal with competitors, the sanction may be inter alia a compulsory license. The ECJ however demands for grant of a compulsory license requirements which are being even higher than under the essential facilities doctrine.

As such, the use of IPRs does not as a rule of thumb constitute an abuse of right or in more precise terms – following the narrower European law – abuse of a dominant position which eliminates or restricts competition: "Intellectual property rights exclude competition ‘by imitation’, which can be expressed economically as a loss of allocative efficiency. However, such exclusion triggers competition ‘by substitution’ for better, more innovative products - and thereby promotes dynamic efficiency. In this sense, a patent, for instance, only grants ‘legal exclusivity’ to the extent that it excludes imitation. But it does not necessarily result in an economic monopoly. In a given case, different products that may be protected by patents can each compete in the same market. Even a patent that results in a market-dominant position today may be thrown from the throne tomorrow by a patent for a more innovative product. In this view, undertakings investing in innovation protected by patents often compete ‘for’ the markets, and not necessarily in a given market." 2

The 2005 discussion paper of the European Commission intends to capture cases of refusal to license by defining the IP right as an input needed by a competitor to enter a different, however, related market. In such circumstances, refusal to license would have to be considered an abuse of a dominant position, provided that the refusal excludes the petitioner of the right from participating in the economic activity in the downstream product market (vertical foreclosure).

The dominant position in a particular market of a say patent holder is per se not unlawful; only where a particular course of conduct is added, an abuse may take place. Such a conduct may consist of unduly exploitation of customers or consumers, or may be found in exclusionary abuses directed against competitors in primary or related markets. The "indispensability" requirement of the Commission’s approach in this respect has to be considered a most important element for any approach to the application of Art. 82 EC to IP. So long as substitution is possible, e.g. by "inventing around" a patent, the IP system works and the exclusivity of the IP right should not be touched. This may include higher costs for competitors to enter a market, or even having to leave the market because of lack of success when competing on the merits. It is not an objective of the competition law to ensure participation in technology owned by a market leader.

The Commission in its paper is pointing out that the IP right may have to be considered indispensable in situations in which the protected technology has become the standard or where interoperability with the right holder's product is necessary for a company to enter or remain in the market.

Excessive or unfair pricing according to the case law decided by the European Court of Justice may be an abuse of a dominant position. This is particularly the case where benefits are reaped which are higher than those that would have been reaped had there been normal and sufficiently effective competition in the market. However, recent case law has made clear the relative high standard required to prove that prices are excessive, and is limited to extreme cases. As regards patents, the ECJ has specifically stated that "higher sales prices for a patented product as compared with that of an unpatented product…does not necessarily constitute an abuse". It is important to note that non-dominant firms can charge what the market can bear. Dominant undertakings are entitled to a fair return, but not an excessive one. 3

European investors concerns for uncertainty of the Anti-Monopoly Law

Industry is concerned about the practical application of this rule. In its current form it is not sufficiently clear what types of behavior are deemed to constitute an abuse of right and eliminate or restrict competition. The law does not clarify who in final instance will be competent to decide these issues, as different administrative agencies such as Mofcom and SAIC will be involved in its implementation.

Uncertainty and interpretation of the law depending on varying local policies are serious concerns for European investors who are the main provider of technology to China. MNCs may reconsider shifting important technology basis to China if an exercise of their rights is branded as "abusive", resulting in an inability to protect their investment through IPRs.

At the same time, the abuse of IPR should not serve as an excuse and standard defence to fend off claims by Chinese or foreign right holders. As European case law shows, abuse of IPR is the exception and not the rule.

It is of great importance for the application of the AML to decide and adopt notices and guidelines on procedures, definition of relevant markets, enforcement authority, etc. For industry, as for the government authorities, uncertainty is the least desirable result of a new law. As the AML is a new type of regulation, China will have to work hard to make the regulations work in practice, especially regarding the abuse of IPR. The block exemption rules of the EC and related rules could serve as a very valuable example for the Chinese government.

There’s no clear stipulation to the set-up of law enforcement organizations in the Anti-Monopoly Law. The presently somewhat ambiguous organizational structure is perhaps the result of internal struggles between various ministries and agencies vying for power and influence. It is likely that these struggles will cease even after the law has been passed, creating jurisdictional disputes, uncertainty, contradictions and a stronger likelihood of inconsistent arbitrary decisions. I therefore believe that it would be more appropriate to have only one enforcement agency in charge of implementing the AML.

Mere refusal to license does not per se constitute an abuse

In this era of knowledge-based economy, market dominance of a company is mainly built on its tech dominance. The result is that a company’s standards can become the standards of an industry. How can innovation be encouraged in that case?

The statement that market dominance of a company is mainly built on its tech dominance as such is not entirely correct. Certainly in the entertainment industry content and not technology dominance may result in increased market shares. Other factors besides technology dominance play a significant role in determining market share, such as service infrastructure, branding, etc. However, in some IP intensive industries such as pharmaceuticals or the ICT industry, technological leadership is indeed an important part of a dominant position in the market.

De facto standards and sometimes even standards which are being created by Standard Setting Organizations may contain IPRs, increasing the leverage of an IPR holder in an industry and sometimes helping to create a dominant position. It must be noted that in principle the mere refusal to license does not per se constitute an abuse. Under EC case law, only under "exceptional circumstances" can a license be requested in spite of refusal to license: 1) the petitioner for the license intends to offer new products or services not offered by the right holder, for which an actual or potential consumer demand exists; 2) the refusal to license is not justified by objective considerations; 3) the refusal to license reserves the right owner the market by eliminating all competition. In a nutshell, a compulsory license is usually only available for new products or follow-up inventions, not "me too" inventions. Especially in cases where the market can be entered without a license, although at higher costs, there is also no reason to grant a compulsory license.

In a recent decision of the German Federal Supreme Court, the court dealt with the question of abuse of market dominance to allow a competitor to use a patent for an invention that had been accepted as industry standard. According to the decision, the law has to take into account that in standardization cases the market would not accept a more innovative product. The only way to compete with the patent holder is to imitate the standardized, patent-protected product. As a result, a duty to license cannot be excluded, but a license would have to take usual market rates of licensing fees into account.

Additional considerations also have to be made in these types of cases: A refusal could be regarded as justified if a right holder has invested so heavily in the development of protected technology that he needs to make the revenues stemming from it by himself in order to adequately compensate for his investment. In cases of de facto standards, predictions have to be made whether the standard might be overthrown by superior technology. A merely very successful technology which is not indispensable for operating in a market does not raise competition concerns. Dominance must consist of the attributes of a de facto monopoly which is also an indispensable input to another product to create the first step in the test of exceptional circumstances. The indispensability test is therefore another important requirement for compulsory licensing due to refusal to license.

European competition law is for the protection of competitors as well as consumers and customers

In Microsoft’s case, its competitors, instead of consumers, are affected by Microsoft’s behavior. However, the anti-trust law is supposed to be pro-competition and pro-consumer, not pro-competitor. Does EU’s verdict go against that idea? Microsoft lost the lawsuit in EU after it won in the US. What differences between EU and US on the understanding of the anti-trust law does the case imply? Furthermore, there are European technologies on the Chinese market. What will happen if China does the same to European technologically dominant companies as the EU has done to Microsoft?

The Microsoft decision found that Microsoft has abused its almost-monopoly created by the Windows operating system for computers to intentionally restrict interoperability between its own servers and those of competitors.

The objectives of European competition law must not be reduced to enhancing aggregate welfare (efficiency) in the sense of economic theory. It also protects the economic freedom of market agents and the interest in economic integration and strives for the participation of consumers in the benefits of competition, advocating a consumer surplus standard as opposed to an aggregate welfare standard. The European Court of Justice has interpreted Article 82 EC to apply against conducts by a dominant undertaking causing damage to the competitive structure of markets already weakened by the presence of its dominance on a market. Such interpretation includes protection of competitors as well as consumers and customers.

The criticism by the Antitrust division of the US Department of Justice in the Microsoft case regarding the decision of the Commission has been directed against the code removal, citing concerns that antitrust policy must avoid chilling innovation and competition even by dominant companies. However, it remains unclear whether alleged copyright and patent protection meriting protection was applicable in the case. Notwithstanding this uncertainty, Microsoft appeared to leverage its dominant position into a dependant aftermarket without competing on the merits. Competition on the merits would have meant a continuation to license the relevant interface information to its innovating competitors and compete on price and quality. Allowing the refusal to license would have created a chilling effect on innovation by competitors in the dependant aftermarket, such as added functionality that Microsoft does not offer to consumers.

Technological dominance does not automatically mean economic dominance. External factors which include definition of the relevant market and conditions for market access must empirically be taken into account. China should follow a concept of dynamic competition according to which competition by imitation is excluded in order to promote competition by substitution. The determination of abuse of a dominant position may naturally follow comparable reasonable and predictable requirements as stipulated under current EC case law.

1.European Commission, Discussion Paper on the application of Article 82 of the Treaty to exclusionary abuses, 19.12.2005, http://europa.eu.int/comm/antitrust/others/discpaper2005.pdf
2.Comments of the Max Planck Institute for Intellectual Property, Competition and Tax Law on the Directorate-General Competition Discussion Paper of December 2005 on the Application of Art. 82 of the EC Treaty to Exclusionary Abuses
3.Steven Anderman, EC Competition law and intellectual property rights

About the author:
    Thomas Pattloch is Intellectual Property Officer of the EU Delegation to China.

                                      (The English text of this article is provided by the author.)

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