This paper was written at the behest of the WTO, and can be found here. It examines the evolution of national competition policies and enforcement approaches vis-à-vis intellectual property rights (IPRs) in major jurisdictions over the past decades. I think it is particularly useful because it provides an integrated analysis of some of the most important developments at the intersection between competition and IP.
A first section describes how the application of competition law in IP has been characterised over the last decades by the replacement of form-based approaches for case-by-case analyses of the effects of IP-related practices. Furthermore, following a period in which competition authorities largely deferred to intellectual property offices with respect to issues concerning the scope and legitimacy of patents and other IPRs, leading agencies have devoted significant resources to advocacy efforts aimed at ensuring the integrity of patent regimes and avoiding the issuance/recognition of ill-founded rights that potentially weaken competition or impede follow-on innovation without serving valid off-setting purposes.
The paper focuses especially on the underlying process of economic learning that, the authors suggest, has driven relevant policy changes. ‘The evident evolution of competition policies and enforcement approaches vis-à-vis IPRs over the past several decades derives first and foremost, we suggest, from a far-reaching process of economic learning that has taken place during the same period. The learning process has encompassed, in addition to other aspects: (i) improved understanding of the role and effects of vertical licensing practices and single-firm exclusionary conduct, including new understanding of the harmful effects of a range of specific practices associated with the exercise of IP; (ii) a far more subtle understanding of the role of intellectual property itself in relation to market power and its exercise than competition agencies once held; and (iii) a better appreciation of problems associated with IP regimes themselves, and the role that both competition enforcement and advocacy work can play in addressing adverse implications for competition, innovation and the diffusion of new inventions and creative works.’
Part 2 of the paper outlines the breakthroughs in understanding that have underpinned the evolution of competition policy approaches toward intellectual property licensing arrangements in the US, Canada and the EU. In broad terms, these jurisdictions transitioned from enforcement approaches that condemned many vertical licensing practices out of hand (‘per se rules’) to a considerably more nuanced approach entailing case-by-case analysis of competing pro- and anti-competitive explanations of the practices in question.
These developments reflect a number of fundamental innovations in competition policy and economic thought:
- First, the treatment of restrictive intellectual property licensing arrangements that are inherently vertical in nature was greatly influenced by the revision of thinking and enforcement approaches concerning vertical market restraints generally.
- Second, the realization dawned that IPRs do not, in most cases, constitute ‘monopolies’ in an economically meaningful sense – instead, in many or (possibly) most cases, competing technologies or other IP exist that effectively preclude the exercise of market power by individual rights-holders.
- The third insight was that, even where IP rights create market power, they may nonetheless serve the over-riding purpose of promoting competition in a dynamic sense, i.e. creative destruction and competition through innovation.
A number of other intellectual developments have also taken place, even if they remain controversial. These include: (i) the concept of innovation markets, which analytical usefulness has been doubted; and (ii) the idea of IP rights as property rights, which has been challenged on the grounds that IP rights are intrinsically more probabilistic than real property. An important related insight shared by many is that intellectual property rights – especially patents – create greater incentives for and susceptibility to opportunistic or anticompetitive behaviour than most forms of real property.
Part 3 elaborates on the foundational insights that have motivated competition policy interventions with respect to ‘newer’ issues. The main development here is that the focus of competition intervention has been on specific behaviours and contexts associated with intellectual property rights that are likely to have anti-competitive consequences – and in particular that impede or undermine incentives for innovation – as opposed to the more generalized scepticism of the role of IP rights that sometimes motivated competition law interventions in the past. The authors provide a number of examples:
- Agencies have devoted increased attention to mergers that could potentially weaken the incentives for innovation and thereby impede economic progress. This is apparent in how the preservation of incentives for innovation was a core consideration in the assessment of pharmaceutical industry mergers, where the divestiture or mandatory licensing of IP rights constituted an important element of the remedies applied.
- Anti-competitive patent settlement agreements, such as those that sought to deter entry by generic competitors in pharmaceutical markets.
- Patent thickets and arrangements to facilitate their successful navigation. Patent thickets occur when an overlapping set of patent rights requires firms seeking to commercialize new technology to obtain licenses from multiple patentees. Such situations are common today in industries such as semiconductors, computing and telecommunications, although they are by no means limited to those sectors.
Patent pools and/or cross-licensing can be efficient responses to patent thickets in many cases. This is notwithstanding that they also raise potential competition law concerns. A key insight in this regard is that pools or licensing arrangements combining complementary patents are generally efficiency-enhancing; whereas pools comprised of substitute patents can indeed create market power and are a legitimate focus of competition policy concern. The impact of patent thickets is heightened by the risk of ‘hold-ups’ – that is, the danger that new products will inadvertently infringe on patents issued after the products were designed.
- ‘Hold-ups’ are particularly problematic in the context of arrangements governing access to standard-essential patents. The paper here serves perfectly to summarise the main conclusion of the emails of the past couple of weeks: ‘A context in which hold-ups are likely to raise particular concerns is that of standard-setting organizations (SSOs). Such organizations provide a forum for the development of new standards through the sharing of information on pertinent inventions as they are developed. Their role is particularly important in industries where the need for standardization is recurring, for example, because there are many players and technology evolves rapidly. However, once a standard is adopted and related investments have been made, firms implementing the standard may find switching technologies to be costly, creating a situation potentially facilitating the exercise of market power. (…) [However] Not all observers agree on the extent of the threat posed by hold-ups in relation to standard setting organizations. Indeed, some argue that ‘hold-out’ – infringement of the SEPs themselves – is a greater problem. While further experience and evaluation may indeed be needed with respect to the relative magnitude of these concerns, the importance of these issues as a focus for reflection and analysis is not in doubt.’
- Single-firm exclusionary practices and other abuses of a dominant position in network industries. These industries include telecommunications, computer hardware and software, and many other industries that are the building blocks of the new, information-based economy. These industries often require common access to unique facilities, and are prone to the possibility of ‘tipping’ or ‘locking into’ inefficient standards. As a result, the risk of undue exercise of market power through anti-competitive licensing and other practices is particularly high in these industries: ‘In the light of these concerns, some authors have suggested that assets protected by intellectual property which are critical to accessing a network should be capable of being treated as ‘essential facilities’ under competition law and, therefore, subject to mandatory rights of access in circumstances where a refusal to license meets the general requirements of the essential facilities doctrine.’ However, this suggestion is controversial, not only because the right to refuse a license is perceived to be inherent to IP rights, but also because granting ‘excessive scope for invocation of the essential facilities doctrine as a tool for accessing specific technologies could erode commercial incentives for development of alternative technologies.’
Another area which has been a recurring concern in multiple jurisdictions is the bundling of technology-embodying products, or of technologies themselves – in which the sale of one product (or the licensing of a particular technology) is conditioned on the purchase of another. More recent concerns involve restricting interoperability and leveraging of market power.
Part 4 outlines some of the core policy concerns and insights driving the increased emphasis that leading competition authorities now devote to policy advocacy and research in relation to the scope and definition of IP rights. While advocacy has become a prominent tool in a competition agency’s toolbox, the importance of targeted competition advocacy activities is, perhaps, particularly salient in the area of intellectual property. Problems: ‘observed in the competition policy realm [often] have their roots in the intellectual property rights-granting process. First-best solutions to competition problems would consist of improvements in the rights granting process. The prosecution of antitrust cases—for example, the application of monopolization concepts to expand access to IP rights—may be a crude, second-best solution to cure weaknesses that reside in the rights granting process’.
This section then provides an overview of various research and advocacy efforts undertaken by competition agencies as regards IP, particularly in Canada, the US and the EU. Particular attention is devoted to the US Federal Trade Commission 2003 Report ‘To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy’ and its follow up – including last year’s report on Patent Assertion Entities. The authors note that the impact of the foregoing advocacy activities has not at all been limited to the jurisdictions in which they have been carried out. Rather, these efforts have resonated and influenced the evolution of policies around the world
The paper concludes that competition policy applications in the intellectual property sphere are matters of fundamental importance for economic advancement and prosperity, and have a direct bearing on innovation, growth and the diffusion of new technologies. Indeed, the roles of IP and competition policy are now sufficiently intertwined and interdependent that neither can be well understood or applied in an optimal fashion in the absence of the other. Secondly, the thought evolution described above implies that successful policy applications require careful study of market structure and behaviour, not in the abstract but with reference to the particular markets affected. Thirdly, the paper concludes that these developments augur favourably for the prospects of continuing gradual and incremental convergence in national approaches in this area, on the basis of continual learning and informed self-interest.