STRIKING A BALANCE BETWEEN CL AND PATENT POLICY. thomas.cheng@hku.hk
These two areas of law share a conflicting relationship, as competition law restricts the abuse of substantial market power while IPRs may confer market power……whatever is the appropriate competition law–patent balance in developed countries, developing countries should tilt it more in favour of competition law enforcement. Developing countries have stronger policy justifications for imposing more stringent cl restrictions on ip.
The main justification for protecting IPRs, especially patents, is to generate incentives to innovate. This justification is persuasive in developed countries, where most of the potential inventors in the world are located. It carries much less weight in developing countries, most of which possess limited capacity to innovate.
three major types of IPR — patents, copyrights and trademarks
patents give the strongest protection. A patent gives a patentee the exclusive right of exploitation, which entitles the patentee to exclude others from copying or commercializing an invention that falls within the scope of the patent.
an IPR creates market power, and hence competition law issues, if there is absence of substitutes for the ip protected product
example: Assume that a patentee has obtained a patent on a new drug that cures a rare disease. The patented drug is currently the only cure for that disease. Under these circumstances, the patentee will possess substantial market power in the market for treatment for that rare disease. In comparison, with the exception of software copyrights, copyrights are less likely to create substantial market power.
While a patent prohibits an unauthorized third party from replicating a protected technology, even without the assistance from the patentee or with no knowledge of the know-how, copyright protection poses no bar to independent creation of protected content. Copyright law merely prohibits a third party from copying and reproducing the content created by the copyright holder….thus, copyrights, and trandemarks, are subject to cl.
“IP [other than patents, secret know how, or software copyrights], is unlikely to yield sufficient economic power to give rise to monopolization issues”
In terms of market effects, a software copyright is similar to a patent. This may explain why software is often protected by patent as well as copyright.
-how developing countries should balance cl and patent protection, as a competition policy?
they should take into account both allocative and dynamic efficiency considerations.
(ECJ) has repeatedly asserted that a dominant firm bears a special responsibility not to allow its conduct to impair competition….thus, authorities can turn a blind eye to slight anticompetitive conduct by smaller firms, but not by dominant firms…thus, padi focuses on dominant firms.
there is no presumption (of market power) to a patentee….so, what is the test to prove it?:
-Bowman’s test : the patentee can set whatever price and conditions he wishes…. but this is too permissive, since pure horizontal cartelization would be the only behavior that cl could use to prohibit it.
-Régibeau and Rockett propound a similarly pro-patent view: the “independence” of patent law from cl.
-The Baxter comparability test : cl should ensure that a patentee receives benefits comparable to the value of the patent. this test is too biased in favour of cl.
the U.S. Supreme Court has expressed a similarly pro-cl view. In Kodak v. Image Technical Services, held that “power gained through some natural or legal advantage such as patent, copyright, or business acumen, can give rise to (cl) liability, if a seller exploits his dominant position in one market to expand this empire into the next”
EC have similar views: in a number of landmark refusal-to-deal cases. In the Court of First Instance (CFI) Microsoft decision, the CFI concluded: the fact that Microsoft’s (workgroup server interoperability information) was protected by patent and trade secret laws, did not relieve (from cl) the company’s refusal to supply competitors with such information
In IMS Health v. NDC Health, the ECJ laid down the conditions to compel a dominant firm to license its IPRs to competitors (special duty to supply):
- the refusal to license prevents “the emergence of a new product for which there is a potential consumer demand”… see Eastman Kodak v. Image Tech. Servs…..Microsoft v. Commission [2007]
- the refusal excludes “any competition on a secondary market”
the IPR at issue was a copyright and not a patent, but the ECJ did not limit its conclusions to copyrights. The ECJ asserted that only an ip that is indispensable to competitors’ ability to compete with the dominant firm, is subject to this duty to supply. The ECJ defined indispensability by the following two criteria: “whether there are products or services which constitute alternative solutions, even if they are less advantageous, and 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 market to create, possibly in cooperation with other operators, the alternative products or services”
the U.S. the ip company can refuse to license
Striking a balance: allocative efficiency losses (AEL) v dynamic efficiency gains (DEG):
Competition law regularly takes into account the effects of a business practice on innovation, and balances dynamic efficiency against static efficiency. Merger review is one prime example.
cl is focused on allocative efficiency,[ i.e. ensuring that consumers obtain the goods they desire the most at the lowest possible price and that producers produce the goods that consumers desire in the most cost-efficient manner].
However, cl recognizes the importance of dynamic efficiency and that most improvement in consumer welfare often results from technological innovations that give rise to new or better products. Therefore, competition authorities and courts do consider gains in dynamic efficiency.
Patent law exclusivity results in losses in allocative efficiency, because patented products are expensive to first produce. The balance is how to offer potential inventors sufficient incentives without incurring excessive losses in allocative efficiency.
Therefore, both cl and patent law balance allocative efficiency against dynamic efficiency
Two premises underpin Kaplow’s framework:
-First, there are two main policy dimensions — the length of the patent term ,and the scope of patent protection. the latter is governed by a variety of patent and competition law rules
-Second, society should set the second dimension (scope of patent protection) by comparing the reward to a patentee from adjusting a particular rule, with the AEL from the adjustment. With the second dimension, the fewer and the more lax the cl restrictions on patent exploitation, the greater the patentee reward, and therefore the greater the incentive to innovate.
The following discussion is based on Kaplow’s article, “The Patent-Antitrust Intersection: A Reappraisal”.pp. 1821–1845 :
If exclusive exploitation results in production below (eg. in quantity or quality or price) the competitive level, society suffers an (AEL), known as the deadweight loss.
Kaplow proposes the ratio test =[ patentee reward divided by monopoly loss] , to determine the second dimension (scope of patent, ie should cl allow a patent exploitation practice, such as an exclusive license?).
Once the optimum patent lifespan (dimension 1) has been set, what the ratio test seeks to answer is “whether the total reward to the patentee, implicit in the optimal patent life, can be achieved at a lower cost”
The answer is obtained by comparing the ratio associated with a particular patent exploitation practice with the optimal ratio. A patentee reward–monopoly loss ratio can be computed for every patent exploitation practice. The optimal ratio represents the most cost-effective way in which society can induce inventions by adjusting patent life.
If the ratio [for a particular patent exploitation practice] is higher than the optimal ratio, the practice should be allowed, subject to the requirement that patent life should accordingly be shortened. Society would be better off obtaining the incremental patentee reward by allowing a particular patent exploitation practice than by granting the last incremental year of patent protection.
As a second-best solution, Kaplow proposes a cost-effectiveness analysis, which requires the competition authority to derive the ratios for all possible patent exploitation practices and align them from the highest to the lowest. A comparison can then be made of the practices that are currently allowed and prohibited to ensure that the total patentee reward is obtained from practices that have the highest ratios.
Adapting Kaplow’s model to developing countries
adjustments are needed to adapt Kaplow’s framework to the developing country context. At this point, one should recall that one of the basic premises of Kaplow’s framework is that patentee reward induces potential inventors to engage in research and development. The ratio test compares patentee reward against monopoly losses resulting from allowing a particular patent exploitation practice. The underlying policy judgment is that some static efficiency loss in the form of monopoly loss should be sustained to generate patentee reward to induce innovative activities. However, in least developed countries, “the present sacrifice of static efficiency finds no justification in future gains of dynamic efficiency as domestic innovation is unlikely to occur…The implications of this are twofold:
-The domestic welfare impact of favouring patent policy. in developing countries, trade-off of between allocative efficiency and dynamic efficiency is not worth making. Moreover, adopting more permissive competition law standards for patent exploitation, may impede domestic producers’ ability to imitate a foreign technology.
-the international incentive effects of favouring patent policy. potential inventors are in developed countries. Therefore, favouring patent policy will only increase reward to foreign patentees and induce foreign inventors to innovate. A developing country therefore should not have to sacrifice domestic consumer welfare, and imitative capacity, in favour of foreign inventors
A developing country should adopt permissive standards for compulsory licensing to allow domestic imitators obtain ip licences from developed country inventors easily. As long as the licence fee is set at such a rate that it compensates the patentee for its loss of profit from increased competition in the supply of the product, the patentee reward may not be affected. In fact, the licence fee could be set at such a rate that the patentee is indifferent between commercializing the patent itself and licensing it to developing country producers. In that case, the patentee reward will not be reduced at all.