The Competition Policy/Intellectual Property Law Interface: Current Thinking within the Competition Bureau

Remarks of Patricia Smith
Deputy Director of Economics and International Affairs
Competition Bureau

Before the Canadian Institute Conference on
Competition Law and Competitive Business Practices
Four Seasons Hotel
Toronto (Canada)

June 12, 1998

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Introduction

I am going to provide a broad outline of the Bureau's current thinking on IP. I would like to preface my remarks by pointing out that the Bureau's position is still being developed. Therefore, my remarks today may not represent the Bureau's final position on these issues.

Importance of the Competition Law/Intellectual Property Rights Interface

In recent years, there has been an increasing interest in the application of competition principles to high-tech sectors characterized by fast-paced innovation. In 1989, the Japanese Fair Trade Commission issued Guidelines. In 1995, the United States competition authorities issued their joint Antitrust Guidelines. In early 1996, the European Commission adopted a Regulation which superseded the two block exemptions covering patent licensing and know-how licensing. Also in 1996, the FTC conducted a wide-ranging study of the interface of competition policy and intellectual property rights in the high-tech global marketplace. Eighteen months ago, Industry Canada co-sponsored a symposium on Competition Policy and Intellectual Property Rights in the Knowledge Based Economy. As recently as October 1997, the OECD Committee on Competition Law and Policy held a roundtable on Intellectual Property Rights.

In addition, the issue of the intersection of competition policy and intellectual property rights has been recognized in international agreements, such as the WTO Agreement on Trade Related Intellectual Property Rights (TRIPS), and Chapter 17 of the North American Free Trade Agreement (NAFTA). The issue is being studied in the WTO Working Group on the Interaction between Trade and Competition Policy as well.

There have also been, in a number of jurisdictions, enforcement cases in this area. The most visible have been the Microsoft litigations in the United States and the Magill case in the European Union. In Canada, the Nutrasweet, Neilsen, and Interac cases all involved issues indirectly related to intellectual property rights, while the Tele-Direct and Warner cases addressed the issue directly.

Why all the interest? Ultimately, it's about productivity and jobs. Innovation leads to increased productivity, which makes Canadian firms attractive to foreign investment, which creates new jobs. For competition authorities, for the Bureau, the challenge is to ensure all the benefits of competition in markets, but without jeopardizing business arrangements that work to stimulate the incentive to innovate. The Bureau is working to articulate clearly how it will face this challenge. Before talking about this more directly, let me give you some history.

Competition Law/Intellectual Property Law Interface - Development

The Old School : In their insightful article, contained in the Industry Canada's Research Series publication on the Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy, Tom Willard and Joshua Newberg identified distinct periods in the development of the IP/competition policy interface.

In early years, competition law and IP law were viewed as two separate spheres, two separate legal regimes, which were fundamentally at odds. The intellectual property laws seemed anti-competitive, because the view was that granting an intellectual property right (particularly a patent right) was synonymous with granting a monopoly. Competition laws were there to preserve and enhance competition, the very thing the other was there to extinguish.

It is important to recognize that the conflict between these two spheres rests on the presumption that the existence of an intellectual property right can be equated to the existence of market power. However, this presumption does not necessarily hold: the availability of substitutes and entry conditions in the market may well mean that an IP holder does not have market power.

Current School: Now, we have entered the "Guidelines World". We recognize that these two sets of laws share a common economic objective. Let me explain. The fundamental economic principles at play here are the following: First, private property owners behaving in their own self-interest put resources to their most desired use. Second, vigorous and intense competition translates this self-centered conduct into what is also in the best interest of the public. Both factors are important in achieving economic efficiency.

Fundamental to the first factor, that resources find their best use, is the existence of clearly defined and readily enforceable property rights. In the absence of such rights, individual property owners would be unable to reap the full benefits from the use of their property. The incentive to engage in exchange and participate in the market would be undermined, leading to inadequate investment and under-utilized resources. Intellectual property laws provide these rights for the particular case of ideas and innovation.

Fundamental to the second factor, that competition leads to efficiency, is that no one property owner, or group of owners, dominate the market to the extent that they are immune from the disciplining influence of other participants. A dominant owner can manipulate the allocative outcome of the market to his/her own advantage, and to the detriment of the overall public interest. It is the role of competition laws to correct such failures.

Thus, both sets of laws work in step toward the general objective of the maximization of welfare and the most efficient operation of the market allocation mechanism. It is within this broad-based market paradigm that the Bureau approaches intellectual property in its enforcement of the Competition Act.

From the Bureau's perspective, intellectual property laws are but a special case of general property rights, which are fundamental to the efficient operation of the market. IP requires a special set of laws because intellectual property owners are particularly susceptible to being deprived of the rewards of their property. Indeed, intellectual property is virtually costless to replicate, and it is sometimes difficult for the owner to exclude others from the benefits of the property. By giving owners the ability to appropriate the benefits from their property, IP laws allow intellectual property to be exchanged and valued by the market in the same way as other types of property.

Taking as given all types of property rights, including IPRs, competition law is then responsible for correcting situations in which the presence of market power distorts the working of the allocative process. Corrective measures can then ensure that the market allocative mechanism achieves the most efficient outcome.

General Principles

This context provides a background against which the three general principles that are currently being applied by the US guidelines on the Licensing of Intellectual Property can be understood. The Bureau's view is that each of these general principles, namely:

a) intellectual property should be treated as any other property;

b) no presumption should be made that intellectual property rights confer market power on owners of intellectual property ; and

c) the licensing of intellectual property rights should generally be considered to be pro-competitive follows directly from treating intellectual property laws and competition laws as working jointly to foster economic efficiency.

With regard to the first principle, that IP should be treated as any other property, placing intellectual property laws in this context has two implications. First, intellectual property laws do not differentiate intellectual property from other forms of property; rather, they place all types of property on an equal footing. Second, since intellectual property is allocated by the same mechanism that directs other forms of property, it seems natural that it be subject to the same laws governing and overseeing the efficient operation of the competitive allocative mechanism. Therefore, intellectual property should be treated as any other property under the Competition Act.

The second principle states that the ability to prevent others from using IP does not confer market power. Market power refers to the ability of firms to cause price, quality, variety, service, advertising, innovation or other dimensions of competition to deviate from competitive levels. This power depends on the extent to which effective substitutes constrain the ability of the intellectual property owner to exercise power over price, or over other competitive elements. This must be determined with explicit reference to the actual economic circumstances involved. Only in some cases will the single product associated with an intellectual property right constitute an anti-trust market that would warrant market power concerns. Consequently, there should be no presumption that intellectual property rights confer market power to owners of intellectual property. .

The third principle, affirming the pro-competitive nature of licensing of intellectual property, again flows from an understanding that intellectual property laws exist to facilitate exchange within the market system. Licensing represents the trading and exchange of intellectual property, which intellectual property rights are in part designed to facilitate and promote. In this regard, the exchange or licensing of intellectual property should generally be considered to contribute positively to the competitive market process and therefore be viewed as being pro-competitive.

In summary, the Bureau approaches the competition law/intellectual property right interface from the broad prospective that the two legal regimes are both necessary ingredients to the goal of promoting the efficient operation of the competitive process, and that this position fosters the adoption of the three general principles described above. From our prospective, these principles provide a sound basis for a practical application of the Competition Act to intellectual property right issues.

From principles to enforcement

As you can see, the fundamental principles that guide the Bureau's thinking on these issues are those developed for the US Guidelines. However, we expect there to be differences between our enforcement approach and the approach adopted by the US. For instance, American authorities emphasize the distinction between horizontal and vertical arrangements because horizontal arrangements are more apt to receive a per se treatment, while vertical arrangements are subjected to a rule of reason. Some licensing arrangements that may on the surface appear to be horizontal in nature in fact involve an efficient vertical arrangement. A particular example would be an arrangement by which a firm licenses its innovation to another for use in a particular territory. These arrangements could be incorrectly assessed as a horizontal agreement among competitors. But, in fact, it can be more properly viewed as a contract between the manufacturer of an invention and its distributor in a particular geographical market, leading to diffusion of the innovation.

Horizontal and vertical licensing arrangements are less likely to be a useful categorization in the Canadian context. Indeed, provisions of the Competition Act which are likely to be relevant to IP enforcement, by and large call for a full rule of reason approach. Therefore, if there exist efficiency gains from a licencing arrangement, these gains would be fully accounted for in the antitrust analysis carried on by the Bureau.

Although there are many other enforcement issues relating to IP, I will stop here and use the remaining few minutes to explain how the Bureau intends to proceed with the drafting of IP guidelines.

It is our intention to have draft guidelines compiled for this fall, at which time it will be distributed widely for comments. Following the public comment period, we will review the submissions and redraft the guidelines, again for comment.