The Canadian Intellectual Property Enforcement Guidelines

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

International Association for Protection of Industrial Property
Montreal, Quebec

November 23, 1998

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Why do we need Canadian IP Guidelines? Any why now?

The facetious answer is that everyone else has them. In 1989, the Japanese Fair Trade Commission introduced guidelines on the application of their Competition Act for patents and licensing agreements. In 1995, the United States antitrust authorities issued their Guidelines for the licensing of IP and in 1996, the European Union adopted its regulation outlining their approach.

Those not issuing them are talking about them. The OECD held a roundtable on the topic last spring. The WTO Working Group on Competition Policy discussed them last month. The issue has surfaced in a number of international agreements, such as the WTO Agreement on Trade Related IP and Chapter 17 of the NAFTA, and, of course, there are a number of high profile antitrust (and some not so high profile) enforcement cases on the go:

• Microsoft litigations in the U.S.
• Magill in the EU
• in Canada, Nutrasweet, Neilsen and Interact all had issues indirectly related to IP, while Teledirect and Warner took the issue head on.

Of course, the answer lies in fairly recent but dramatic changes in the economic landscape

Knowledge and the ability to use it, are becoming the only source of long-term, sustainable competitive advantage. Now that raw material is widely available and decreasing in value, and capital, it is just a commodity to be borrowed globally; knowledge determines success. Wealth has long been associated with oil, such as John D. Rockefeller, or the Sultan of Brunei. Now Bill Gates, a knowledge worker, has usurped that position.

Major growth industries, i.e. micro-electronics, biotechnology, designer -made materials, telecommunications, are all knowledge-based. These knowledge-based industries enable other industries; electronic commerce means that retailing success in the future will be based on software (for information and logistics). Some companies now see that licensing of technology is at least as important to their bottom line as the goods or services they sell. IP is becoming important for strategic planning for many companies.

Another major change in the economic environment is the decline in publicly funded R&D. As this happens, stronger private incentives are needed to replace these funds.

So, basically, all governments are competing to provide the best environment possible for innovation. Competition and IP laws are the two key policy instruments designed to enhance incentives for innovation and its diffusion. However, there has been some tension, historically, between the two fields. Previous thinking saw them as two separate spheres. You know the jargon, IP granted a ‘monopoly' to the inventor, while competition laws were supposed to enhance competition, which IP had just distinguished. This misunderstanding was based on the presumption that the IP granted the holder market power. We now know that this doesn't necessarily hold. I will return to this point later.

Having realized that the real competition in the global marketplace is the competition to innovate, governments are attempting to get market framework laws right, including competition laws. The precise challenge for competition authorities is to ensue the market benefits from healthy competition, without jeopardizing business arrangements that stimulate the incentive to innovate.

So, back to the question of why do we need Canadian IP guidelines. Basically, we are trying to remove uncertainty about how the Competition Bureau will apply the Act. When you minimize the uncertainty, and you enhance the incentive to innovate and diffuse technology, that allows you to attract investment, enhance productivity and create jobs.

To summarize, the purpose of the IP guidelines is to provide the business community with more certainty of how the Competition Bureau will apply the Competition Act to IP, and I hope that this will:

• deter anti-competitive behaviour
• inform affected firms of their rights
• mitigate any chilling effect on innovative behaviour that may exist.

What will be the general approach?

Earlier I mentioned the old school of thought. Now, let me talk about the guidelines world. We now recognize that the two sets of laws share a common economic objective, that is, economic efficiency, and two economic principles are at play. First, we know that private property owners, behaving in their own self interest, put resources to their most desired use. Second, competition translates this self-centred conduct into what is also in the best interest of the public.

Fundamental to the first factor is clearly defined and enforceable property rights, without which people wouldn't participate in the market. IP laws provide these rights for the particular case of ideas and innovation. They allow them to be exchanged and valued. Fundamental to the second factor is that no one should be able to manipulate the market to his/her own advantage, to the detriment of the overall public interest. It is the role of competition law to correct such failure.

The first principle in the IP guidelines, that the same general competition law framework applies to business arrangements involving IP as applied to conduct involving other forms of property, has two implications:

1. it places all types of property on an equal footing, and
2. 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, IP should be treated as any other tradeable property under the Competition Act.

The second principle followed in the guidelines is that the ability to prevent others from using IP does not necessarily confer market power. Market power depends on the extent to which effective substitutes constrain the ability of the intellectual property owner to exercise power over price, or other competitive elements. This must be determined with explicit reference to the actual economic circumstances involved. There should be no presumption that IP rights confer market power to owners of IP.

The third principle in the guidelines affirms the pro-competitive nature of licensing of IP. It flows from an understanding that IP laws exist to facilitate exchange within the market system. Licensing represents the trading and exchange of IP, which IP rights are in part designed to facilitate and promote. In this regard, the exchange or licensing of IP 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 laws/IP right interface from the broad perspective 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, which in turn provides a sound basis for a practical application of the Competition Act to IP right issues. We will continue to apply the sound antitrust principles on a case by case basis.

Some can see that these principles are comparable to those developed for the U.S. guidelines. However, we do expect that there will be some differences in our enforcement approach. Our guidelines (or at least the draft ones that go out for public consultations) will be more general in application. In addition to licensing, they will examine issues related to mergers, abuse of dominance and refusal.

The existence and abuse of the market power issue will remain the critical triggering factor in initiating enforcement actions. Furthermore, a traditional antitrust inquiry will have to be done, including specifying a consistent theory of how the exercise of an IP right, or any associated restraint, will facilitate the existence of market power and its abuse.

Before I take questions, let me explain how the Bureau will proceed with making the guidelines public. It is anticipated that they will be available in late winter. We will be putting them on the Bureau's web site and we will be placing them in the Canada Gazette for comments. Once individuals have had time to review them, we will be setting up roundtables across the country to get feedback. We will then take these into consideration and publish the final guidelines in the fall of 1999. I encourage you either individually or as an association to participate.

Thank you for you attention.