Competition Policy and Intellectual Property Rights: Complementary Framework Policies for a Market Economy

Notes for an Address by Howard I. Wetston
Director of Investigation and Research
Competition Act
Consumer and Corporate Affairs Canada

To the Conference on Global Rivalry and Intellectual Property:
Developing Canadian Strategies
Sponsored by the Institute for Research on Public Policy
Toronto, Ontario

April 25, 1990

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Good morning. It is a pleasure to be here today to discuss the interface between competition policy and intellectual property rights in the Canadian economy. I believe there is a growing recognition in Canada of the importance of competition policy as a framework policy for economic development in the 1990s. There is also increasing awareness of the close relationship between the objectives of competition policy and intellectual property. This is particularly so in the present environment of accelerating technological change and global competition in which economic framework laws are an important determinant of our international competitiveness.

In my remarks today, I shall first discuss the basic competition policy perspective towards intellectual property rights (IPRs) and how this perspective has evolved over the years. I shall then review certain sections of the Competition Act that have specific implications for intellectual property rights and licensing practices. This discussion will show that Canadian competition law provides a balanced framework for addressing IP licensing issues.

In the next part of my remarks, I will turn to the matter of policy development--the role that the Bureau of Competition Policy has played in the modernization of Canada's intellectual property legislation. I will then comment briefly on some important competition policy-intellectual property issues for the 1990s, with particular attention to the international sphere. In this connection, I shall also mention some work proceeding under the auspices of the OECD Committee on Competition Law and Policy that I believe will be of interest to you.

I. The Competition Policy Perspective Towards IPRs

At the outset, I should mention that the perspective towards IPRs in Canada and abroad has changed considerably in the past decade. Prior to the 80s, IPRs were often viewed as "statutory monopolies"--a form of necessary evil that could easily impose excessive costs on consumers. Consistent with this view, there were major efforts by competition officials worldwide to constrain the exercise of IPRs.

It is now recognized that intellectual property rights serve a useful, pro-competitive function in a market-based economy.¹ Firstly, from an economic perspective, intellectual property rights foster innovation and creative activities. This enhances consumer welfare and helps to provide a more competitive marketplace. In a complementary fashion, competition policy, as one of its main objectives, seeks to promote consumer welfare by removing impediments to the efficient functioning of markets.

Today, there is also an improved understanding of the economic effects of trade practices such as tied selling, field-of-use restrictions and other vertical market restraints which are sometimes employed in IPR licensing arrangements. Whereas in the past these practices were widely viewed as intrinsically anti-competitive, it is now accepted that in many cases they serve useful, pro-competitive functions.² Licensing practices are of concern primarily where they serve to create or enhance market power, rather than to capture the economic value inherent in an invention or product.

Accordingly, while the Bureau of Competition Policy remains ready to address actual anti-competitive abuses associated with IPRs, the Bureau also recognizes that in the vast majority of instances the exercise of IPRs through licensing and other arrangements is consistent with sound competition policy objectives.

II. The Competition Law Framework for the Exercise of IPRs in Canada

As most of you are no doubt aware, in 1986 Canada's competition legislation was substantially overhauled and modernized by Parliament. The resulting legislation, the Competition Act, incorporated important new provisions relating to mergers, abuse of dominant position, specialization agreements and other matters.

The present legislation provides a case by case approach for dealing with IPRs and related licensing practices. This is evident, for example, in the abuse of dominance provisions which were added to the legislation in 1986. These provisions replaced the old monopoly provision of the Act and form a key element for dealing with restrictive business practices.

The abuse of dominance provisions are non-criminal and provide remedies for a broad range of anti-competitive acts. A non-exhaustive list of such acts is provided in section 78 of the legislation. The list includes acts such as requiring or inducing a supplier to sell primarily to certain customers, or to refrain from selling to a competitor, with the objective of preventing a competitor's entry into, or expansion in, a market. It should be emphasized, however, that the list of anti-competitive acts that may be dealt with under the abuse provisions was deliberately left open-ended by Parliament. Accordingly, this section is potentially applicable to a broad range of IPR licensing practices such as tie-ins, field-of-use or exclusive purchasing requirements.

It is worth noting that the abuse of dominance provisions contain a limited exception for the exercise of intellectual property rights. This exception applies to acts that are engaged in "pursuant only to the exercise of" rights or enjoyment of interests derived under intellectual property statutes. This exception does not, however, provide a blanket exemption for intellectual property holders. The wording of the exception clearly suggests that the abuse of dominance provisions remain applicable to practices that are shown to constitute abuses of intellectual property rights.³

You may be aware that the first application by the Director of Investigation and Research under the abuse of dominance provisions, the NutraSweet matter, is currently before the Competition Tribunal. It is worth noting that intellectual property rights figure importantly in this case. In particular, a key allegation of the Director in this matter is that the respondent has used its well-known trade-mark to foreclose competition in the market for aspartame by paying an allowance to customers who display the trade-mark.

Furthermore, in the NutraSweet matter, in addition to the effect of the trade-mark allowance, exclusive purchasing requirements were imposed on major customers who agreed to use the trade-mark. The impact of the NutraSweet company's patents in Canada and the U.S. is also an important part of the background to the case. This will no doubt be an important precedential case not only from the abuse of dominance perspective but also to help clarify some issues regarding the competition policy-intellectual property interface in Canada.

Another key provision of the Competition Act relating to intellectual property rights is section 32. This section, a predecessor of which was first enacted in 1910, permits the Federal Court of Canada, on application by the Attorney General, to take various remedial measures respecting anti-competitive abuse of patents, copyrights, trade-marks or registered industrial designs. The available remedies include orders: (i) declaring void practices in licensing agreements; and/or (ii) restraining any persons from carrying out such objectionable provisions.

Two points regarding section 32 should be noted. First, the taking of any remedial measure is contingent on establishing before the Federal Court that the practices in question had "undue" anti-competitive effects. This is essentially the same test that applies under the conspiracy provision of the Act. The cases under the conspiracy provision have established that this test embodies a high threshold of anti-competitive effects. Second, the Competition Act also stipulates that remedial measures taken under this section may not violate Canada's international obligations with respect to the protection of IPRs.

Section 32 has been applied in two previous cases, the Union Carbide cases of the early 1970s. These cases involved field-of-use restrictions and other provisions employed by the Union Carbide company in its patent licensing agreements. Each of the cases was resolved through a negotiated settlement between the Attorney General and the company that addressed the primary competition concerns.

Other sections of the Competition Act that are applicable to IPR licensing arrangements also embody appropriate threshold requirements and tests that limit their application to licensing practices. For example, the various provisions applicable to tied selling, exclusive dealing and territorial market restriction all require that the practices in question be shown to "lessen competition substantially." The point is that the current Competition Act provides remedies for dealing with abusive practices without interfering in normal commercial licensing practices relating to IPRs. This is broadly similar to the approach followed by other major industrialized countries.

I would like to mention one other section of the Competition Act which was added in the 1986 amendments and which refers specifically to patents, namely section 86, concerning specialization agreements. In conjunction with sections 85 and 91, this section provides for the non-application to registered specialization agreements of the conspiracy section of the Competition Act as well as section 77 of the Act as it relates to exclusive dealing. The purpose of this potentially very important (but to date unused) section is to facilitate industrial rationalization and help Canadian firms to compete effectively in international markets.

The reference to patents is contained in subsection 86(4) of the provisions governing specialization agreements. As a condition for registration of an agreement, this subsection authorizes the Competition Tribunal to make orders requiring the wider licensing of patents. In effect, therefore, subsection 86(4) makes it possible for firms to avoid potential liability for certain actions relating to specialization agreements through undertakings to ensure wider licensing of patents and/or other competition measures.

III. The Role of the Bureau of Competition Policy in Providing Input to Intellectual Property Legislative Modernization

The Bureau of Competition Policy has long recognized that ensuring an appropriate interface between competition policy and intellectual property is not simply a matter of enforcing existing legislation. Rather, it requires staff of the Bureau to carefully monitor and provide direct input into the legislative and policy development process. For example, the Bureau participated extensively in the development of the 1987 amendments to the compulsory drug patent licensing provisions of the Patent Act, to ensure that competition policy concerns were fully considered.

More recently, the Bureau of Competition Policy participated actively in the development of competition policy-related aspects of the 1988 Copyright Act amendments. An important thrust of the amendments was to foster the establishment of collective societies to administer rights in new fields of copyright, such as photocopying. This required a limited exemption for certain collective licensing arrangements from the Competition Act.

Another important aspect of the 1988 Copyright Act amendments which we were involved with was a consequential amendment to section 32 of the Competition Act, which I mentioned earlier. Prior to 1988, this section provided remedies to deal with anti-competitive abuses pertaining only to patents, trade-marks and industrial designs. The 1988 consequential amendment extended this section to cover anti-competitive abuse of copyright as well. This was an important balancing aspect of the Bill.

Recently, a similar amendment was also included in Bill C-57, the Integrated Circuit Topography Act, which is currently before Parliament. This will ensure that the new exclusive rights that will attach to semiconductor chip designs will also be subject to the remedies available under this provision of the Competition Act. I believe these competition policy-related provisions, while admittedly technical in nature, will help to ensure the efficacy of the new legislation.

IV. Competition Policy-Intellectual Property Issues for the 1990s

With the globalization of markets, there is more and more interest in measures to foster Canadian international competitiveness. In this connection, there will likely be renewed interest in the treatment of intellectual property licensing arrangements and their implications for technology transfer.

I believe the existing provisions of the Competition Act provide a sound basis for dealing with IPR licensing practices. This applies to international as well as domestic licensing agreements that impact directly on Canadian firms. It might be helpful, however, to the business community if the Bureau of Competition Policy developed a set of guidelines setting out the application of the relevant provisions of the Competition Act to technology licensing agreements. For example, in the U.S. and Japan, the antitrust authorities have recently issued guidelines that describe the application of their antitrust laws to international licensing arrangements and other matters.⁴ Of course, this would be a complex exercise which would require considerable consultation both within Consumer and Corporate Affairs Canada and with interested parties.

A related issue concerns the regulatory treatment of restrictive licensing practices in multilateral discussions respecting IPRs. In the past, representatives of various developing countries have proposed the implementation of international agreements to regulate or prohibit restrictive licensing practices at the multilateral level.⁵ While we recognize their concerns, it is questionable whether the development and international diffusion of technology would, in fact, be facilitated by strict regulation of licensing practices. As I have indicated previously, we believe that many of these practices are not generally harmful to competition and can even serve valid efficiency-related functions.

A third competition policy-intellectual property issue for the 1990s concerns the role of IPRs in facilitating international price discrimination and market segmentation. This role arises from the ability of IPR owners in some circumstances to use their rights to bar parallel importation of legitimately made foreign products. On the surface, this may appear to be inconsistent with the general trend toward freer movement of goods, services and capital in international trade.

A measure that is sometimes proposed to address this situation is the implementation of exhaustion of IPRs in international trade. In general terms, exhaustion refers to the elimination of the existing rights of IP holders to control parallel imports of products embodying their intellectual property.

A study of this issue prepared in the Bureau of Competition Policy indicates that the exhaustion issue is even more complex than first meets the eye.⁶ The study suggests that, by eliminating the ability of IPR owners to segment international markets, the implementation of exhaustion "across the board" could actually undermine the incentive for rapid introduction of new technology into Canada. In any event,implementation of exhaustion would also prove difficult without substantial standardization of intellectual property legislation internationally.

In considering these and related issues respecting the competition policy-IPR interface, interested persons should have regard to the ongoing work in this area by the OECD Committee on Competition Law and Policy. In 1989, a Working Party of the Committee completed an extensive study of the competition policy treatment of intellectual property rights in OECD member countries.⁷ Recently, the Working Party has initiated a follow-up study on competition policy and franchising. I expect that the OECD Working Party will remain active in the intellectual property area for some time to come, and look forward to participating in this work.

In closing, I would like to add that, in our view, innovation is best facilitated by maintaining structurally competitive markets. At the same time, innovation itself increases competition in the affected markets and facilitates the efficient functioning of a competitive market-based economy. Seen in this light, the Competition Act and Canadian intellectual property laws clearly represent complementary means to serve closely related objectives.

NOTES

1. See, generally, Robert D. Anderson, S. Dev Khosla and Mark F. Ronayne, "The Competition Policy Treatment of Intellectual Property Rights in Canada: Retrospect and Prospect" (Bureau of Competition Policy: Mimeo, 1990). To be published in a forthcoming volume by IRPP to commemorate the Centenary of Canadian competition law.

2. Organisation for Economic Co-operation and Development, Competition Policy and Intellectual Property Rights (Paris: 1989).

3. See R.D. Anderson and S.D. Khosla, "Reflections on McDonald on Abuse of Dominant Position," Canadian Competition Policy Record, vol. 8, no. 3, September 1987, pp: 51-60.

4. See U.S. Department of Justice, "Antitrust Guidelines on Internatinal Operations" (Washington, D.C.: U.S. Government Printing Office, November 1988) and Fair Trade Commission of Japan, "Guidelines on Unfair Trade Practices With Respect to Patent and Know-how Licensing Agreements" (1989).

5. For background, see J.P. Palmer and R.J. Aiello, "International Technology Exchange: An Economic Analysis of Legal Proposals," in John J. Quinn, ed., The International Legal Environment (Toronto: University of Toronto Press for the Royal Commission on the Economic Union and Development Prospects for Canada, 1986), pp. 239-270.

6. R.D. Anderson, P.J. Hughes, S.D. Khosla and M.F. Ronayne, "Exhaustion of Intellectual Property Rights in International Trade" (Hull, Quebec: Bureau of Competition Policy, Economics and International Affairs Branch, mimeo, 1990).

7. Organisation for Economic Co-operation and Development, supra, note 2.