Intellectual property & competition law: innovation in the 4th industrial revolution

Remarks by John Pecman, Commissioner of Competition

LESI Young Members Congress — 2nd Pan‑American Event: Into the 4th Industrial Revolution

Ottawa, Ontario

June 10, 2016

(As prepared for delivery)


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Introduction

Thank you, Natalie.

I am grateful for the opportunity to be here with you to discuss the interface of intellectual property and competition law at such an exciting time—as we head into the 4th Industrial Revolution, the subject of your conference.

We’re experiencing a wave of technological and business innovations that is disrupting traditional industries, challenging the status quo and offering new opportunities for economic growth.

For the Bureau, as with other competition enforcement agencies around the world, these rapid changes have led us to re‑examine the intersection of IP and competition law. As we head into the 4th Industrial Revolution, our approach will be to review and revise our guidelines more frequently to keep pace with rapid changes, so we can continue to provide effective guidance and more certainty to inventors and innovators.

Today, I would like to talk to you about the Bureau’s recently revised Intellectual Property Enforcement Guidelines (IPEGs), and how they reflect our goal to promote competition, collaboration–and ultimately innovation.

Intersection of IP and competition law

I would like to start with a key point: that IP and competition policy share a common goal—driving innovation in support of a dynamic and productive economy. They are often portrayed as opposing forces in perpetual tension, but agencies around the world, in both domains, recognize that IP and competition policy are complementary—if not mutually dependant—parts of a comprehensive innovation policy.

On one hand, firms are more likely to invest in developing innovative new offerings when IP rights protect their ability to earn a return on that investment. And on the other, firms are driven to innovate when they face competition from rivals in the marketplace. Each part of this marketplace framework is a vital part of a healthy economy. Recognizing the nuances, the interdependencies, and the appropriate policy responses to emerging situations is key to maximizing the benefits of both competition and innovation.

Now, as we have embarked on the 4th Industrial Revolution, advanced consumer and business technologies are becoming more common and more complex, and we’re seeing a surge in the importance and value of IP to our economy. Business practices involving IP are likewise becoming more complex and more strategic. And some of these practices–like those involving Patent Assertion Entities (PAEs), patent settlements, product switching and standard essential patents–have captured the attention of competition authorities around the world.

We’re seeing an increasing number of precedent‑setting cases as major jurisdictions grapple with these new issues in order to determine where patent rights foster competition and innovation, and where they can be exercised in harmful, anti‑competitive ways. I would like to provide a few global highlights here, developments that the Bureau has monitored closely and that have informed our own efforts to strike the right balance.

Patent assertion entities

Some Patent Assertion Entities—the topic of your 2nd panel discussion this morning—are known for sending out huge numbers of royalty demands to firms they allege are using their patented technology. (Critics associate them with certain fairy‑tale creatures that lurk under bridges.) While there’s no issue with asserting one’s patent rights in good faith, there have been concerns expressed in both the U.S. and the U.K. about certain PAEs targeting small businesses with unsubstantiated claims of patent infringement, chilling competition in a segment of the economy that is often the cradle of innovation.

While there haven’t been many contested cases involving PAEs, the U.S. Federal Trade Commission (FTC) has taken action against deceptive patent assertion tactics. The FTC reached a settlement in 2014 with a company that had purchased the rights to a number of computer science patents. The FTC found that the company had used deceptive claims and phony legal threats in letters accusing thousands of small businesses around the U.S. of infringing its patents.

Patent settlements

The issue of patent settlements has been far more contested. Many jurisdictions have raised competition concerns when branded drug companies resolve patent litigation with generic drug producers through settlements in which generic companies agree to delay the introduction of a generic drug in exchange for payment—known as "pay for delay" or "reverse payment settlements".

We’ve seen a number of recent rulings in the E.U., the U.K. and the U.S. specific to reverse payment settlements. With respect to the E.U. and the U.K., both jurisdictions have taken a firm position that certain reverse payment settlements violate competition law.

Since 2013, the European Commission has issued three separate decisions against pharmaceutical companies for agreeing to delay the market entry of various generic drugs. In all three cases, the Commission found that the agreements had harmed consumers by keeping prices artificially high. Earlier this year, the U.K.’s Competition and Markets Authority similarly concluded that GlaxoSmithKline and several generic companies had entered into anti‑competitive settlement agreements to delay the market entry of a generic antidepressant. The CMA characterised the agreements as a cartel and as an abuse of dominance by the patent holder.

In the U.S., the Supreme Court’s 2013 landmark decision in the Actavis case took a somewhat different approach. Importantly, the Supreme Court confirmed that patent settlement agreements are reviewable under U.S. antitrust law. But the Court also indicated that such agreements should be evaluated using a ‘rule of reason’ approach, which is to say that a patent settlement agreement would be considered illegal only if its effect was to "unreasonably restrain trade". Since the ruling, patent litigation settlements continue to be litigated on a case‑by‑case basis in the U.S.’s lower courts.

Standard essential patents

Standard‑setting presents another interesting intersection of IP and competition law. Establishing industry standards is widely acknowledged as promoting both competition and innovation, to the benefit of both businesses and consumers. We would not have such as wide range of smartphones to choose from if manufacturers did not have easy access to hundreds of Standard Essential Patents (SEPs).

At the same time, the process of standard‑setting can be manipulated by deceptive conduct. Once a standard has been set, it may also confer market power on the holder of standard patents, leading to potential "patent hold‑up", where a threat of litigation to prevent the sale of products that incorporate the standard can result in artificially‑high royalties. And while standard‑setting involves a commitment from patent holders to licence at fair, reasonable and non‑discriminatory (FRAND) rates, patent hold‑up can occur when parties breach those commitments.

We’ve seen cases in both the U.S. and the E.U. dealing with anti‑competitive conduct in the standard‑setting context that have focussed on the harm caused by patent hold‑up. The FTC has reached consent agreements over the past few years in cases where companies had reneged on commitments to license key, standard essential patents, with the companies agreeing as a result of those settlements to honour those commitments.

The Court of Justice of the E.U. made a landmark ruling in this area in 2015. In Huawei v. ZTE, the Court ruled that a Standard Essential Patent holder who commits to license on FRAND terms, then seeks an injunction against a potential licensee in breach of that commitment, may be found in contravention of E.U. competition law. Significantly, the Court’s decision supported a "middle path" approach, seeking a balance between over‑ and under‑protecting IP rights.

There have also been some notable outliers in the area of standard patent licensing, court cases in which certain nations are seen to have used competition law to support their industrial policy objectives, including overriding IP rights in order to establish more favourable licensing agreements for their domestic suppliers. However, we are seeing international convergence by agencies on the principle that IP holders who commit to making their patents available on fair terms, as a condition of the standard‑setting process, must honour that commitment. And once IP holders make such a commitment, they should not seek an injunction against a company willing to pay fair rates in order to prevent them from selling products that make use of their patents.

Product hopping

The pharmaceutical industry practice of "product hopping"—when a brand switches from a drug that is coming off patent to a modest reformulation with little or no medical advantage—has also raised competition concerns for its intention to circumvent the intentionally limited duration of IP rights, preventing the entry of generic competitors and removing the incentive for continued product innovation.

In May of 2015, the U.S. Court of Appeals for the Second Circuit became the first appellate court to address the practice. In New York v. Actavis, the Second Circuit ruled that forcing consumers to switch from an old product to a new one by withdrawing the old one from the market, with the intent and effect of thwarting generic competition, violated antitrust laws. Significantly, the Court also noted that persuading consumers to switch to a new product, while the old product remained available, would not raise antitrust concerns.

Case law in Canada

While there haven’t been many recent IP‑related competition cases in Canada, the Bureau did conclude a pharmaceutical product hopping investigation in 2014. Our investigation found evidence that the pharmaceutical company Alcon had withdrawn its allergy drug Patanol from the market, before its patent expired, in order to switch consumers to a more recently‑patented, second‑generation drug. Shortly after the Bureau began its investigation, Alcon reversed the move and re‑introduced Patanol to the Canadian market. Following that reversal, and the subsequent market entry of competing generic companies, the Bureau closed its inquiry.

For some of the other landmark cases in Canada involving IP rights, we have to go back to 1997. Some of you might remember it better for the release of the Nintendo 64, or as the year Alanis Morissette won a Juno Award for the song "Ironic". But in addition to those milestones, Canada’s Competition Tribunal also made two significant rulings with respect to the licensing of music and trademark copyrights.

The first was a case brought against Warner Music Canada under section 75—the refusal to deal provision of the Competition Act—for its refusal to sell certain music licensing rights to a competing record club. The Tribunal ruled in favour of Warner, stating that "the right granted by Parliament to exclude others is fundamental to intellectual property rights and cannot be considered to be anti‑competitive".

The second was a case brought against Tele Direct under section 79—the abuse of dominance provisions of the Competition Act—for its refusal to license its Yellow Pages trademark. (This was back when we had something called telephone books, which were giant paper compendiums filled with nothing but phone numbers.) Once again, the Tribunal ruled in favour of the rights holder. While it noted that there are instances in which a trademark could be misused, the Tribunal indicated that competitive harm must stem from something more than the mere refusal to license.

Fast forward to 2015, when Tribunal dealt with a similar case of refusal to license. Stargrove Entertainment made a request to file a private application with the Tribunal, alleging that major players in Canada’s music industry had blocked its access to the mechanical patent licenses it needed to manufacture and sell popular music that had entered the public domain. Stargrove alleged that the refusal from the music industry was a deliberate attempt to prevent increased competition in the market. Relying heavily on the earlier Warner and Tele Direct cases, the Tribunal once again ruled that both the refusal to deal and the abuse of dominance provision did not apply. Interestingly, however, it allowed Stargrove’s complaint to proceed under section 76—the price maintenance provisions of the Act, citing sub‑section 76(3), which includes express mention of IP rights holders being subject of an order under this provision. We’re looking forward to the Tribunal’s final decision in the matter.

Updating the intellectual property enforcement guidelines

As the intersection of IP and competition law has evolved, so has the Bureau’s approach to supporting dynamic competition and innovation. We’ve tracked the emergence of enforcement approaches to significant new issues on the international stage, began dealing with new issues like product hopping, and fined‑tuned our own approach. As part of these efforts, we also set about updating our guidance for stakeholders.

We did this in two phases. First, we updated the IPEGs to reflect recent changes to the Competition Act, as well as our related enforcement experience. The second phase involved more extensive updates to clarify the Bureau’s approach to the other emerging IP‑related issues we’ve already discussed—patent assertion entities, patent litigation settlements, standard essential patents and product hopping.

The release of the final IPEGs in March 2016 followed a rigorous public consultation process. We collected numerous written submissions on a draft version of the guidelines, including feedback from the Canadian and American bar associations, industry associations, major technology firms, and well‑known anti‑trust scholars. I also held a number of in‑person meetings with stakeholders who wished to have more in‑depth discussions on areas of concern.

We did this because we wanted to ensure that we got it right. Given the increasing importance of intellectual property to our economy, we wanted to create the best possible guidance for stakeholders. The final result is reflective of the Bureau’s enforcement experience, Canadian case law, guidance documents from other jurisdictions and the feedback from our stakeholders.

In broad strokes, the guidelines provide that the mere exercise of an IP right is not cause for concern under the general provisions of the Competition Act, even where competition is affected. To hold otherwise could effectively nullify IP rights in many circumstances.

The Bureau applies the general provisions of the Act only when IP rights form the basis of agreements between independent entities, whether in the form of a transfer, licensing arrangement or an agreement to enforce IP rights, and when the resulting harm to competition stems from that agreement, and not just from the exercise of IP rights. Applying the Act in this way may limit how the IP owner may license, transfer or sell their IP, but it does not interfere with the fundamental right of the IP holder to do so.

As I noted earlier, the Bureau recognizes that IP and competition law are both essential and interdependent parts of effective innovation policy. Striking the right balance in certain situations involving competing issues is key. We also remain very much aware that the interface of IP and competition law will continue to evolve with business practices in the rapidly changing world of the 4th Industrial Revolution.

To ensure we keep up, we will be reviewing the IPEGs annually and will revise them as needed—in consultation with our partners and stakeholders—in light of our ongoing experience, changing circumstances, decisions of the Competition Tribunal or the Canadian courts, as well as broader international developments.

Innovation & collaboration

I would like to take a moment to address the importance of collaboration. Some have suggested that rather than being a key part of innovation policy, competition law serves as a chill on collaborative innovation. In my mind, nothing could be further from the truth, and I’m not alone in that view. In its 2015 Report, the World Intellectual Property Organization identified "competitive market forces" as crucial part of ecosystems giving rise to breakthrough innovation. The OECD’s 2015 Innovation Strategy also calls attention to the need for an open and competitive business environment in growing innovation.

The Bureau recognizes that collaboration, like competition, is a key driver of innovation. The amendments to the Competition Act in 2009 clearly distinguish between acceptable and unacceptable collaborations. We’ve issued Competitor Collaboration Guidelines that clarify the Bureau’s position with respect to joint R&D work. With respect to IP, the IPEGs make it clear that the Bureau recognizes that arrangements among technology companies, such as the formation of a patent pool, have the potential to bring tremendous efficiencies by integrating complementary technologies, reducing transaction costs and clearing blocking patents.

I would also like to note that in exercising its enforcement discretion, the Bureau would examine the extent to which a remedy may alter the incentives to engage in R&D.

The Bureau also strives to be as open, transparent and collaborative as possible. When in doubt, there are a number of avenues for you and your clients to gain insight into our enforcement approach besides the Competitor Collaboration Guidelines and the IPEGs. We issue written opinions about whether conduct would contravene the Competition Act. Or you may request a meeting with Bureau officials to discuss ways of ensuring that competition enforcement does not unduly limit collaboration. In these matters, like all others, the Bureau is looking to fulfill our mandate in a way that maximizes competition and innovation in the marketplace.

Conclusion

In addition to its interplay with competition policy, the changing IP environment is also a big issue on other fronts, including international trade. Canada has recently signed trade agreements with the Trans‑Pacific Partnership and the European Union, which include, among other things, provisions covering trademarks, patents and copyright. These agreements have not yet been ratified, so it remains to be seen whether any changes to Canadian IP laws will be required to comply with the terms of these agreements.

That said, these international agreements show a trend toward global convergence in IP policy, making it increasingly important for competition agencies from different jurisdictions to find common understanding and approaches to business conduct involving IP. The Bureau is following these developments closely, strengthening its bilateral relationships with its counterparts around the world, and taking an active role in international forums like the OECD and the ICN.

Once again, we strive to be as open and collaborative as possible with stakeholders such as yourselves, and we will continue to seek your feedback as we move forward.

Thank you.

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