Intellectual property laws create legally enforceable private rights that protect to varying degrees the form and/or content of information, expression and ideas. The primary purpose of these laws is to define the scope of these rights and determine under what circumstances they have been infringed or violated.

11.

In the Guidelines, IP rights include rights granted under the Copyright Act, the Patent Act, the Trade-Marks Act, the Industrial Design Act, the Integrated Circuit Topography Act and the Plant Breeders' Rights Act.

The Copyright Act confers upon the creator of an original work, for a limited term, exclusive rights to reproduce or communicate that work.

The Patent Act protects an inventor by granting, for a fixed term, the exclusive right to use, or to sell the right to use, an invention.

The Trade-Marks Act allows the registration of distinctive marks and confers upon the owner the exclusive right to use that mark.

Upon registration of a design, the Industrial Design Act confers on the owner the right to limit the production and sale of articles that incorporate the design.

The Integrated Circuit Topography Act confers similar rights for a topography, which is a design for the disposition of an integrated circuit product.

The term IP rights also encompasses the protection afforded IP under common law and the Quebec Civil Code, including that given to trade secrets and unregistered trade-marks.

2.2 Competition Law

12.	The principle underlying competition law is that the public interest is best served by competitive markets, which are socially desirable because they lead to an efficient allocation of resources. Competition law seeks to prevent companies from creating, enhancing or maintaining market power that undermines competition without offering offsetting economic benefits. Market power refers to the ability of firms to profitably cause one or more facets of competition, such as price, quality, variety, service, advertising, or innovation to significantly deviate from competitive levels for a sustainable period of time.² However, a firm would not contravene the Competition Act if it attains its market power solely by possessing a superior product or process, introducing an innovative business practice, or other reasons for exceptional performance.
13.	The provisions of the Competition Act that set out when it may be necessary for the Bureau to intervene in a business arrangement, including an arrangement involving IP, fall into two categories: those that cover criminal offences and those that cover reviewable (civil) matters. Many provisions state that the Bureau must show before it intervenes that the conduct either substantially or unduly lessens or prevents competition.
14.	Criminal offences include conspiracy (section 45), bid-rigging (section 47), price maintenance (section 61), price discrimination and predatory pricing (section 50), and some forms of misleading advertising and related deceptive marketing practices (sections 52 to 55).³
15.	The provisions on reviewable (civil) matters deal with conduct that is generally pro-competitive but that may, in certain economic circumstances, significantly constrain competition. Reviewable matters include abuse of dominant position (section 79), exclusive dealing, tied selling and market restriction (section 77), refusal to deal (section 75), mergers (section 92), and misleading advertising and related deceptive marketing practices (section 74). As a rule, the Competition Tribunal may order remedies under these provisions if the conduct is likely to substantially lessen or prevent competition.⁴
16.	When a court determines that a firm has contravened the criminal provisions of the Competition Act, it can impose fines, imprisonment and prohibition orders.⁵ In addition, parties may bring private actions seeking damages. With respect to reviewable (civil) matters, the Competition Tribunal may issue a variety of remedial orders, some of which restrict private property rights. For example, the Tribunal has, in the past, ordered merging firms to divest themselves of assets, including IP, when it concluded that the proposed merger was likely to substantially lessen or prevent competition, thereby overriding the rights of property owners to acquire or dispose of their private property.⁶ Similarly, remedies under the abuse-of-dominant-position provisions have involved orders affecting IP.⁷
17.	Section 32, which is in the special remedies part of the Competition Act, gives the Federal Court the power, when asked by the Attorney General, to make remedial orders when it finds that a company has used the exclusive rights and privileges conferred by a patent, trade-mark, copyright or registered integrated circuit topography to unduly restrain trade or lessen competition (see section 4.2 of this document for specific circumstances in which the Bureau may seek to have the Attorney General bring an application under section 32).
18.	When the Federal Court determines that a special remedy is warranted under section 32, it may issue a remedial order declaring any agreement or licence relating to the anti-competitive use void, ordering licensing of the IP right, revoking the right, or directing that other things be done to prevent anti-competitive use. This provision provides the Attorney General with the statutory authority to intervene in a broad range of circumstances to remedy an undue lessening or prevention of competition involving the exercise of statutory IP rights.

Table of contents

Part 3: Interface Between IP and Competition Law

3.1 Property Rights

19.

Private property rights are the foundation of a market economy. Property owners must be allowed to profit from the creation and use of their property by claiming the rewards flowing from it. In a market system this is accomplished by granting owners the right to exclude others from using their property, and forcing those wishing to use it to negotiate or bargain in the marketplace for it and then rewarding the owner. This creates incentives to invest in developing, and leads to the exchange of, private property, thus, contributing to the efficient operation of markets.

3.2 IP Law

20.

IP has unique characteristics that make it difficult for owners to physically restrict access to it and, therefore, exercise their rights over it. The owner of physical property can protect against its unauthorized use by taking appropriate security measures, such as locking it away, but it is difficult, if not impossible, for the creator of a work of art to prevent his or her property from being copied once it has been shown or distributed. This is exacerbated because IP, while often expensive to develop, is often easy and inexpensive to copy. IP is also typically non-rivalrous -- that is, two or more people can simultaneously use IP. The fact that a firm is using a novel production process does not prevent another firm from simultaneously using the same process. In contrast, the use of a physical property by one firm prevents concurrent use by another.⁸

21.

Accordingly, IP laws confer on an IP owner the right to unilaterally exclude others from using that property. While each IP statute grants this right to varying degrees, and the right may be subject to limitations that vary across statutes, it allows the owners of the IP to maximize its value through trade and exchange in the marketplace. This claim on the rewards flowing from IP enhances the incentive for investment and future innovation in IP as it does for other forms of private property. For the most part, with the exception of the protections afforded unregistered trade-marks and other common law rights, the legal protection of IP is a function of and does not exist outside the ambit of IP statutory regimes.

3.3 Competition Law

22.

Since the right to exclude, which is the basis of private property rights, is necessary for efficient, competitive markets, the enforcement of the Competition Act rarely interferes with the exercise of this basic right. Enforcement action under the Competition Act may be warranted when anti-competitive conduct creates, enhances or maintains market power.

3.4 Interface

23.

IP and competition laws are both necessary for the efficient operation of the marketplace. IP laws provide property rights comparable to those for other kinds of private property, thereby providing incentives for owners to invest in creating and developing intellectual property and encouraging the efficient use and dissemination of the property within the marketplace. Applying the Competition Act to conduct associated with IP may prevent anti-competitive conduct that impedes the efficient production and diffusion of goods and technologies and the creation of new products. The promotion of a competitive marketplace through the application of competition laws is consistent with the objectives underlying IP laws.

Table of contents

Part 4: Applying the Competition Act to Conduct Involving IP

4.1 Overview

24.	In general, the Bureau's analysis for determining whether competitive harm would result ⁹ from a particular transaction or type of business conduct comprises five steps: identifying the transaction or conduct;¹⁰ defining the relevant market(s); determining if the firm(s) under scrutiny possess market power by examining the level of concentration and entry conditions in the relevant market(s) as well as other factors; determining if the transaction or conduct would unduly or substantially lessen or prevent competition in the relevant market(s); and considering, when appropriate, any relevant efficiency rationales.
25.	This analysis applies to all industries and all types of business transactions and conduct, and is sufficiently flexible to accommodate differences among the many forms of IP protection as well as between IP and other types of property. For example, the Bureau takes differences among the various forms of IP protection into account when defining the relevant market and determining whether a firm has market power. In addition, although IP rights to a particular product or process are often created and protected by statute and are thus different from other forms of property rights, the right to exclude others from using the product or process does not necessarily grant the owner market power. It is only after it has defined the relevant market and examined factors such as concentration, entry barriers and technological change that the Bureau can conclude whether an owner of a valid IP right possesses market power. The existence of a variety of effective substitutes for the IP and/or a high probability of entry by other players into the market (by "innovating around" or "leap-frogging over" any apparently entrenched position) would likely cause the Bureau to conclude that the IP has not conferred market power on its owner.
26.	The Bureau's analysis may reveal that an IP owner does, indeed, have market power. In general, to violate the Competition Act a firm must engage in anti-competitive conduct that creates, enhances or maintains market power. Again, consistent with its approach with respect to all forms of property, the Bureau does not consider an owner of IP to have contravened the Competition Act if it attained market power solely by possessing a superior quality product or process, introducing an innovative business practice or other reasons for exceptional performance.
27.	Licensing is the usual method by which the owner of IP authorizes others to use it. In the vast majority of cases, licensing is pro-competitive because it facilitates the broader use of a valuable IP right by additional parties.¹¹ In assessing whether a particular licensing arrangement raises a competition issue, the Bureau examines whether the terms of the licence serve to create, enhance or maintain the market power of either the licensor or the licensee. The Bureau will not consider licensing agreements involving IP to be anti-competitive unless they reduce competition to a level below that which would have existed in the absence of the licence.

Table of contents

4.2 Enforcement Principles

28.

Specific reference is made to IP rights in a number of provisions of the Competition Act.¹² The circumstances in which the Bureau may apply the Competition Act to anti-competitive conduct involving IP or IP rights fall into two broad categories: those involving anti-competitive conduct that is "something more" than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else. The general provisions of the Competition Act address the former, while section 32 (special remedies) addresses the latter. The Bureau's approach is consistent with subsection 79(5), which acknowledges that the mere exercise of an IP right is not an anti-competitive act,¹³ while acknowledging the possibility that under specific circumstances set out in section 32 the mere exercise of an IP right might raise a competition issue.¹⁴

4.2.1 General Provisions

29.	The mere exercise of an IP right is not cause for concern under the general provisions of the Competition Act. The Bureau defines the mere exercise of an IP right as the owner's right to unilaterally exclude others from using the IP, including the right to use the IP, the right to not use the IP, and the right to refuse others the use of the IP (typically, refusal to license).
30.	*The unilateral exercise of the IP right to exclude does not violate the general provisions of the Competition Act* no matter to what degree competition is affected**. To hold otherwise could effectively nullify IP rights, impair or remove the economic, cultural, social and educational benefits created by them and be inconsistent with the Bureau's underlying view that IP and competition law are generally complementary.
31.	Accordingly the Bureau applies the general provisions of the Competition Actwhen IP rights form the basis of arrangements between independent entities, whether in the form of a transfer, licensing arrangement or agreement to use or enforce IP rights, and when the alleged competitive harm stems from such an arrangement and not just from the mere exercise of the IP right and nothing else.
32.	Applying the Competition Act in this way may limit to whom and how the IP owner may license, transfer or sell the IP, but it does not challenge the fundamental right of the IP holder to do so. If an IP owner licenses, transfers or sells the IP to a firm or a group of firms that would have been actual or potential competitors without the arrangement, and if this arrangement creates, enhances or maintains the IP owner's market power, the Bureau may seek to challenge the arrangement under the appropriate section of the Competition Act.¹⁵ Part 7 of this document provides a series of hypothetical examples to illustrate how the Bureau would examine the licensing, transfer or sale of IP under the Competition Act.
33.	This approach is consistent with the Competition Tribunal's decisions in both Tele-Direct¹⁶ and Warner¹⁷ in which the Tribunal held that the mere exercise of the IP right to refuse to license a complainant was not an anti-competitive act. In its decision in Tele-Direct, the Tribunal indicated that competitive harm must stem from something more than just the mere refusal to license.¹⁸
34.	Underlying this enforcement approach is the view that market conditions and the differential advantages IP provides should largely determine commercial rewards flowing from the exploitation of an IP right. If a company uses IP protection to engage in conduct that creates, enhances or maintains market power as prohibited by the Competition Act , then the Bureau may intervene.
35.	When joint conduct of two or more firms lessens or prevents competition, the competitive harm clearly flows from something more than the mere exercise of the IP right to refuse. To the extent that conduct such as conspiracy,¹⁹ bid-rigging, joint abuse of dominance, market allocation agreements and mergers restricts competition among firms producing actual or potential substitute products or services, the presence of IP should not be a mitigating factor. Such conduct would be subject to review under the appropriate general provision of the Competition Act.
36.	A transfer of IP rights that lessens or prevents competition is a further example of a situation in which competitive harm results from something more than the mere exercise of the IP right to refuse. Two examples of this are when a licensor ties a non-proprietary product to a product covered by its IP right, and when a firm effectively extends its market power beyond the term of its patent through an exclusive contract.
37.	When an IP owner refuses to grant others access to its IP rights, the competitive harm may stem from something more than just the unilateral refusal. For example, if a firm acquires a controlling collection of IP rights, refuses to license the rights to others and lessens or prevents competition in markets associated with the IP rights, it would be the acquisition and the refusal to license that the Bureau sees as anti-competitive. The Bureau would review the matter under either section 92 or section 79 of the Competition Act. Without the acquisition, the owner's mere refusal to license the IP rights would unlikely cause concern (see Example 8). Similarly, a firm terminating its IP licences with other firms that rely on the licensed IP as an essential input would be cause for concern under the general provisions of the Competition Act when the licensor led the licensees to believe that they would have an ongoing licence for the IP and the termination of the licences resulted in competitive harm. In this case, the competitive harm would stem from both the creation of the expectation of continued access and the subsequent refusal of that access rather than from the mere exercise of the right to refuse to license the IP (see Examples 7.1 and 7.2).

4.2.2 Matters Outside the General Provisions -- Section 32 ²⁰

38.	Only section 32, in the special remedies part of the Competition Act, contemplates the possibility that the mere exercise of an IP right may cause concern and result in the Bureau seeking to have the Attorney General bring an application for a special remedy to the Federal Court.
39.	The Bureau will seek a remedy for the unilateral exercise of the IP right to excludeunder section 32 only if the circumstances specified in that section are met and the alleged competitive harm stems directly from the refusal and nothing else. Such circumstances require the Federal Court to balance the interests of the IP holder against those of the public to have fair and free competition. Generally, the Bureau would recommend to the Attorney General that an application be made to the Federal Court under section 32 when, in the Bureau's view, no appropriate remedy is available under the relevant IP statute.
40.	Enforcement under section 32 requires proof of undue restraint of trade or lessened competition. The Bureau expects such enforcement action would only be required in certain narrowly defined circumstances. The Bureau determines whether the exercise of an IP right meets this threshold by analyzing the situation in two steps.
41.	Step one the Bureau establishes that the mere refusal (typically the refusal to license IP) has adversely affected competition to a degree that would be considered substantial in a relevant market that is different or larger than the subject matter of the IP. This step is only satisfied by the combination of the following factors: i) the holder of the IP is dominant in the relevant market, and ii) the IP is an essential input or resource for firms participating in the relevant market -- that is, the presence of the IP prevents other firms from entering the relevant market.
42.	Step two the Bureau establishes that invoking a special remedy against the IP right holder would not adversely alter the incentives to invest in research and development in the economy. This step is satisfied by the presence of at least one of the following two factors: iii) the cost to the innovator to create the IP was insignificant, or iv) the refusal to license the IP is stifling further innovation.
43.	If factors i) and ii) are present then the IP is the source of dominance in a relevant market and other competitors would be able to participate in the relevant market only by having access to that IP. If either of factors iii) or iv) are present then the Bureau would conclude that incentives to invest in research and development would not be adversely altered by invoking a special remedy.
44.	The Bureau recognizes that only in the rarest of circumstances would both the step one and step two conditions be satisfied. A case in which the step one conditions could arise is in a network industry,²¹ when the combination of IP protection and substantial positive effects associated with the size of the network could create or entrench substantial market dominance. In such a situation, IP rights and network externalities can interact to create de facto industry standards. Standardization means that the protected technology is necessary for a competitor's products to be viable alternatives. IP protection can effectively exclude others from entering and producing in the market.²² However, the Bureau still would have to be satisfied that a section 32 remedy would not adversely alter firms' incentives to invest in research and development before seeking to have the Attorney General bring an application for a special remedy to the Federal Court (see Example 9).

4.2.3 Matters Outside the Competition Act

45.

An illegitimate extension of an IP right could include anti-competitive behaviour. This might involve an IP holder claiming that its patent covers products not specified in the original patent. Alternatively, the Bureau may receive complaints that infringement of a legitimate IP right should be justified on competition grounds. Such disputes are best resolved by the appropriate IP authority under the appropriate IP statute (see Example 1).

Table of contents

Part 5: The Analytical Framework in the Context of IP

46.	As outlined in section 4.1 above, the Bureau's analytical approach is sufficiently flexible to accommodate the specific characteristics of IP and the differences in the scope and length of protection extended to different IP rights. The following highlights how the Bureau takes these factors into account when analyzing a transaction or business conduct involving IP.

5.1 Relevant Markets

47.	Relevant markets provide a practical tool for assessing market power.²³ When the anti-competitive concern is prospective (that is, the conduct is likely to have a future anti-competitive effect),²⁴ relevant markets arenormally defined using the hypothetical monopolist test.²⁵
48.	When the anti-competitive concern is retrospective²⁶ (that is, the conduct has already had an anti-competitive effect), applying the hypothetical monopolist test could lead to erroneous conclusions about the availability of substitutes and the presence of market power. Accordingly, the Bureau takes into account the impact of any alleged anti-competitive conduct that may have preceded the investigation when determining the relevant market. In this context, the Bureau analyzes market definition and competitive effects concurrently (see Example 2).
49.	For transactions or conduct involving IP, the Bureau is likely to define the relevant market based on one of the following: the intangible knowledge or know-how that constitutes the IP, the processes on which the IP is based, or the final or intermediate goods resulting from, or incorporating, the IP.
50.	Defining a market around intangible knowledge or know-how is likely to be important when IP rights are separate from any technology or product in which the knowledge or know-how is used. For example, consider a merger between two firms that individually license similar patents to various independent firms, which, in turn, use them to develop their own process technologies. Such a merger may reduce competition in the relevant market for the patented know-how if the two versions of that know-how are close substitutes for each other, if there are no (or very few) alternatives that are close substitutes for the know-how, and if there are sufficient barriers that would prevent the development of conceptual approaches that could replace the know-how of the merging firms. This last condition may hold if the scope of the patents protecting the merging firms' know-how is sufficiently broad to prevent others from "innovating around" the patented technologies, or if the development of such know-how requires specialized knowledge or assets that only the two merging firms possess and that potential competitors could not develop or obtain in less than two years.
51.	In cases involving the licensing of IP, the Bureau generally treats the licence as the terms of trade under which the licensee is entitled to use the IP. The Bureau does not define a relevant market around a licence but, rather, focuses on what the legal rights granted to the licensee actually protect (see Example 7.1).
52.	The Bureau does not generally define markets based on research and development activity or innovation efforts alone. The Bureau usually concentrates on price or output effects. Conduct that directly reduces the innovation effort of the firms under scrutiny or restricts or prevents the innovation efforts of others may be anti-competitive if it reduces the likelihood of future entry into a market. The appropriate relevant market definition or definitions will depend specifically on the knowledge or know-how, process, or final or intermediate good toward which the innovation effort is directed.

Table of contents | Next section

Common menu bar links

Institutional links

Resources For

The Organization

Proactive Disclosure

Intellectual Property Enforcement Guidelines - Draft for Consultation Purposes Only

Table of Contents

Part 1: Introduction

Part 2: Overview of IP Law and Competition Law

2.1 IP Law

2.2 Competition Law

Part 3: Interface Between IP and Competition Law

3.1 Property Rights

3.2 IP Law

3.3 Competition Law

3.4 Interface

Part 4: Applying the Competition Act to Conduct Involving IP

4.1 Overview

4.2 Enforcement Principles

4.2.1 General Provisions

4.2.2 Matters Outside the General Provisions -- Section 32 ²⁰

4.2.3 Matters Outside the Competition Act

Part 5: The Analytical Framework in the Context of IP

5.1 Relevant Markets

1.	Today's economy is increasingly based on knowledge and innovation and driven by rapid advancements in information and communications technologies. New technologies create economic, cultural, social and educational opportunities for people to put ideas to work in innovative ways that increase productivity and create employment and wealth. Adequate protection of intellectual property (IP) plays an important role in stimulating new technology development, artistic expression and knowledge dissemination, all of which are vital to the knowledge-based economy.¹ In this context, IP becomes a valuable asset that firms may use strategically to lessen or prevent competition.
2.	Owners of IP, as with owners of any other type of private property, profit from property laws, which define and protect owners' rights to exclude others from using their private property. The special characteristics of IP have made it necessary in many instances for governments to develop laws that confer property rights to IP comparable to those for other kinds of private property.
3.	IP laws and competition laws are two complementary instruments of government policy that promote an efficient economy. IP laws provide incentives for innovation and technological diffusion by establishing enforceable property rights for the creators of new and useful products, technologies and original works of expression. Competition laws may be invoked to protect these same incentives from anti-competitive conduct that creates, enhances or maintains market power or otherwise harms vigorous inter-firm rivalry.
4.	The Bureau has received an increasing number of requests for information on its treatment of IP under the Competition Act. This document, the Intellectual Property Enforcement Guidelines, sets out how the Competition Bureau views the interface between IP law and competition law. It also explains the analytical framework the Bureau uses to assess conduct involving IP.
5.	The Guidelines discuss the circumstances in which the Bureau, under the Competition Act, would restrain anti-competitive conduct associated with the exercise of IP rights in order to maintain competitive markets. The approach elaborated in this document is based on the premise that the Competition Act generally applies to conduct involving IP as it applies to conduct involving other forms of property.
6.	The Bureau's overall approach to the application of the Competition Act to IP is as follows: The circumstances in which the Bureau may apply the Competition Act to conduct involving IP or IP rights fall into two broad categories: those involving "something more" than the mere exercise of the IP right, and those involving the mere exercise of the IP right and nothing else. The Bureau will use the general provisions of the Competition Act to address the former and section 32 (special remedies) to address the latter. In either case, the Bureau does not presume that the conduct is itself anti-competitive, violates the general provisions of the Competition Act or should be remedied under section 32. The analytical framework the Bureau uses to determine the presence of anti-competitive effects stemming from the exercise of rights to other forms of property is sufficiently flexible to apply to conduct involving IP, even though IP has important characteristics that distinguish it from other forms of property. When conduct involving an IP right warrants a special remedy under section 32, the Bureau will act only in the rare circumstances described in this document and when the conduct cannot be remedied by the relevant IP statute.
7.	Circumstances will determine how the Bureau uses its enforcement discretion to respond to any alleged contravention of the Competition Act. Therefore, individuals contemplating a business arrangement involving IP should either consult an IP lawyer or contact the Bureau when evaluating the risk of the arrangement contravening the Competition Act. The final interpretation of the law rests with the Competition Tribunal and the courts.
8.	When developing these Guidelines, the Bureau considered the current global economic and technological environment and, in particular, the rapid rate of technological change occurring in many industries. The Bureau also took into account its past enforcement experience, Canadian case law, and the approaches taken in the Antitrust Guidelines for the Licensing of Intellectual Property issued by the U.S. Department of Justice and the Federal Trade Commission in 1995, and in other jurisdictions, including the European Union.
9.	The remainder of this documents is organized into six parts: Part 2 discusses the purpose of IP laws and lists the various statutes that deal with IP, and reviews the purpose of competition law and lists the principal provisions of the Competition Act that relate to IP; Part 3 discusses the interface between IP law and competition law; Part 4 outlines the principles underlying the application of the general provisions and section 32 of the Competition Act to business arrangements involving IP; Part 5 describes the Bureau's analytical framework, which is sensitive to the particular characteristics of IP; Part 6 discusses the Bureau's mandate to promote competition, which may include intervening in proceedings in which IP rights are being defined, strengthened or extended inappropriately; and Part 7 presents a series of hypothetical scenarios to illustrate how the Bureau would apply the Competition Act to a wide variety of business conduct involving IP.

Common menu bar links

Resources For

The Organization

Proactive Disclosure

Intellectual Property Enforcement Guidelines - Draft for Consultation Purposes Only

Part 4: Applying theCompetition Act to Conduct Involving IP

Part 4: Applying the Competition Act to Conduct Involving IP