5.2 Market Power

5.2.1 Market Concentration

5.2.2 Ease of Entry

5.2.3 Horizontal Effects

5.3 Anti-competitive Effects

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5.4 Efficiency Considerations

Part 6: Competition Policy Advocacy

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Part 7: Application of Competition Law to IP: Hypothetical Examples

Example 1: Alleged Infringement of an IP Right

TAX is a software company that produces and distributes a sophisticated and complex tax management program to help households with their tax planning. As is customary in the software industry, TAX assigns a serial number to each copy of the program that it distributes. A customer may register with TAX by providing the serial number listed on the packaging along with certain personal information. TAX offers upgrades to its software from time to time to respond to changes in the tax code and technology advances, and users need to be registered to receive these upgrades at low prices. If TAX finds that a serial number has been used more than once, it knows that its software has been illegally reproduced. TAX realizes that serial numbers do not prevent duplication but do provide a mechanism for detection, thus weakening incentives to copy. TAX has been selling its product for a number of years and is now widely recognized as a leading producer of tax management software.

More than two years ago, a key member of TAX's software engineering team left the company to start her own software business, called UPSTART. Recently, UPSTART began to market its own tax management program to be used in conjunction with TAX's product. UPSTART designed its program to operate as a graphical user interface to TAX's software. Furthermore, relatively minor changes in the tax code can be incorporated into UPSTART's product. As a consequence, for users who already own TAX's product, there is no longer a need to get upgrades from TAX. Instead, they can purchase UPSTART's product for a much lower price and can continue to buy upgrades from UPSTART.

TAX has alleged, publicly, that UPSTART must have infringed TAX's copyright because it would have been impossible for UPSTART to have created its program without having access to TAX's source code. Despite its claims, TAX has not filed a suit against UPSTART. Instead, TAX has made a formal complaint to the Bureau that UPSTART's conduct is predatory since it has undermined TAX's serial number policy by making it less valuable for users to become registered with TAX. TAX claims that since UPSTART's product came on the market, there has been widespread piracy of TAX's program and, consequently, the market for its product has evaporated.

Analysis

The Bureau would likely conclude that the underlying issue in this case is the possibility that UPSTART infringed TAX's copyright. Therefore, the Bureau would inform TAX that the Bureau does not view the matter as raising any issues under the Competition Act and would suggest that TAX seek legal advice on other remedies, if any, that might be available.

Example 2: Price Fixing

Three firms, each of which has developed and owns a patented technique, offer competing cosmetic surgical procedures to treat a particular condition. All three procedures involve several visits to a private clinic over six months, produce no side effects and have approximately equal success rates. The only existing alternative to the three procedures is an expensive medication that causes undesirable side effects in some patients. The three firms have agreed on a minimum price at which each will perform the procedure as well as a minimum fee to license each procedure to third parties. Prior to entering into the agreement, the procedures cost approximately $5,000 each. After the agreement, prices increased to approximately $8,000 on average.

Analysis

The Bureau would likely examine this agreement under section 45 of the Competition Act.

To determine the relevant market, the Bureau would consider, along with other factors, direct evidence of the exploitation of market power, such as the fact that prices increased by $3,000 following the parties' agreement. The Bureau may view this change in price as direct evidence that the three medical procedures are part of the same relevant market and of the parties' collective market power.

The Bureau would also look for evidence that the three firms intended to enter into the agreement, knew its terms and either knew or should have known that it would unduly lessen competition. The Bureau would also seek to assess the effect of the agreement, specifically to determine the extent to which it had added to the market power that the three firms could exercise together. If the Bureau determined that the three firms accounted for 100 percent of the relevant market and that their patents provided effective barriers that would prevent others from entering this market, it would likely conclude that the objective intent and likely effect of the minimum price agreement was to increase or create market power. Given evidence of the parties' intent to enter into the agreement and the market power resulting from the agreement, the Bureau would likely refer the matter to the Attorney General for prosecution under section 45 of the Competition Act.

Example 3.1: Exclusive Licensing

SHIFT recently developed a new gear system for mountain bikes. Two other firms manufacture systems that compete with SHIFT's. All three of these firms manufacture several varieties of bicycle gear systems and are engaged in research and development to improve gear system technology. SHIFT grants licences for the use of its patented gear system technology to manufacturers of mountain bikes as it does not have the ability to manufacture mountain bikes itself. Demand for mountain bikes is supplied by three large firms, which account for approximately 80 percent of sales, plus six smaller firms. SHIFT has just granted ADVENTURE, the largest mountain bike manufacturer (accounting for 30 percent of sales) an exclusive licence to use its new patented gear system technology on its mountain bikes. ADVENTURE does not own or have the ability to develop gear system technology. Although SHIFT's new gear system offers a number of features not available on other current products, the demand for mountain bikes with these new features is uncertain. In addition, ADVENTURE expects to incur significant expense developing and promoting mountain bikes that use SHIFT's new gear system technology. SHIFT has refused requests from other mountain bike manufacturers for a licence for this technology.

Analysis

The Bureau is likely to examine the conduct of both firms under the abuse-of-dominant-position provision (section 79) of the Competition Act.

SHIFT and ADVENTURE relate as supplier and customer, and are neither actual nor potential competitors in the markets for gear systems or mountain bikes. Since the firms do not compete, the exclusive licence would likely not lessen competition between the two firms. The exclusive licence may have been granted in consideration for ADVENTURE's agreement to incur significant expense in the development and promotion of mountain bikes that use SHIFT's technology.

Even though SHIFT's technology is not available to ADVENTURE's two principal rivals and the markets for gear systems and mountain bikes are concentrated, SHIFT's rivals in the gear system market may still sell to ADVENTURE. Furthermore, the other mountain bike manufacturers have access to other gear systems from SHIFT and to gear systems from other suppliers. As a result of ongoing research and development, alternative gear system technologies are likely to become available in the future.

In the course of its assessment, the Bureau would consider the competitiveness of the mountain bike market before and after the licence. Since SHIFT is not a mountain bike manufacturer and has no obligation to license its gear system to a mountain bike manufacturer, any licensing agreement would enhance competition. In this case, the technology licence mandated the development and promotion of mountain bikes using the technology, thereby enhancing competition without in any way limiting the ability of other mountain bike manufacturers to access or use competing technologies. Consequently, the Bureau would likely conclude that the exclusive licence arrangement did not raise any competition issues.

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Example 3.2: Foreclosure by Purchaser

Consider a variation on the situation described in Example 3.1, in which ADVENTURE's business has grown to represent approximately 70 percent of mountain bike sales. ADVENTURE has taken advantage of its increasing sales share to independently negotiate long-term exclusive licences and supply arrangements with the three competing suppliers of mountain bike gear systems. The inability of the competing manufacturers to obtain suitable gear system technology has put a number of them out of business and has substantially cut into the sales of the remaining firms. ADVENTURE has raised the prices of its mountain bikes by 25 percent. Although alternative gear system technologies are under development, it appears unlikely that a viable technology will be tested and in production in less than 18 months.

Analysis

The Bureau is likely to examine ADVENTURE'S conduct under the abuse-of-dominant-position provision (section 79) of the Competition Act.

The Bureau would initially determine whether mountain bikes comprised a relevant market and assess whether ADVENTURE substantially or completely controlled the supply of product within that relevant market. The Bureau would likely view the apparent lack of good substitutes, and ADVENTURE's high sales share and ability to successfully impose a 25 percent price increase as evidence that ADVENTURE substantially controlled the mountain bike business and that mountain bikes comprise a relevant market.

The Bureau would then consider whether ADVENTURE's exclusive licence agreements, through which it precluded its competitors from obtaining an adequate supply of gear systems, constituted anti-competitive conduct. While an exclusive licensing arrangement may, as was apparent in Example 3.1, enhance competition, the use of an exclusive licensing arrangement to effectively control the supply of a competitively essential input, may be anti-competitive. The Bureau would likely view as anti-competitive the systematic manner in which ADVENTURE prevented its competitors from obtaining access to this vital input through the execution of long-term exclusive licences with each supplier.

The Bureau would then assess the impact of the exclusive licences on competition. It would likely conclude that the adverse impact on the ability of other mountain bike manufacturers to compete that resulted from ADVENTURE preventing them from gaining access to proven gear system technology, and the manner in which ADVENTURE successfully imposed substantial price increases, constituted evidence that ADVENTURE substantially lessened or prevented competition. In the absence of compelling efficiency benefits or business justifications, neither of which are apparent in this case, the Bureau would likely seek to have the exclusive licences voluntarily terminated. Failing that, the Bureau would likely bring an application before the Competition Tribunal seeking to terminate these licences.

Example 3.3: Foreclosure by Suppliers

A variation on the situation described in Example 3.2 sees the gear system suppliers, concerned about ADVENTURE's growing purchasing power, enter into an agreement to subdivide the market for mountain bike systems among themselves. To make it easier to monitor compliance, the firms agree to enter into exclusive licence agreements, at premium prices, with ADVENTURE. The result of this arrangement is as described in Example 3.2.

Analysis

The Bureau is likely to examine this matter under section 45 as a conspiracy case against the gear system suppliers or under section 79 as a joint abuse-of-dominance case against the gear system suppliers and, possibly, ADVENTURE.

A number of factors would influence the Bureau's initial decision to examine and, possibly, challenge these arrangements, including the existence of any legitimate business justification or efficiency rationale, whether ADVENTURE had been told about the arrangement and the business rationale for it, and whether the parties had behaved covertly. If the agreement was a blatant market allocation scheme implemented in a covert manner, the Bureau would likely investigate it under the conspiracy provision. A specialization arrangement, under which each supplier publicly agrees to focus on a particular gear system technology, that the parties disclosed to and discussed with ADVENTURE, would likely be investigated as joint abuse of dominance.

The Bureau would initially determine whether gear systems comprised a relevant market and assess whether the gear system suppliers either had market power or completely controlled the supply of product within that relevant market. The Bureau would likely view the apparent lack of good substitutes for gear systems, and the suppliers' and ADVENTURE's high sales shares and ability to successfully impose price increases as evidence that the gear system suppliers had market power or substantially controlled the gear systems business and that gear systems comprise a relevant market.

If the Bureau was investigating the matter under the conspiracy provision, it would then assess whether the requirements of that section, discussed in Example 2, had been satisfied. If the Bureau was investigating the matter under the abuse-of-dominance provision, it would then assess whether the requirements of that section, discussed in Example 3.2, had been satisfied in terms of the impact of the arrangement on either or both the market for gear system technology and/or the market for mountain bikes. For the reasons discussed in Example 3.2, and in view of the facts of the case, it seems likely that the Bureau would conclude that the arrangement had either unduly or substantially lessened or prevented competition. It would then either refer the matter to the Attorney General (in the case of an investigation under the conspiracy provision) or seek to terminate the market allocation agreement and the exclusive licences (in the case of an investigation under the abuse-of-dominance provision).

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Example 4: Exclusive Contracts

SPICE, by virtue of its international patents, is the sole supplier of Megasalt, a unique food additive that has effectively replaced salt in certain prepared foods in most countries. SPICE's Canadian patent recently expired; however, SPICE still has valid patent protection throughout much of the rest of the world. Shortly before its Canadian patent expired, SPICE signed five-year contracts, which included exclusive supply rights, with its two principal Canadian buyers. These contracts prevent the two buyers, which use Megasalt in specially prepared foods for hospitals and other health care institutions, from combining Megasalt with any other salt substitute on the same product line. SPICE does not have long-term exclusive supply contracts with other buyers of Megasalt in Canada or elsewhere. Recently, NUsalt, a firm that has developed a potential alternative to Megasalt, filed a complaint with the Bureau alleging that SPICE's contracts are preventing NUsalt from manufacturing and marketing its product in Canada. NUsalt claims that SPICE's contracts have "locked up" a substantial part of the market, thereby precluding NUsalt from profitably entering Canada at a sufficient scale.

Analysis

The NUsalt allegations suggest that SPICE, as a result of its contracts with its two largest buyers, is currently exploiting market power within the market for salt substitutes. The Bureau would likely investigate these allegations under the exclusive dealing provision (section 77) or the abuse-of-dominance provision (section 79).

The Bureau would initially determine whether salt substitutes comprise a relevant market. This would entail determining whether salt substitutes are subject to effective competition from other substances (for example, salt) or whether salt substitutes have specific properties and functional characteristics that make salt ineffective as a substitute. The Bureau would then seek to determine whether SPICE substantially controlled the market in which its salt substitutes competed, and then assess SPICE's share of sales and barriers to entry to this market. Among others, the Bureau would consider all of the factors currently preventing alternative suppliers from offering their products to customers in Canada, including the effect of the exclusive supply contracts on the ability of alternative suppliers to obtain sales from a critical mass of customers. Assuming that the Bureau had determined that salt substitutes constitute a relevant market, it would likely conclude that SPICE substantially controlled that market.

The Bureau would then consider whether the exclusive supply contracts, through which SPICE had precluded its principal customers from obtaining salt substitutes from alternative suppliers, constituted exclusive dealing or abuse of dominance. The Bureau would likely conclude that the exclusive supply contracts constituted exclusive dealing. In order to assess whether the formation of these contracts was an anti-competitive act, the Bureau would examine the circumstances surrounding their negotiation and settlement and the extent to which they were exclusionary and intended to erect barriers to effective competition in the relevant market. If the Bureau found that the contracts in this case were intended to hold back a sufficient amount of market demand from potential entrants so the remaining demand would provide an insufficient volume of sales to cover the cost of entry and future operating costs in Canada, then the Bureau would likely view the execution of the long-term exclusive licences as anti-competitive.

The Bureau would then assess the impact of the exclusive contracts on competition. In this regard, the adverse impact on the ability of other suppliers of salt substitutes to compete in Canada would be assessed to determine whether the contracts had substantially lessened or prevented competition. If the relevant market is narrowly defined as salt substitutes and SPICE's contracts are preventing the entry of potential salt substitute producers, the Bureau may conclude that the exclusive contracts have substantially lessened competition. By deterring firms from attempting to supply alternative salt substitutes in Canada, the exclusive contracts may cause other buyers in Canada not under contract with SPICE to pay higher prices than they would if SPICE faced effective competition. The magnitude of the decrease in competition would depend on the extent to which the contracts prevent entry and the expected degree of substitution that would exist between Megasalt and alternative salt substitutes, such as NUsalt, if the exclusive contracts did not exist. In general, if the contracts are determined to be the principal barrier to new entry and the new entrants' products are likely to be close substitutes for Megasalt, then the Bureau is likely to conclude the contracts have substantially lessened competition. However, if the Bureau determines that, notwithstanding the contracts, there is still sufficient demand in Canada or the rest of the world to support effective competitive entry in Canada, then SPICE's exclusive contracts would not be considered to have substantially lessened or prevented competition.

The Bureau would also consider whether there are efficiency reasons or a compelling business justification for SPICE's exclusive contracts. For example, SPICE may have signed these contracts in order to ensure that it would have sufficient sales to justify investing in enough productive capacity to realize economies of scale. Also, the restriction preventing buyers from combining Megasalt with other salt substitutes could have a safety or quality rationale. If the Bureau concludes that SPICE's contracts substantially lessen competition, but that there is also a strong efficiency rationale or business justification for those contracts that could not be achieved without them being exclusive, the Bureau would not likely challenge the practice under sections 77 or 79 of the Competition Act. However, if there is no compelling efficiency rationale or business justification for the exclusivity provisions, the Bureau would likely seek to have SPICE's exclusive licences voluntarily terminated. Failing that the Bureau would likely bring an application before the Competition Tribunal seeking to terminate these licences.

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Example 5: Output Royalties

MEMEX currently holds a patent for the design of a memory component it manufactures for use in personal home computers. MEMEX does not manufacture personal computers but instead sells its memory components and licenses the use of its technology to computer manufacturers. Historically, MEMEX's licensing contracts required that the licensee pay a fee for each MEMEX memory component it installed in a computer. Because of its patent, MEMEX currently faces no competition from other memory component producers wishing to use a similar design; however, MEMEX's patent is to expire within a year and there is speculation that once it expires other firms will begin manufacturing and selling memory components based on MEMEX's design. MEMEX has recently introduced a new licence agreement. Under the new agreement, MEMEX grants non-exclusive licences for the use of its technology and memory components to all personal computer manufacturers for a royalty on every computer shipped, regardless of whether the computer included a MEMEX memory component, and a further fee for every MEMEX memory component the manufacturer installs. MEMEX claims that the previous licensing policy had the unintentional effect of encouraging computer manufacturers to install too few MEMEX memory components, which detracted from computer performance. MEMEX claims that the new licensing practice makes it less expensive for manufacturers to install a more appropriate quantity of memory in computers. To offset the loss in revenue, MEMEX charges a royalty on every computer sold.

Analysis

The Bureau would investigate this case under the abuse-of-dominance provision (section 79).

The Bureau would first determine whether memory components that employ the MEMEX's technology comprise a relevant market and then assess whether MEMEX substantially or completely controls the supply of product within that market. In view of the rapid rate of technological development and intense competition in the production of integrated circuit devices, the Bureau may conclude that the MEMEX technology competes with other memory technologies, that barriers to entry are sufficiently low that the scope of the relevant market extends beyond the MEMEX technology, or that MEMEX is unable to substantially control the supply of products within the specified relevant market. If the Bureau determines that MEMEX faces substantial, effective competition from other suppliers of memory components then it would likely conclude that further investigation is not warranted. If, on the other hand, the Bureau concluded that the memory components supplied by the alternative suppliers are not considered good substitutes and would not allow computer manufacturers to build computers that could compete with those using MEMEX's memory component, the Bureau might determine that further inquiry was warranted.

Assuming that the Bureau determined that the MEMEX technology defines the relevant market and MEMEX substantially controls that market, the Bureau would then consider whether MEMEX's use of its new licensing arrangements constituted anti-competitive conduct. This determination would depend on the specific terms of the contracts and the likely effect they would have on competition in the relevant market. While MEMEX's licensing contracts do not expressly prohibit computer manufacturers from using memory components based on technology other than MEMEX's, they effectively impose a tax on computer manufacturers who use memory components from both MEMEX and another supplier.³⁷ The imposition by a dominant supplier of long-term licensing contracts containing such provisions could preclude competition and maintain the supplier's market power. Accordingly, the Bureau would determine whether these contracts are in widespread use and their duration, and whether the per computer royalty is sufficient to deter computer manufacturers from buying memory components from alternative suppliers.

If the Bureau determined the relevant market to be memory components based on the MEMEX technology, and found MEMEX to have market power, then the Bureau would assess the likely impact of MEMEX's new licensing practice on competition and the price of memory components. If the Bureau determines that this practice would permit MEMEX to exercise a significantly greater measure of market power after its patent expired than would otherwise have been the case, the Bureau would consider MEMEX's efficiency rationale and any other business justification for charging the per computer royalty. In the absence of offsetting efficiency benefits or business justifications, the Bureau would likely seek to have the new licensing practice voluntarily terminated. Failing that, it would likely bring an application before the Competition Tribunal seeking to terminate this practice.

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Example 6: A Patent Pooling Arrangement

ABC and ZENIX have each developed a revolutionary new X-ray imaging machine to help diagnose cancer. Each firm has been granted a series of patents on certain components of their respective machines, and the machines themselves are functionally interchangeable. ABC's machine does not infringe any of ZENIX's patents; however, the design of one of the components of the ZENIX machine may infringe on one of ABC's patents. ABC has threatened to sue ZENIX for patent infringement if ZENIX begins marketing its machine without getting a licence from ABC to use the component. ZENIX disputes ABC's claim of patent infringement. However, to avoid a messy court battle, the companies have placed their various patents in a patent pool. The pool has established a $500 licensing fee, which is to be paid to the pool each time an X-ray imaging machine produced by either firm is used in a medical diagnosis. The proceeds from the licence fees are split between the two firms according to a predetermined formula. As a result, neither firm is likely to charge medical practitioners less than $500 per procedure.

Analysis

The Bureau would examine this case under the conspiracy provision (section 45) of the Competition Act.

The Bureau recognizes that a patent pooling arrangement may provide pro-competitive benefits by, among other things, clearing blocking patents. If two firms each possess patents that would prevent the other from using its technologies, and if it is not possible for either party to "invent around" the other's patents, the firms cannot be considered to be horizontal competitors. In this case, only ABC claims that the ZENIX machine infringes on one of its patents. Therefore, it would not matter to the Bureau whether ABC's claim of infringement was groundless or valid or whether ZENIX could easily "invent around" the alleged blocking patent. Instead, the Bureau would seek to determine whether the pool constituted a reasonable method for achieving the legitimate goal of avoiding or reducing the cost and risk of litigation. In this example, there was no reason for ABC to participate in the patent pool since there was apparently no basis for the claim that ABC's machine infringed any of ZENIX's patents. To overcome the blocking patent, all that is required is for ABC to license the use of its infringed patent to ZENIX. Nevertheless, the existence of a blocking patent means that ZENIX would not be a competitor for ABC if the patent pool or some other form of licence for ZENIX to use ABC's blocking patent did not exist.

The Bureau would then assess whether it was reasonable for ABC and ZENIX to have licensed ABC's patent to ZENIX in the manner provided for in the patent pool, or whether such arrangement was, in substance, an agreement to prevent price competition between ZENIX and ABC. The Bureau would decide whether to challenge the arrangement based on the outcome of this assessment.

Example 7.1: Terminating Licence to Deny Access to Complementary Product Suppliers

MEGARUSH and EXCITEMENT were initially competitors in the market for electronic game entertainment systems. Each company's system consists of a hardware console and game cartridges. Players insert cartridges into the hardware console to play video games on a television set or other similar monitor. MEGARUSH originally introduced its system as an "open" standard and widely licensed the use of the technical specifications for its hardware console to independent game developers in exchange for a royalty on each game sold. MEGARUSH stated publicly that it would continue this open licensing policy. There is evidence that it implemented this policy in an effort to win prospective customers by creating the expectation that a wide variety of independently developed games would become available at low prices and that there would be continual innovation in game development. In contrast, EXCITEMENT decided to offer a "closed" standard and to internally develop all its own game cartridges. Over time MEGARUSH's system gained widespread acceptance while EXCITEMENT's system virtually disappeared from the market. Recently, MEGARUSH decided to terminate its policy of permitting independent game developers to access its technical specifications so it could more effectively capture the value of the installed base of MEGARUSH consoles.

Analysis

The Bureau would examine this case under the abuse-of-dominance provision (section 79) or under section 32 (special remedies) of the Competition Act.

As the first step in its analysis, the Bureau would consider whether MEGARUSH was merely exercising its rights by refusing to license its IP (in which case, its conduct would not be subject to review under the general provisions of the Competition Act) or whether it involved "something more" (in which case the general provisions would apply). The Bureau would initially assess whether the source of the competitive harm was the refusal of MEGARUSH to license its technical specifications or its breach of its commitment to continue to treat its technical specifications as an "open" standard. The Bureau would likely conclude that it was MEGARUSH's breach of its commitment that was the source of competitive harm (as the expectation of a continuing "open" standard induced consumers and independent game developers to support the MEGARUSH console as they believed there would be continuing competition among the various suppliers of game cartridges for this console).

The Bureau would then assess this conduct under the abuse- of-dominance provision, using the process and criteria outlined in the previous examples. The Bureau would endeavour to identify the relevant market (which could be the provision of games for its "open" standard consoles), determine whether MEGARUSH now substantially controlled that market, assess whether MEGARUSH's apparent foreclosure of competition by unilaterally terminating its "open" standard policy constituted anti-competitive conduct that substantially lessened or prevented competition, and consider whether MEGARUSH's conduct was justified by offsetting business or efficiency justifications. If the abuse-of-dominance criteria were satisfied, in the absence of offsetting efficiency benefits or business justifications, the Bureau would likely ask MEGARUSH to voluntarily restore its "open" standard licensing. Failing that, it would likely bring an application before the Competition Tribunal seeking an appropriate order under section 79.

Example 7.2: Refusing to Licence Complementary Product Suppliers

Consider a variation of the situation described in Example 7.1, in which MEGARUSH has developed and started to market a new 128-bit hardware console that offers greater speed and better graphics than its previous system. Games designed for MEGARUSH's previous system are compatible with the new system but do not fully utilize all its technical capabilities. MEGARUSH has chosen not to release the technical specifications for its new console to independent game developers. As a result of this policy, MEGARUSH is the exclusive supplier of games designed to exploit all of the capabilities of the new system. A number of complainants have alleged that MEGARUSH publicly stated that it would continue to license its technical specifications to independent game developers in exchange for a royalty on each game sold and, therefore, should not be permitted to breach this commitment. MEGARUSH acknowledged that this was (and is) its policy with respect to its old game console but said that it had made a substantial research and development investment to create the new console. It wished to recoup its investments by selling the new console (which includes an expensive 128-bit processor and 256 megabytes of RAM) at heavily discounted prices, with a view to creating substantial demand for the new games that it also supplies. MEGARUSH stated that it would not have invested hundreds of millions of dollars on a new 128-bit game console if it had believed that it might be forced to license the technical specifications to independent game developers.

Analysis

The Bureau would examine this case under section 32 of the Competition Act.

As the first step, the Bureau would consider whether MEGARUSH's policy of refusing to license the technical specifications for games designed for its new 128-bit hardware console was a "mere exercise" of its IP rights or involved "something more." To this end, the Bureau would review MEGARUSH's public statements and representations concerning the licensing of the technical specifications of its old and new consoles. In the absence of evidence that MEGARUSH had lessened competition by reversing its licensing policy, its refusal to license would constitute the "mere exercise" of its IP rights and would be subject to review only under section 32 of the Competition Act.

Assuming that the Bureau found no evidence of a policy reversal, the Bureau would then assess the conduct under section 32. It would initially seek to determine whether MEGARUSH's refusal to license adversely affected competition in a relevant market different or larger than the subject matter of its IP rights. In this case, the affected market could be video games for the 128-bit console, which is different from what MEGARUSH's IP rights protect (the technical specifications for the new console). However, in the second step of its two-step analysis, the Bureau would likely conclude that invoking a remedy under section 32 would have the effect of adversely altering firms' incentives to invest in research and development. This is because MEGARUSH made a substantial investment in developing the new game system and MEGARUSH's refusal to license is not preventing any other firm from developing its own game system. As a result of its analysis, the Bureau would likely not seek to bring an application under section 32.

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