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The Competition / Intellectual Property Interface–Present Concerns And Future Challenges

The Interface Between Competition Law And Intellectual Property Law

Present Concerns And Future Challenges Facing Industry Canada

Richard F.D. Corley
Navin Joneja
Prakash Narayanan
Blake Cassels & Graydon LLP
Toronto, Ontario

March 2006

"The fact is, though, that the monopoly on the bricks is over, and Mega Bloks and Lego bricks may be interchangeable in the bins of the playrooms of the nation – dragons, castles and knights may be designed with them, without any distinction ... The appellant is no longer entitled to protection against competition in respect of its product. It must now face the rigours of a free market and its process of creative destruction."*

*Kirkbi AG v. Ritvik Holdings Inc., 2005 SCC 65, paras. 61, 69 (Nov. 17, 2005)

IV. Time For A Review Of The Application Of The Competition Act To IP And The Treatment Of The IP/Competition Law Interface Under The IPEGs?

A. Review of Sections 19 and 65 of the Patent Act and Section 32 of the CA

B. Review of Specific Provisions of the Competition Act and the Bureau's IPEGs

I. The Intellectual Property/Competition Law Interface

A. Overview

Intellectual property ("IP") laws and competition laws are both intended to promote efficiency. However, the different mechanisms that each employs to achieve this goal have sometimes been viewed as a potential source of tension. Competition laws have traditionally tended to focus on the achievement of static allocative and productive efficiencies by preventing the inappropriate accumulation or exercise of market power with respect to existing products or services. IP laws seek to foster long-term dynamic efficiency gains through incentives to invest in the creation of valuable developments, which may involve the acquisition, perfection and protection of IP rights ("IPRs") and, in some cases, confer an element of market power on the holder.

In some circumstances, however, the achievement of certain dynamic efficiencies necessarily precludes the attainment of other allocation or productive efficiencies and vice versa. Consequently, there is a danger that the traditional competition law emphasis on shorter-term allocative efficiency may result in enforcement activities that adversely impact the incentives to innovate and the long-term benefits to society that flow from the research and development activities which are fostered by the protection of IPRs.¹

1. Objectives of Intellectual Property Law

IP laws were first enacted to protect the inventors of new inventions and creators of original works from the unscrupulous exploitation of their work without compensation. For example, the preamble of the first copyright law -- the Statute of Anne,² which was enacted by the British Parliament in 1709 -- provides insight into the underlying problem faced by the legislators at that time:

Whereas Printers, Booksellers and other Persons have of late frequently taken the Liberty of printing, reprinting and publishing; or causing to be printed, reprinted, and published, Books and other Writings, without the Consent of the Authors or Proprietors of such Books and Writings, to their very great Detriment, and too often to the Ruin of them and their Families...³

In the civil law context, the term droit d'auteur began to be adopted by the middle of the 19th century and in contrast to 'copyright' was identified as a personality right. The emphasis is on the human author as the beneficiary of the right as compared to English tradition of placing greater emphasis on the protection of the right to copy a work.⁴ In Canada, while both terms have been adopted, the degree of influence of one or the other over Canadian law offers scope for discussion.⁵

In any case, in Canada there has been a recognition that the protection of the creator's rights in new inventions and original works serves to encourage further innovation. In the 1950s, the Royal Commission on Patents, Copyright and Industrial Designs was formed to undertake a comprehensive study of the IP law system in Canada. The Commission, led by Chief Justice Ilsley, had the following terms of reference for its study:

To enquire as to whether Federal legislation relating in any way to patents of invention, industrial design, copyright and trade marks affords reasonable incentive to invention and research, to the development of literary and artistic talents, to creativeness, and to making available to the Canadian public scientific, technical, literary and artistic creations and other applications, adaptations and uses, in a manner and on terms adequately safeguarding the paramount public interest, the whole in the light of present economic conditions, scientific, technical and industrial developments, trade practices, and other relevant factors and circumstances, including practices under or related to the said legislation and any relevant international convention to which Canada is a party .⁶

The Patent Act,⁷ the Copyright Act,⁸ the Trade-marks Act,⁹ the Industrial Design Act,¹⁰ the Integrated Circuit Topography Act¹¹ and the Plant Breeders' Rights Act¹² reflect Canada's commitment to protecting IPRs and allowing creators to benefit from the fruits of their ideas and innovations. The relevance of effective IP protection is highlighted by the observation that currently nearly three quarters of the value of publicly traded companies in the U.S. comes from intangible assets, and the estimated revenue from technology licensing worldwide is U.S. $ 100 billion.¹³ These economic benefits arise not only from a strong regime for protection of IPRs, but equally as a result of a vibrant economy, supported by a robust competition regime.

As discussed in greater detail below, there is an inherent need to be mindful of the appropriate balance between the proprietary rights accorded to creators by IP laws and the promotion of principles of sound competition policy.

a. The Patent Act

The Patent Act grants an inventor a patent over an invention, which is defined as any "new and useful art, process, machine or composition of matter" or any "new and useful improvement in any art, process, machine or composition of matter."¹⁴ A principal objective of the Patent Act is to encourage innovation and invention;¹⁵ and it achieves this in two ways . First, by only conferring a time limited right; once the patent expires, the invention passes into the public domain for all to use and build upon. Second, patent laws require the details of the invention to be disclosed so that the invention can be made use of by all after expiry of the patent and so that the disclosure adds to knowledge in the art.¹⁶ This is consistent with certain competition policy related objectives,¹⁷ as recognized by the Bureau in its Intellectual Property Enforcement Guidelines (the "Guidelines" or the "IPEGs").¹⁸

The grant of a patent provides its owner exclusive rights to make, sell or use the invention, for a limited time period - currently the period between the grant of the patent and the twentieth anniversary of the filing date of the application.¹⁹ If the patent is ultimately granted, a more limited contingent right to collect reasonable compensation for unauthorized use by others is retroactively available, for the period from the date the application is laid open to the public 18 months after the effective filing date, to the date of the grant of the patent.²⁰ Because the grant of a patent provides the patent holder with a monopoly over an invention, there is an ongoing concern that patents could be used in an anti-competitive manner or have an anti-competitive outcome.

The Patent Act acknowledges this concern through, for instance, Section 65 of the Patent Act, which allows for compulsory licensing of patents where the exclusive rights under a patent have been abused by a patent holder (see Section IV.A.1 below for a more detailed discussion of Section 65 of the Patent Act). Similarly, in Apotex v. Eli Lilly and Co.²¹ (discussed in Section I.C.1 below), the Federal Court of Appeal held that where there is evidence of "something more than the mere exercise of patent rights" that may affect competition in the relevant market, the exercise of the patent rights is subject to the provisions of the Competition Act.²² Therefore, it is perhaps more difficult for IP law and policy makers to strike the appropriate balance between IPRs and competition principles when dealing with patents, as opposed to other forms of IPRs (e.g., copyright, trade-marks).

Because the manner in which patents are exploited by commercial entities is increasingly raising competition policy concerns, IP law and policy makers are faced with a number of challenges that require careful consideration of the appropriate balance between IPRs and principles of competition. These issues are discussed in more detail in Section II.A below.

b. The Copyright Act

The Copyright Act grants the owner of a copyright in an original work a bundle of rights that prevents others from exploiting the work.²³ Copyright is distinct from other forms of IPRs in that a work is fully protected under the Copyright Act as soon as it is created, without the need for any procedural activity to obtain registration, provided that the author satisfies certain eligibility requirements. To be protected by copyright, a work must be original; that is, the work must not have been copied and must be the exercise of some skill and judgment in its authorship.²⁴ There is no requirement of novelty or non-obviousness.²⁵

Copyright protection subsists in a wide variety of works, including literary, dramatic, musical, artistic works and compilations thereof. For example, literary works include books, other writings, and computer programs. Copyright is also available for performers' performances, sound recordings and broadcasting signals. The rights of a copyright owner vary, depending on the work, but for some works include the rights to reproduce the work, to first distribute an unpublished work, to translate the work, to communicate the work by telecommunication, to publicly perform the work, to exhibit the work, etc.

Copyright protects only the expression of an idea, and not the idea itself. Although the Copyright Act grants the copyright owner a number of rights, copyright does not provide a monopoly right. The idea behind the work that is protected is itself free to be used by anyone and expressed in a different manner. Any such other work, if original, would then be protected by copyright. There is also no exclusion of the independent creation of a similar work. Accordingly, there are relatively fewer instances of tension between the application and development of copyright law and competition policy.²⁶ At the same time, there are certain aspects of copyright policy that are deserving of attention from a competition policy perspective, particularly given changes in technological advancements. Making multiple copies of a work and transmitting them has become easier and inexpensive. Courts have increasingly had to grapple with issues relating to the transmission of copyrighted material over the internet²⁷ and copyright in works published on online databases.²⁸ As a result, policy makers have been forced to adopt different methods of copyright protection and enforcement, which can raise competition policy concerns (see Section II.B below).

c. Trade-marks

Trade-marks are signs, such as names, designs, letters, numerals, colours, slogans and other figurative elements, that distinguish or are capable of distinguishing between products.²⁹ The purpose of a trade-mark is "the protection of the distinctiveness of the product, not of a monopoly on the product."³⁰ Trade-mark rights arise at common law as a result of the use of a mark which distinguishes the source of wares and/or services. Unregistered trade-mark rights are protected under common law through the passing-off action and pursuant to the Trade-marks Act by a corresponding statutory action.³¹ However, registration of a trade-mark with the Trade-marks Branch of the Canadian Intellectual Property Office ("CIPO") under the Trade-Marks Act affords the registrant some additional benefits. Registration of a trade-mark grants the owner exclusive rights to the use of the trade-mark in association with the wares and/or services for which the mark is registered.

The exploitation of trade-mark rights in and of itself is not likely to raise significant competition policy concerns, since trade-marks merely allow persons to distinguish their wares or services from the wares or services of others. There have been practices involving trade-marks that have been alleged to violate the CA, but that is because of the nature of the practice itself rather than because of the fact that a trade-mark was involved. For example, in Nutrasweet the Competition Tribunal (the "Tribunal") pointed out that it is conceivable that a trade-mark can be the subject of a tying arrangement.³² However, in that case the Tribunal did not find any evidence of such tying. Indeed, the Tribunal noted that the Commissioner of Competition (the Director of Investigation and Research as the position was then called) recognized that there should be no interference with NutraSweet's proprietary rights.³³ Thus, even if a tying arrangement involving a trade-mark occurs, the activity will be illegal not because of the existence of the trade-mark rights, but because tying, under some circumstances and irrespective of whether it involves a trade-mark or not, is prohibited by the CA. In the Tele-Direct case the Tribunal concluded that mere selective licensing of a trade-mark, without more, is not an anti-competitive act. ³⁴

In the more recent case of Kirkbi AG v. Ritvik Holdings Inc. involving the famous LEGO toy blocks, the Supreme Court pointed out that once a patent has expired, any attempts to bring it back under another guise, such as, by alleging that trade-mark rights can be obtained for functional aspects of the formerly patented product, are to be discouraged.³⁵ The court found that the doctrine of functionality ensures that trade-mark protection cannot be obtained for the "utilitarian features" of a mark, whether the mark is registered or unregistered.³⁶ Kirkbi's claim that the shape of LEGO blocks, most of which were governed by functional aspects, was a trade-mark was dismissed by the Supreme Court.

Trade-marks are nothing more than "a symbol of connection between a source of a product and the product itself", which, while giving rise to economic value and rights to the holder, "do not protect the product as such".³⁷ Thus, trade-marks on their own are not likely to give rise to anti-competitive concerns. On the contrary, trade-marks may even be considered pro-competitive since they perform the function of allowing consumer to distinguish between products easily and identify the source of the goods, enabling consumers to re-purchase products that they like.

However, as will be discussed in greater detail in Section II.C.1 below, some aspects of trade-marks, such as official marks, may give rise to some competition concerns.

d. Other IP Rights

There are some other rights that fall under the scope of IPRs. For instance industrial designs are protected in Canada under the Industrial Design Act. An industrial design is the aesthetic features of a product, such as the shape, configuration, pattern or ornament that is applied to the product that "appeal to and are judged solely by the eye".³⁸ Designs that are merely utilitarian are not capable of registration and protection. Similarly, an idea, a method of construction, material used in the construction, or the useful function of an article cannot be registered.³⁹ Since industrial designs by definition, relate only to an aesthetic aspect, rather than a functional use, it is unlikely that there will be any significant adverse effect on innovation.

The Integrated Circuit Topography Act protects three-dimensional configuration of integrated circuits. However, this legislation is not extensively used in Canada.⁴⁰

The Plant Breeders' Rights Act provides exclusive protection to new varieties of some plant species. This legislation, while providing certain protection for newly developed plant varieties, relates to different rights than those protected under the Patent Act.

Another form of rights that is often discussed under the rubric of IPRs are trade secrets. There is no legislation relating to trade secrets in Canada⁴¹, and it is instead protected under the general principles of provincial tort law.⁴² While trade secrets are unlikely to raise competition law concerns directly, the contracts under which trade secrets may be licensed for use by other parties may well have anti-competitive effects.

2. Objectives of Competition Policy

While various objectives of competition policy have been identified over the years, there has been an increasing trend in the past two decades towards the promotion of consumer welfare and economic efficiency. A June 1994 OECD Interim Report on Convergence of Competition Policies states that:

There is general consensus that the basic objective of competition policy is to protect and preserve competition as the most appropriate means of ensuring the efficient allocation of resources – and thus efficient market outcomes – in free market economies. While countries differ somewhat in defining efficient market outcomes, there is general agreement that the concept is manifested by lower consumer prices, higher quality products and better product choice. ⁴³

The Report also notes that, although the competition laws of some countries also encompass other objectives, it is clear that the efficiency goal is central to competition enforcement in virtually all developed countries. The growing emphasis on economic efficiency is an important and positive trend since it leads to greater appreciation of the long-term benefits of competition policy which promote economic growth for the betterment of a society's citizens and businesses.

Most commentators agree that true efficiencies should give rise to consumer benefits.⁴⁴ This is evident from the jurisprudence and academic writings in jurisdictions with a well developed competition law tradition, as well as from the statements of objectives in the competition laws of various developed and developing countries.⁴⁵ Efficiencies can, for example, lead to lower product prices by creating economies of scale and synergies. In many instances, significant consumer benefits result from innovation and technological advances that lead to the development of new products or more efficient production methods. In other words, consumers may benefit from not only lower prices but also new opportunities as goods and services become better, cheaper, more accurate and reliable, and of course as new technologies are researched, developed and brought to market to satisfy latent commercial demands that previously went unsatisfied.

a. The Competition Act

The modern day CA was enacted in 1986 to encourage competition, efficiency and innovation in the Canadian economy. Section 1.1 of the Act provides that:

The purpose of this Act is to maintain and encourage competition in Canada in order to promote the efficiency and adaptability of the Canadian economy, in order to expand opportunities for Canadian participation in world markets while at the same time recognizing the role of foreign competition in Canada, in order to ensure that small and medium-sized enterprises have an equitable opportunity to participate in the Canadian economy and in order to provide consumers with competitive prices and product choices.

Although competition policy in Canada, and elsewhere, has been motivated by these and other objectives over the years, there has been a clear trend in Canada toward a careful balancing of two more fundamental evolving objectives: (i) the promotion of a marketplace framework whereby participants may contract, buy and sell free from the abusive exercise of market power by other marketplace participants (which will also promote economic efficiency in the long term); and (ii) the promotion of short-term economic efficiency which will have a consequential benefit to the international competitiveness of Canadian industry.⁴⁶

In summary, the principal goals of Canadian competition law are the maximization of consumer welfare and the promotion of efficiency. In the new economy, these goals are usually best advanced through the promotion of innovation and the resulting development of new or improved products and services.

The CA reflects these objectives and prescribes the circumstances in which the public interest objectives advanced by the CA are to limit the exercise of private contractual or property rights. For example, the CA is intended to prevent competitors from implementing mergers or other arrangements or conduct that would substantially or unduly prevent or lessen competition.⁴⁷ Parties will be found to have substantially prevented or lessened competition where an arrangement or conduct will permit them to obtain and exercise, unilaterally or interdependently with others, a materially greater degree of market power than in the absence of that arrangement or conduct. However, these limitations do not apply in cases where the impact on competition is a result of "superior competitive performance"⁴⁸ or is offset by greater gains in efficiency.⁴⁹

Canadian competition law also implicitly recognizes that traditional competition laws and IPRs are designed for the same purpose – to reward success on the merits of effort, creativity and skill. In this regard, the CA has taken into account specific considerations relating to IPRs. For example:

Section 32 gives the Federal Court the power, on application by the Attorney General, to make remedial orders if it finds that a person 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 IV.A.3 for a more detailed discussion of Section 32.)

Subsection 61(1), dealing with price maintenance, explicitly recognizes that exclusive rights and privileges conferred by a patent, trade-mark, copyright, registered industrial design or registered integrated circuit topography, could lead to price maintenance (although the language relating to IPRs in that provision is likely superfluous for all practical purposes).⁵⁰

Subsection 79(4) provides a "superior competitive performance" exception that states that, in determining whether a practice has had, is having or is likely to have the effect of preventing or lessening competition substantially in a market, the Tribunal shall consider whether the practice is a result of superior competitive performance.⁵¹

Subsection 79(5) includes an exception to the abuse of dominance provisions, which provides that an act engaged in pursuant only to the exercise of any right or enjoyment of any interest derived under the Copyright Act, Industrial Design Act, Integrated Circuit Topography Act, Patent Act, Trade-marks Act or any other Act of Parliament pertaining to intellectual or industrial property is not an anti-competitive act.

Also, the concept of "innovation" is specifically recognized as a factor in the review of mergers under the CA.⁵²

b. The Bureau's Intellectual Property Enforcement Guidelines

On September 21, 2000, the Bureau released the final version of its IPEGs which, in addition to the provisions described above, articulate the Bureau's approach to the interface between competition policy and IPRs. The Guidelines have provided greater clarity with respect to the manner in which conduct involving IPRs will be assessed by the Bureau and, in particular, have made it clear that the mere exercise of IPRs will rarely give rise to competition law concerns in Canada. The Guidelines are intended to address the perception that the goals of IP law and competition law were inconsistent and make it clear that the Bureau does not in any way view the rights granted by IP law as inherently suspect.⁵³

In general, the Guidelines recognize IP laws and competition laws as two complementary instruments of government policy that promote an efficient economy.⁵⁴ In this respect, the manner in which IP laws generally serve to foster and promote innovation by creating enforceable and exclusionary proprietary IPRs is now widely considered to be self-evident. For example, the Guidelines recognize this function of IP in the following passage:

Adequate intellectual property ("IP") protection plays an important role in stimulating new technology development, artistic expression and the dissemination of knowledge all of which are vital to the knowledge-based economy.⁵⁵

The Guidelines reflect the Bureau's recognition that dynamic change and innovation, which are fostered by the protection of IPRs, are increasingly important drivers of economic activity and productivity gains in Canada, and in many cases, are now the most important indices of competition. The Bureau generally considers licensing to be "pro-competitive, because it facilitates the broader use of a valuable IPR by additional parties".⁵⁶

The Guidelines were prepared in response to the numerous requests that the Bureau provide greater transparency and certainty with respect to its approach to the exercise of IPRs as well as two decisions in which the Tribunal highlighted the limitations of the Bureau's ability to seek measures such as the compulsory licensing of IPRs.⁵⁷ The business community was also interested in: (i) understanding whether the Bureau's approach to IPRs was consistent with that adopted by the U.S. Department of Justice and the Federal Trade Commission ("FTCs") in their April 6, 1995 Antitrust Guidelines for the Licensing of Intellectual Property (the "U.S. IP Guidelines"); and (ii) understanding the Bureau's views with respect to the application of Section 32 of the CA. The Guidelines reflected the input received by the Bureau: (i) from a panel of experts (of which Richard Corley was a member); (ii) in response to the drafts of the Guidelines, which were circulated by the Bureau for comment in June 1999 and in February 2000; and (iii) during the consultative meetings concerning the Guidelines which were held by the Bureau across Canada.⁵⁸

The Guidelines make it clear, as a general proposition, that the CA applies to transactions and conduct involving IP in essentially the same manner as it applies to other property (and in this regard are consistent with the approach adopted by the U.S. IP Guidelines). However, the Guidelines provide additional guidance (and comfort for those concerned about the protection of IPRs) by specifically addressing two general categories of conduct: (i) conduct involving the "mere exercise" of IPRs; and (ii) conduct involving "something more than the mere exercise" of IPRs.

Conduct involving "the mere exercise of an IPRs" will be challenged by the Bureau only in very rare circumstances. By the "mere exercise", the Bureau means "the exercise of the owner's right to unilaterally exclude others from using the IP".⁵⁹ The Guidelines indicate that conduct involving a mere exercise of IPRs will be assessed under Section 32 of the CA and will only be challenged in circumstances where the Bureau concludes that the requirements for a remedy to issue under Section 32 have been met and, in addition, that: (i) invoking a remedy against an IPR holder under Section 32 "would not adversely alter the incentives to invest in research and development in the economy"; (ii) "the alleged competitive harm stems directly from the refusal and nothing else"; and, (iii) "no appropriate remedy is available under the relevant intellectual property statute".⁶⁰

Regarding the second broad category of conduct addressed in the Guidelines, i.e., conduct involving more than the "mere exercise" of IPRs, one of the more helpful statements indicates that the Bureau will only intervene to challenge licensing agreements if "they reduce competition substantially or unduly relative to that which would likely have existed in the absence of the license".⁶¹ (The qualifications "substantially or unduly" did not appear in earlier drafts). Examples of conduct to which the general provisions of the CA might apply (namely joint conduct or other conduct involving "something more than the mere exercise of the IPR") include bid-rigging, conspiracy, joint abuse of dominance and mergers (or other direct or indirect transfers of IPRs).

With respect to market definition, the Bureau declined to adopt an "innovation market" approach, and instead adopted a conventional approach to market definition. The Guidelines explicitly state: "The Bureau does not define markets based on research and development activity or innovation efforts alone."⁶² The Guidelines also indicate that the Bureau will not "define a relevant market around a license, but rather focuses on what the legal rights granted to the licensee actually protect."⁶³ Where the anti-competitive concern is prospective, the Guidelines state that "relevant markets are normally defined using the hypothetical monopolist test" set forth in the Merger Enforcement Guidelines. However, when the anti-competitive concern is retrospective, the Bureau believes that "applying the hypothetical monopolist test could lead to erroneous conclusions about the availability of substitutes and the presence of market power" and will concurrently assess market definition and competitive effects.⁶⁴

Regarding efficiencies, the Guidelines state that "there may be instances when creating or increasing market power is justified because of the efficiencies created".⁶⁵ After noting that efficiencies in respect of mergers are explicitly recognized in Section 96 of the CA, the Guidelines state that "efficiency rationales and business justifications may be relevant to determining whether conduct is, on balance, anti-competitive" under the provisions in the CA dealing with abuse of dominance and non-price vertical restraints.⁶⁶ While the Guidelines add that the Bureau will not assess all of the theoretically possible alternative means for achieving the claimed efficiencies, they state that the Bureau will assess whether "commercially reasonable [alternative] means to achieve the efficiencies likely would be less harmful to competition".⁶⁷

B. Current Views on IP/Competition Interface

1. United States

U.S. legislation is largely silent on the issue of the relationship between competition and IPRs; hence, it is the U.S. antitrust enforcement agencies and the courts which have determined the interaction between competition law and IPRs. In the early part of the 20th century, the approach towards IPRs and competition law was that they had opposing purposes – while IPRs created and protected certain monopoly power, competition law was aimed at ensuring that monopolies did not come into existence.⁶⁸ For instance, in Precision Instrument Manufacturing Co. v. Automotive Maintenance Machinery, the U.S. Supreme Court held that, "a patent is an exception to the general rule against monopolies and to the right to access to a free and open market."⁶⁹

In the patent and copyright context, there have been also been a number of cases in the U.S. under the "patent misuse" (and corresponding "copyright misuse") doctrine, which is a principle of equity based on which the court refuses to assist a patentee who "misuses" its patent to suppress competition.⁷⁰ The doctrine has evolved since Morton Salt by virtue of court decisions to increasingly take into account competition law principles⁷¹ and has been recognised by virtue of legislation.⁷²

Over time, both the antitrust enforcement agencies and the courts have recognized that competition and IP are in fact compatible. The courts began to recognize that IPRs and competition concepts could co-exist,⁷³ and the enforcement agencies began to narrow the types of conduct that were considered excluded from antitrust scrutiny.⁷⁴ More recently, in Atari Games Corp. v. Nintendo of America, Inc., the Federal Circuit stated: "[t]he aims and objectives of patent and antitrust laws may seem, at first glance, wholly at odds. However, the two bodies of law are complementary, as both are aimed at encouraging innovation, industry and competition."⁷⁵

The U.S. IP Guidelines note that, "intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare."⁷⁶ The U.S. IP Guidelines adopt the following general principles in their treatment of IPRs in the context of competition law: (i) IPRs are treated as any other form of property; (ii) IPRs are no longer presumed to create market power; and (iii) the licensing of IPRs is recognized as having potentially pro-competitive effects.

To analyze situations that involve a restriction on the sharing of an IPR, the antitrust enforcement agencies adopt an approach that examines whether:⁷⁷ (i) the restraint is likely to have an adverse effect on competition; and (ii) the pro-competitive effects of the restraint outweigh the anti-competitive effects.

The clear shift towards viewing IPRs and competition law as complementary to each other is seen in the 2003 Report by the FTCs that notes that patents do not necessarily confer monopoly power on their holders, and further that, even where a patent confers a monopoly power, that alone does not create an antitrust violation.⁷⁸ This Report concludes that both IPRs and competition make significant contributions towards innovation, consumer welfare and prosperity, and in order to maximize these benefits, an appropriate balance between the two needs to be struck.

U.S. courts have recognized that IPRs are not completely immune from the operation of competition laws. Thus in Microsoft⁷⁹ the Appeals Court accepted the Federal Court's statement that IPRs do not confer a privilege to violate the antitrust laws. Similarly, most recently, the U.S. Supreme Court in Illinois Tool Works, Inc. v. Independent Ink, Inc. overturned its long-held view that the mere possession of a patent gives rise to a presumption of market power. The U.S. IP Guidelines since 1995 have stated that the antitrust enforcement agencies themselves do not consider the mere possession of an IPR as granting the holder market power.⁸⁰

Thus, even as the U.S. antitrust enforcement agencies have moved from treating antitrust and IPRs as contradictory to each other to recognizing their complementary features, the courts are still to some extent struggling to reconcile the application of these areas of the law. In this regard, the newly created Antitrust Modernization Commission has identified the balance between IPRs and promotion of competition as one of the issues to be examined by its "new economy" study group. Presumably, this group will also provide recommendations that will assist in finding the appropriate approach to competition and IP in the U.S.⁸¹

2. Internationally

While there is no international treaty dealing with substantive competition law matters in which the interface between competition law and IPRs could be addressed, a number of international organizations, including the WTO, the OECD and UNCTAD, have considered the subject.

At the end of the Uruguay Round of negotiations, countries incorporated into the WTO set of agreements including the Agreement on Trade-Related Aspects of Intellectual Property Rights ("TRIPS"), which expands on previous international IP treaties and requires that WTO member countries have legislation in place providing IP protection of a certain standard. TRIPS provides that member countries may take appropriate measures to limit the exercise of IPRs where action is necessary to prevent unreasonable restraints of trade or conduct adversely affecting the international transfer of technology.⁸² Further, WTO members may prescribe in their domestic legislation that licensing practices such as grant-backs, coercive package licensing, and prohibitions against challenges to validity, are anti-competitive.⁸³ However, TRIPS does not resolve issues such as to what extent competitive considerations should limit the exercise of IPRs.⁸⁴

A WTO agreement on competition law does not appear likely in the near future, as there is little consensus among WTO member countries on the feasibility of such an agreement. Nonetheless, the WTO Working Group on the Interaction Between Trade and Competition,⁸⁵ formed in 1996, continues to examine issues relating to competition for possible negotiation. So far, the interface between IPRs and competition does not appear to be a particular focus for the Working Group.

The OECD, on the other hand, has looked at the interaction between IPRs and competition law more closely. For example, the OECD Competition Committee conducted a roundtable in 1997 on this issue and found that there was general, if qualified, consensus for the following principles:⁸⁶ (i) it should not be presumed that an IPR creates or increases market power; (ii) competition policy should respect the basic rights granted under patent law; and (iii) a licensing restriction should be prohibited if it leads to a situation which is less anti-competitive than would occur if there were no license at all. Even where a licensing agreement fails this test, it should be permitted if there are sufficient actual or potential efficiencies to be obtained. The OECD Committee on Science, Technology, and Industry has also examined the competition/IP interface. For instance, a 2002 working paper found that there was no evidence that competition policy impeded innovation, and provided a framework for guiding competition policy in the areas of innovation and IP.⁸⁷

Another international organization that has examined the interface between IPRs and competition is the United Nations Conference on Trade and Development (UNCTAD). In 2000 the UNCTAD Secretariat prepared a report providing a comparative analysis of competition policy and rules relating to IPRs, focussing on the U.S., the E.U. and Japan, but also touching on Canada, Australia, Korea, Jamaica, Zambia, and India.⁸⁸ The Report found that there was a general move away from doctrines that focus on the scope of the IPR towards an open inquiry into the purpose of the conduct engaged in by the IP holder and the effect of such conduct on competition.⁸⁹

In summary, international organizations that have examined the interface between IPRs and competition policy appear to have found that there is a broad degree of consensus among countries that IPRs and competition law are compatible and should co-exist. However, there appears to be little discussion, let alone consensus, on the precise manner in which competition law should apply to IPRs.

C. Recent Canadian Decisions that Implicate the IP/Competition Law Interface

There have been relatively few cases focusing on IPRs or information technology that have been investigated and/or prosecuted recently by the Bureau (apart from cases involving deceptive representations). The relative dearth of competition law cases in this area may be attributable primarily to a group of early Canadian cases that constrained the use of competition law in alleging IP infringements⁹⁰ and in recent years at least in part, to the guidance that the Guidelines provide with respect to the circumstances in which the Bureau is likely to challenge conduct involving the exercise of IPRs. Nevertheless, the following are two examples of recent significant developments in Canadian competition law that have raised issues related to the interface between IP and competition law.

1. Eli Lilly and Co. v. Apotex Inc.

A recent case that highlights the interface between IP and competition law is Eli Lilly and Co. v. Apotex Inc.⁹¹ In 1997, Eli Lilly brought suit against Apotex alleging infringement of eight of its patents. Four of these patents were assigned to Eli Lilly by Shinogi & Co. Ltd., a Japanese company. Apotex counterclaimed that the assignment of the four patents by Shinogi constituted an agreement that resulted in undue lessening of competition contrary to Section 45 of the CA. Subsection 45(1) makes conspiracies that unduly restrain trade unlawful. The Trial Division of the Federal Court held that an undue impairment of competition cannot be inferred from evidence of the exercise of patent rights alone.⁹² While granting a motion to strike the claims based on Section 45 of the CA, the Court pointed out that, although there was an agreement between Eli Lilly and Shinogi that had the effect of lessening competition, that lessening was not "undue" as required by Subsection 45(1) because it had been authorized by an Act of Parliament, specifically, Section 50 of the Patent Act.⁹³ The Court also noted that this conclusion is compatible with the IPEGs.⁹⁴

The decision of the Trial Division was appealed, and the Competition Bureau participated as an intervener before the Federal Court of Appeal. The Bureau argued that the trial judge erred in his characterization that, because the Patent Act permits the assignment of patents, any transfer of a patent between two entities could not give rise to an undue lessening of competition. Such a characterization would effectively allow IP law to take precedence over competition law on such an issue. The Bureau argued that such an approach was inconsistent with the IPEGs and encouraged the court to accept the Bureau's approach.

The Federal Court of Appeal explained that Section 50 of the Patent Act does not immunize the assignment of a patent from Section 45 of the CA "when the assignment increases the assignee's market power in excess of that inherent in the patent rights assigned."⁹⁵ The Court found that Section 50 of the Patent Act and Section 45 of the CA do not conflict since the relevant provision of the Patent Act only authorizes, and does not compel, the assignment of a patent. The court noted that this approach allowed Section 50 of the Patent Act and Section 45 of the CA to "operate harmoniously in accordance with the ordinary meaning of the statutory language of the provisions."⁹⁶ In so doing, the Court essentially adopted the approach set out in the IPEGs and, in fact, cited Section 4.2.1 of the IPEGs as being particularly relevant to the issue. The court concluded that "... the assignment of a patent may, as a matter of law, unduly lessen competition."⁹⁷

The Federal Court of Appeal's decision attempts to strike a balance between promoting innovation through IPR protection, and promoting competition through the elimination of barriers to entry deriving from the grant of exclusive IPRs. While the "mere exercise" of an IPR will not attract the CA, scrutiny under the CA when conduct goes beyond such "mere exercise", cannot be avoided merely because an IPR derives from a statute.

It must be noted that these decisions were based on motions seeking to strike the claims relating to Section 45 of the CA. The result of the Federal Court of Appeal's decision was to restore the paragraphs of the claim alleging a violation of Subsection 45(1) of the CA, to accept the conclusion of the trial judge that there was a lessening of competition as a result of the assignment, and to allow the matter to go ahead on trial.⁹⁸

2. LEGO Case ⁹⁹

While the LEGO case primarily dealt with the relationship between patent and trade-mark rights, it involved principles of competition law and policy to the extent that Kirkbi was attempting to seek continued IP protection that would restrict its competitors' actions even after Kirkbi's patent protection over the LEGO blocks had expired. The Supreme Court pointed out that IPRs cannot be used to extend the protection that IP offers from competition once the statutory period of protection expires.

Kirkbi manufactured LEGO products since 1949 under various patents in Canada and elsewhere. In Canada, the last patent expired in 1988. After the expiry of Kirkbi's patents, new competitors appeared and attempted to market virtually identical products. The most aggressive was Mega Bloks (originally Ritvik Holdings Inc.), the respondent, who created a line of blocks which were interchangeable with the LEGO blocks. "Facing new competition and now deprived of patent protection, Kirkbi attempted to protect its market position, employing a highly creative and aggressive use of the law of IP and unfair competition, in several different legal systems throughout the world." ¹⁰⁰ In Canada, Kirkbi attempted to register the pattern of studs on a LEGO piece as a trade-mark or design. After the Register of Trade-marks rejected the design as a trade-mark, Kirkbi asserted unregistered trade-mark rights in respect of the LEGO indicia. Kirkbi alleged that the marketing by Ritvik Holdings of its micro and mini lines of bricks using the same pattern caused confusion with its unregistered trade-mark. It claimed relief under Subsection 7(b) of the Trade-marks Act and under the common law tort of passing off. Kirkbi claimed ownership of the unregistered mark, sought a declaration that its rights had been violated, and requested a permanent injunction to prevent the marketing of mini and micro bricks by Ritvik Holdings and damages.

Both the Federal Court, Trial Division, and the Federal Court of Appeal, found that purely functional features, such as the LEGO indicia, could not become the basis of a trade-mark, whether registered or unregistered, and dismissed the action.

In dismissing the appeal by Kirkbi, Lebel J., writing for the Supreme Court of Canada, first made a distinction between patent rights and trade-marks. "Patents protect new products and processes. In consideration of disclosure of the invention, patent law grants a limited time monopoly to the patentee on the use and marketing of the subject matter of the patent." ¹⁰¹ However, "[i]n the case of trade-marks, the focus shifts from the product itself to the distinctiveness of the marketing... [and] seek to indicate the source of a particular product... so that, ideally, consumers know what they are buying and from whom." ¹⁰²

When Kirkbi's patents over LEGO blocks expired, the technology fell into the public domain. Although the LEGO trade-mark was protected, the monopoly on the wares had expired. "The monopoly had been the key to the building up and preservation of LEGO's market share, and so Kirkbi employed a number of different means to protect it, one of which was the assertion of a trade-mark." ¹⁰³

The doctrine of functionality in trade-marks reflects the purpose of a trade-mark – the protection of the distinctiveness of the source of a product, and not of a monopoly on the product. It recognizes that the law of trade-marks is not intended to inhibit the competitive use of "utilitarian" features of a product. "In the law of intellectual property, it prevents abuses of monopoly positions in respect of products and processes...[once] patents have expired, it discourages attempts to bring them back in another guise." ¹⁰⁴ The court found further that:

Competition between products using the same technical processes or solutions, once patents rights are out of the way, is not unfair competition. It is simply the way the economy and the market are supposed to work in modern liberal societies. ¹⁰⁵

In summary, in response to Kirkbi's position, the Supreme Court held:

In the end, the appellant seems to complain about the existence of competition based on a product, which is now in the public domain...The fact is, though, that the monopoly on the bricks is over, and MEGA BLOKS and LEGO bricks may be interchangeable in the bins of the playrooms of the nation – dragons, castles and knights may be designed with them, without any distinction. ¹⁰⁶

D. Future IP/Competition Challenges for Canada

The IP/competition interface presents challenges for the development of both IP law and policy and competition law and policy in the following ways.

First, IP law and policy must continually reflect an appropriate balance between protecting the IPR-holder's ability to exclude others without restricting unreasonably the freedom of competitive forces and the benefits inherent to society from competition. In this manner, the ways in which IP law and policy is informed by competition policy and principles of competition (if not competition law) is critical to ensuring that IP laws work well in terms of promoting innovation through sound competition. Also, IP policy-makers face a number of challenges as a result of the ever-increasing pace of technological development, and the ongoing need for IP law and policy to keep up with such developments or, otherwise, risk becoming outdated, obsolete and, ultimately, inadequate. As discussed in Section II, there are a number of areas of IP law and policy deserving of further academic research and study in these respects.

Second, the provisions of the CA dealing with IP issues are well-established and the Bureau's Guidelines have now been in effect for over five years. However, these important aspects of Canadian competition policy must evolve with the continuing development of new technologies and new issues that emerge. Recent developments in competition law enforcement and policy dealing with IP highlight the fact that a number of challenges will emerge and will need to be addressed under Canada's existing competition policy regime, or an amended regime. Section III describes such challenges and provides suggestions for areas of further academic study and research.

II. Future Challenges For Intellectual Property Law And Policy Makers

A. Patent Law

1. Patent Pooling

"Patent pooling"¹⁰⁷ involves two or more owners of different patents agreeing to pool together their individual patents and agreeing to collectively license the pooled set of patents. Patent holders might agree to pool their patents together for a number of legitimate reasons including: (i) to avoid costly infringement litigation in case one of the parties to the pool is alleging infringement of its patent by another party to the pool; (ii) to clear blocking patents owned by another person without which a person would not be able to develop its product; or (iii) to offer a single source for obtaining licenses for related patents thereby reducing transaction costs for licensees.

However, patent pooling could, in certain circumstances, amount to anti-competitive activity, such as price fixing, joint abuse of dominance or tying.¹⁰⁸ The IPEGs address the issue of patent pooling by providing an example. While recognizing that such arrangements could have pro-competitive benefits, the IPEGs suggest that, where a patent pool does not result in the clearing of blocking patents, it could be challenged as being a conspiracy to prevent price competition under Section 45 of the CA.¹⁰⁹ To date, the Canadian courts and the Tribunal do not appear to have considered a case involving patent pooling.

The U.S. IP Guidelines recognize that patent pooling may be a form of tying arrangement if the licensing of one product is conditioned upon the acceptance of a license of another, separate product.¹¹⁰ The U.S. IP Guidelines also recognize that patent pooling can be efficiency enhancing, and state that the antitrust authorities will evaluate its competitive effects in the same manner as for other tying arrangements.¹¹¹ In the U.S., courts have held that, if the patent pool creates market power and the patents are potentially competing patents, the pool is likely to be anti-competitive.¹¹² On the other hand, if the patent pool does not foreclose competition for a viable product, permits licensees to obtain licenses for individual patents within the pool, and does not create exclusive licenses, anti-competitive concerns are not likely to arise.¹¹³

Potential Area for Academic Study:

Empirical Study Concerning Patent Pooling in Canada. While the IPEGs present the problem of patent pooling and its competition policy concerns by way of an example, it may be worthwhile to examine if there is any empirical evidence to suggest that patent pooling is in fact being used for anti-competitive purposes or with anti-competitive effect. Questions that could be answered by an empirical study on patent pooling in Canada may include: How prevalent is the practice of patent pooling in Canada? In what industries is patent pooling most prevalent? How often is patent pooling engaged in by competitors/competition patents being pooled together? Is competition in Canada being lessened as a result of patent pooling? The answers to these questions would help inform the future outlook on patent pooling for IP law and policy makers.

2. Patent Ambush

"Patent ambush" occurs when a patent owner participates in the process of adoption of an industry standard by a standard setting organization ("SSO")¹¹⁴ without disclosing its ownership of pending patent applications or patents relating to implementation of an aspect of the standard, and then claims infringement of its patent after the SSO adopts, and others begin to use, the standard.

Setting industry standards can have pro-competitive effects as it assures producers that their products will be compatible. This can in turn promote innovation, lead to greater investment in research and development due to reduced research overlap, provide network efficiencies, and result in reduction of transaction costs. The competition law concern with such activities, however, is that businesses indulging in patent ambush acquire market power and exercise it to suppress competition in the very same emerging markets that the industry standards are aimed at promoting.

Issues relating to patent ambush are not dealt with by the CA or the IPEGs. In the U.S., the FTCs has filed complaints against patent owners on the basis that, through participation in SSOs, they manipulated the industry standard setting process by concealing information on pending patent applications and issued patents.¹¹⁵ For instance, the FTCs filed a complaint against Rambus Inc., a company specializing in semiconductor chip design alleging that Rambus deliberately and intentionally manipulated the standard setting process of the Joint Electron Device Engineering Council (JEDEC), a private SSO in which Rambus participated, by concealing information on pending and issued patents.¹¹⁶ The Administrative Law Judge of the FTCs dismissed the complaint, and an appeal is now pending before the FTCs Commissioner.¹¹⁷

Another recent case involved an allegation by the FTCs that Unocal had violated Section 2 of the Sherman Act¹¹⁸ by intentionally failing to disclose to the California Air Resources Board (a SSO) that it had relevant pending patent applications when it participated in discussions leading to the SSO adopting a standard relating to clean-burning gasoline, and subsequently asserting its proprietary interests. While the Administrative Law Judge of the FTCs dismissed all charges based on the "Noerr-Pennington" doctrine,¹¹⁹ the FTCs Commissioner reversed the decision and remanded the case to the Administrative Law Judge.¹²⁰

Potential Areas for Academic Study:

Developing rules for Standard Setting. Currently no rules exist to address competition concerns arising from standard setting. Guidelines that clarify under what circumstances standard setting will be considered to be a violation of the CA would be beneficial, especially for the high-technology and network industries where the interaction between IPRs and competition are more prevalent and where standard setting often occurs. Such clarification would deal with issues such as: (i) conditions under which SSO's activities could result in attempted monopolization; or (ii) whether government sponsored SSO's should be treated differently than private SSOs.¹²¹

Nature of Disclosures. Some SSOs attempt to minimize the possibility of patent ambush by requiring participants to promise to offer reasonable and non-discriminatory ("RAND") license terms in case a standard that requires the use of their patent is adopted. Issues to consider might include: (i) the degree of detail the ex-ante negotiation of the license terms and promise to offer RAND licenses can go into without amounting to collusion; or (ii) the extent of open disclosure that should be required. Requiring the disclosure of all existing and potential patents and patent applications that relate to the product or process being standardized could involve great expenditure and dissuade patent owners and applicants who may not wish to disclose the existence of all their inventions, especially those for which applications are pending. On the other hand, requiring limited disclosure may not be sufficient.

3. Multiple Patents to Delay Market Entry

The process by which a patentee may prevent a generic manufacturer from obtaining regulatory compliance is governed by the Patented Medicines (Notice of Compliance) Regulations ("PM-NOC Regulations") under the Patent Act. Under these regulations, a patentee of a drug who has obtained or filed a submission for a notice of compliance ("NOC") for that drug can apply to have a patent relating to a drug containing a medicine listed on the patent register maintained by Health Canada. For another person, typically a generic drug manufacturer, to obtain a NOC to sell a generic version of the drug without filing a New Drug Submission ("NDS"), but only an Abbreviated New Drug Submission ("ANDS"), the generic must serve a notice of allegation ("NOA") on the patentee. The generic manufacturer is required to allege that: (i) the generic manufacturer will not infringe the patent; (ii) the patent is invalid; or (iii) the generic manufacturer will wait until expiry of the patent before manufacturing and selling the drug. The patentee can then apply for an order of the Federal Court to prohibit the Minister of Health from issuing a NOC to the generic manufacturer. This process triggers an automatic stay which cannot exceed 24 months during which the generic manufacturer cannot obtain a NOC to manufacture its generic version.

Generic manufacturers have alleged that brand name drug companies attempt to keep extending their patent monopolies for as long as possible by obtaining patents for improvements and variations and adding these patents to the patent register (a process sometimes referred to as "evergreening"), thereby triggering the need for additional NOAs and resulting in subsequent stays. This allegedly has the effect of delaying the entry into the market of generic manufacturers. The Competition Bureau examined this issue based on a complaint received from the National Union of Public and General Employees and other national organizations. Consistent with the approach outlined in the Guidelines, which indicates that the Bureau is generally reluctant to use the CA to directly override IPRs (absent the extraordinary circumstances in which the Bureau has indicated that Section 32 might apply), the Bureau concluded that it was not the appropriate vehicle to examine this issue since this was largely a patent law dispute between two entities.¹²² At the same time, the Bureau suggested that the Government may wish to review its current rules relating to drug patents to ensure an appropriate balance between protecting IPRs and facilitating the supply of pharmaceutical products for Canadians.¹²³

The decision by the Bureau to end its inquiry contrasts with a more aggressive approach taken by the U.S. FTCs in respect of alleged drug patent abuses. In March 2003, Bristol-Myers Squibb ("BMSs") entered into a consent order with the FTCs to settle charges that it had engaged in a series of anti-competitive acts with respect to three of its drug products.¹²⁴ The FTCs complaint against BMSs alleged that BMSs had abused the special statutory 30-month stay by listing patents in the Orange Book (similar, but not identical, to the patent register in Canada) which did not meet the listing criteria, and that this had the effect of triggering an automatic 30-month stay of generic approval. The consent order, among other things, eliminated BMSs's ability to obtain a 30-month stay on later-listed patents (i.e., patents listed after a generic manufacturer has sought U.S. Food and Drug Administration approval for a competing generic version).¹²⁵

The Government of Canada has indicated that it would amend the PM-NOC Regulations in order to address some of these issues, including limiting the circumstances under which patentees can receive an automatic injunction, and increasing the period of time for which patent holders receive protection for the data relating to the patent thus allowing them to recover profits for some of the time lost when waiting for drug approvals.¹²⁶ One remedy that already exists for generic manufacturers who claim unfair delaying tactics by the patented drug manufacturers is Section 8 of the PM-NOC Regulations. Under Section 8 of the PM-NOC Regulations a generic company can sue a brand name company for losses during the time period that a NOC proceeding kept the generic out of the market. A number of suits have been filed on this basis and are scheduled for trial while a number of motions for summary judgements have been dismissed.¹²⁷

The main competition policy concern that arises from the practices adopted by patented drug manufacturers is that it provides an opportunity for patentees to extend their patent rights even beyond the statutory patent period, thereby reducing competition from generic manufacturers and ultimately adversely affecting the availability of lower priced generic drugs to consumers. It must be noted that these practices do not prevent the generic manufacturer from producing and marketing the generic version of the brand-name drug from the market since the patent protecting the 'original' brand-name drug has expired. Rather, the concern of the generic manufacturers is that they are prevented from competing with the improved and varied version of the brand-name drug that has now obtained patent protection. From a competition perspective, promoting competition among newer and innovative products is important as older versions and technologies become obsolete and disappear from the market. At the same time, since effective protection of IPRs is a crucial aspect of encouraging expensive research and development ("R&D") in the pharmaceutical industry, a balance between patent protection and competition policy needs to be found. In particular, the application of Section 79 of the CA should also be considered in this context.

Potential Area for Academic Study:

Empirical research on the effects of obtaining multiple patents on the cost and quality of patented medicines in Canada. This study could focus on whether the practice of obtaining multiple patents to delay market entry is increasing the cost of patented medicines in Canada. The study could also discuss whether there is any positive or negative effect on research, development and innovation that has occurred as a result of such practices. Any such study must consider the impact of federal price controls on patented medicines by the Patented Medicines Prices Review Board¹²⁸ and price controls on generic drugs by provincial drug formulary regimes.¹²⁹

4. Authorized Generics

Authorized generics¹³⁰ are drugs made by brand-name drug companies but sold by generic drug companies at the lower generic price through a licensing agreement. Brand-name drug companies sometimes adopt the strategy of licensing their drugs to a generic company just before their patent expires in order to be the first on the market and thereby gain market share before other independent generics can enter the market subsequent to the expiry of the patent.

On the one hand, it can be argued that authorized generics result in a cheaper version of the patented drug being available to the consumers earlier than they would otherwise be. Indeed, in 2004 the United States Federal Drug Administration dismissed two petitions brought by generic manufacturers seeking to prohibit the marketing and distribution of authorized generics during the 180-day exclusivity period that U.S. law affords the first generic manufacturer that challenges a listed patent, on the basis that marketing of authorized generics increases competition and promotes lower prices for pharmaceuticals.¹³¹

On the other hand, it has been argued that authorized generics restrict competition since the authorized generic licensees are generally prohibited from marketing the licensed product only when at least one other independent generic product is competing or is about to compete with the brand name drug.¹³² In addition, concerns relating to a violation of Section 52 of the CA dealing with misleading representation have also been raised on the basis that authorized generic licensees falsely represent that the authorized generic originates from them, whereas in fact they originate from the patent holders.¹³³ Finally, it has also been suggested that the use of authorized generics amounts to abuse of dominance since the brand name companies control the market even following the expiry of the patent until the first independent generic enters, and the existence of authorized generics either stops or delays the entry of independent generics.¹³⁴

It is noteworthy that the FTCs is initiating a study on authorized generics.¹³⁵ The issues relating to authorized generics may be of particular significance to Canada since it has been suggested that authorized generics account for as much as 25% of the total generic sales in the Canadian market.¹³⁶

Potential Area for Academic Study

Study of effect of authorized generics on consumers and innovation. This study could consider the various competition law aspects of authorized generics such as misleading representation and abuse of dominant position. Other aspects to consider would be the effect of authorized generics on innovation as well as the impact of authorized generics on consumers in the form of price competition.

5. Extraterritoriality of U.S. Patent Laws

The ongoing dispute between Research in Motion Limited ("RIM") and NTP, Inc. could have significant repercussions on the competitive abilities of Canadian technology companies. In particular, the decision of the United States Court of Appeal for the Federal Circuit in NTP v. Research in Motion¹³⁷ in August 2005 raised the issue of extraterritorial operation of U.S. patent laws. The case held that, even though some aspects of the operation of the patented process occurred outside the U.S. (in Canada), the application of U.S. patent laws is not necessarily precluded.¹³⁸ Indeed the Canadian Government had submitted a brief before the Court of Appeal for the Federal Circuit in support of an en banc review of the courts' earlier decision regarding the extraterritorial application of U.S. patent laws.¹³⁹ The Canadian Government pointed out that the extraterritorial reach of U.S. patent laws may have a chilling effect on innovation by Canadian high-tech companies.¹⁴⁰ A certiorari petition before the U.S. Supreme Court regarding the decision of the Court of Appeal for the Federal Circuit has been dismissed,¹⁴¹ and now is back before the District Judge of the Eastern District of Virginia.

Potential Area for Academic Study:

Implications for Canadian companies (and the Canadian high-tech industry) of the extraterritorial application of U.S. IP laws. Whatever the outcome of the certiorari petition, it would be beneficial to conduct a detailed study on the potential implications of the extraterritorial application of U.S. IP laws to Canada, and their potential effect on Canadian R&D, innovation and competitiveness. Topics would include: scope of legal liability; potential exposure to damages; and access to U.S. market.

B. Copyright

Collective Management of Copyrights

The Copyright Act provides for the collective administration of copyrights in a number of circumstances. In general, collective societies may administer the rights assigned or licensed to them by individual copyright owners, and the collective societies in turn license out the copyrights to users, collect the royalties and distribute the royalties to the copyright owners. The collectives specifically dealt with by the Copyright Act can be generally categorized as "compulsory" collectives, "voluntary" collectives and "involuntary" collectives.¹⁴²

"Compulsory" collectives are dealt with under Sections 67 and 67.1 and Part VIII of the Copyright Act. These collectives administer specified rights in certain types of works (specifically, the public performance and communication to the public of musical works, dramatico-musical works, performer's performances of such works, or sound recordings¹⁴³ and the reproduction of musical works in order to make private copies¹⁴⁴) and must annually submit proposed tariff rates and have them approved by the Copyright Board. Such collectives may not commence an action to enforce their rights where a proposed tariff has not been filed in respect of a particular use.¹⁴⁵

Voluntary collective societies administer any collection of works, performances, sound recordings or communication signals but are not otherwise subject to the compulsory system. These types of collective societies can voluntarily propose tariffs and have them approved by the Copyright Board to create general application tariffs.¹⁴⁶ Voluntary collective societies are also free to enter into agreements directly with users.

Lastly, where a collective society and a potential user cannot agree on license terms, the Copyright Act allows either to apply to the Copyright Board to fix royalties and "related terms and conditions."¹⁴⁷ In this way, a collective society that is not within the compulsory system and has not chosen voluntarily to file a tariff to be approved by the Copyright Board can still be forced to grant licenses as ordered by the Board.

While the administration of copyrights through copyright collectives offers a number of advantages, the main justification for their use is the reduction of transaction costs since collective administration enables potential users to access multiple works through a single source and individual owners of copyrights need not negotiate with numerous potential users. It is therefore generally argued that collective societies increase efficiency by reducing costs for licensing transactions which individually would not have high value, such as photocopying several pages of a book or playing a single song on a radio broadcast. In addition, because copyright collectives have developed in most countries across the world, there exists an international network of collectives that allows users to obtain licenses through the domestic copyright collective even when the copyright owners reside in a foreign jurisdiction and may be members of a foreign copyright collective.

The main objection to copyright collectives from a competition policy perspective is that they entail the joining together of a number of individual copyright owners to control the availability of their copyright protected works. Without some regulatory controls, this may result in a lessening of competition and the ability of the copyright owners, through their collective societies, to extract monopoly prices from the marketplace or otherwise abuse their market power.¹⁴⁸ To some extent, the Copyright Act provisions discussed above relating to collective societies and the fixing of tariffs by the Copyright Board are intended to ensure that this potential market power of collective societies is eliminated or at least attenuated.

Finally, currently, there are upwards of 30 collective societies in Canada, dealing with different media, different copyrights, and different copyright holders. In addition, there are other organizations and companies that do not style themselves as copyright collectives but may fall within the definition of "collective societies" in the Copyright Act (for example, book publishers, record companies, motion picture studios). Users may often have to deal with multiple collectives and other organizations in order to fulfil their requirements and obtain the requisite licenses. This is particularly the case in the increasingly digital context – playing a song over the internet may arguably involve both the communication right of each of the composer and sound recording owner (for transmission over the internet) and reproduction rights (for downloading).¹⁴⁹ Industry Canada has recognized such new technology issues as a part of the medium-term reform agenda of the Copyright Act.¹⁵⁰ While dealing with collectives vastly reduces the complications of dealing with multiple owners or licensees of copyrights, dealing with multiple collective societies also increases complexity and transaction costs, running contrary to some of the key benefits of collectives.

Agreements entered into by copyright collective societies and users are in limited circumstances granted a somewhat favoured position when it comes to scrutiny by Canadian competition regulators. Where a collective society concludes an agreement to grant a license¹⁵¹ and files a copy of the agreement with the Copyright Board within 15 days, the Copyright Act provides an explicit exemption from the application of Section 45 of the CA,¹⁵² although the Commissioner may inspect the agreement and may request that the Board to "examine" it.¹⁵³

Potential Areas for Academic Study:

Examination of Different Approaches to Collective Management of Copyright. It may be worthwhile to examine the approaches used in different jurisdictions to the issue of collective management of copyright, such as a system of "extended collective licensing" used by the Nordic countries (whereby if a collective society represents a substantial number of copyright holders in a particular category, the collective's repertoire is, by law, extended to cover all domestic and foreign copyright holders in that category, whether or not they chose to become part of the collective). Individual copyright holders who do not want to be part of this system can exclude themselves by notice to the society. In particular, it would be worth examining whether the Nordic system exacerbates competition issues or mitigates them. In this context, the use and effectiveness of the existing provisions of the Copyright Act (for instance Section 83(11)) that address a similar situation should also be considered.

Examination of Copyright Collectives under the CA. It would be worthwhile to examine in greater detail the relation between copyright collectives and CA, particularly with respect to high-tech industries. Issues could include: the pros and cons of the statutory exemption from the CA for copyright collectives, whether copyright collectives can seek exemption from the purview of the CA based on the regulated conduct defence in the absence of an explicit statutory exemption¹⁵⁴ and whether, and if so, to what extent, copyright collectives are acting as a barrier to entry for small copyright owners who refuse to join a collective.

Pros and Cons of Copyright Collectives. Issues relating to the advantages and disadvantages of copyright collectives generally also need to be considered – for instance the efficacy of collectives in the digital era, including the benefits of an international network of collectives and the inefficacy of multiple copyright collectives. The impact of each of these aspects on consumers should also be considered.¹⁵⁵ In considering each of the above issues, regard must also be had to the obligations under the international treaties to which Canada is a party and the international network of copyright collective arrangements.

2. Technical Protection Measures

Another competition law concern could arise in the context of the use of copyright protection devices, often referred to as "technological protection measures" or "TPMs". Copyright owners may use TPMs to make it difficult to create unauthorized copies of copyrighted material, and may also restrict the manner and extent to which a work may be accessed, used or distributed to third parties. A recent example of such "extended copy protection" technology involves software used in CDs that protects the copyright of the owner by ensuring that only a certain number of copies of the CD can be made, and that the music can be uploaded from the CD only onto specific devices.

One competition concern that can arise is that TPMs could limit inter-operability such that only particular devices can function with the purchased product. Situations may arise where, in order to use a copy protected product, the consumer would also have to purchase a particular type of player or device, which might raise an instance of tying under the CA. In addition, while the concept has not yet been employed by any Canadian courts, it is possible that TPMs that restrict access to, or use of, a legally-acquired copy of a work would be the basis for a "copyright misuse" claim. Lastly, to the extent that TPMs restrictions on the ability of a purchaser to access and use a legally acquired copy of a work are inconsistent with the advertised attributes of the work, this could form the basis for a misleading advertising charge pursuant to Section 52 of the CA.

Canada's international obligations with regard to providing IPRs to technical protection measures must also be taken into account when determining Canada's policy choices in this area.¹⁵⁶

Potential Areas for Academic Study:

What is the impact of the use of new technologies to protect copyrights in the digital context from a competition perspective? For instance, could the use of technical protection measures result in tying?

C. Trade-marks

Official Marks

Pursuant to Subparagraph 9(1)(n)(iii) of the Trade-marks Act, an "official mark" is any badge, crest, emblem or mark adopted and used by any "public authority" in Canada as an official mark for wares and services in respect of which the Registrar has, at the request of the public authority, given public notice of its adoption and use.¹⁵⁷ Subsection 9(1) of the Trade-marks Act prevents the adoption in connection with a business or otherwise, by any person, of any mark consisting of, or so nearly resembling as to be likely mistaken for, an official mark.

Official marks have special status under the Trade-marks Act. First, any mark may be protected; official marks are not subject to the usual limitations regarding trade-marks that are eligible for registration.¹⁵⁸ Second, unlike the standard application process for a trade-mark, an official mark cannot be the subject of an opposition and can only be rejected by the Trade-marks Office on very limited grounds.¹⁵⁹ Third, official marks need not be limited to particular wares or services – the person at whose request publication of the official mark was made can use it for any goods or services that it chooses. Fourth, unlike for trade-marks, there is no provision under the Trade-marks Act for contesting rights in a official mark.

Courts have held that the tests to determine whether an entity is a "public authority" are: (i) a significant degree of control must be exercised by the appropriate government over the activities of the body; and (ii) the activities of the body must benefit the public.¹⁶⁰ A number of entities in Canada have received protection for their official marks, including the Canadian Olympic Association and Canada Post.¹⁶¹

The competition law concern is that some "public authorities" compete against other private entities in the provision of goods and services. This can lead to allegations of favouritism under international treaties when a foreign company has entered the market. For instance, United Parcel Service (UPS) has filed an action under NAFTA Chapter 11 (Investor Protection) alleging that Canada Post enjoys NAFTA-illegal subsidies granted by the Canadian Government that undermine UPS's market share.¹⁶² When entities such as Canada Post perform tasks that are in competition with private entities, the ability to obtain, without opposition, broad protection for official marks which is difficult to attack, could grant them an unfair competitive advantage against both domestic and foreign competitors.¹⁶³ Indeed, this issue becomes even more stark when it is considered that, based on a recent decision, only Canadian public authorities, and not foreign authorities, can benefit from the protection of official marks in Canada.¹⁶⁴

For example, concerns have been raised about the government of the North West Territories having obtained an official mark for "Canadian Diamond" without consulting industry participants.¹⁶⁵ Canadian jewellers have objected to this, on the basis that the official mark hinders them in their advertising and marketing activities.¹⁶⁶ On the other hand, the NWT Government has been trying to attract the diamond cutting and polishing industry by licensing out the official mark as a certification mark under certain circumstances. Due to the descriptive or generic nature of the phrase, it is questionable whether the NWT Government would have been able to obtain ordinary trade-mark protection for the words "Canadian Diamond". This situation illustrates the nature of the problems to which rights in an official mark may give rise.

The treatment of official marks under the Trade-marks Act raises some of the same types of issues as the treatment under the CA of public and quasi-public entities engaged in commercial activities.¹⁶⁷ For example, the regulated conduct defence is a common law doctrine that provides the basis for an exemption from the application of the CA where the impugned conduct is required or authorised by a legislation or regulation.¹⁶⁸ Based on the regulated conduct defence, courts have exempted regulatory activities of agencies constituted under provincial legislation such as the fixing of prices, from the criminal provisions of the CA.¹⁶⁹ More recently, the Supreme Court of Canada, while extending the application of the regulated conduct defence beyond competition law suggested that, in order for a regulated conduct defence to apply, it must be clear that the legislature intended the regulated conduct defence to be available, for instance, through some "leeway language" that denotes "public interest".¹⁷⁰

Potential Area for Academic Study:

Examination of use of official marks by public authorities in the private market. It would be pertinent to examine more thoroughly whether public authorities have used official marks to obtain an advantage in the market for the provision of goods and services, and if so, whether such use is in line with the policy objectives behind the existence of official marks. In particular, the approach adopted by other jurisdictions and the influence of the jurisprudence surrounding the regulated conduct defence should also be taken into account. This study will help determine whether the regime relating to official marks needs to be reviewed.

D. Specific Types of IP Protection

As discussed in Section I.A.1.a above, patent policy is continually struggling to achieve the appropriate balance between granting a patent, which entails the right to exclude the manufacture, sale and use of the invention by others, and ensuring that such exclusion is not detrimental to the principles of sound competition policy. As a result, IP law and policy makers are faced with a challenge each time patent protection is sought for a new type of "invention." In addition, the strains on the patent protection process and system also need to be considered. We have identified at least three areas where IP law and policy makers in Canada are facing such challenges or will face them in the near future, any one of which could be the topic of future academic study in respect of appropriate patent policies:

1. Open Source Software (OSS)

OSS in simple terms is software that is made available on licensing terms that promote access to the software and any further development to anybody who wants to use it.¹⁷¹ An increasing number of technology companies, including the ones that traditionally are major filers of patent applications are providing and using OSS.¹⁷² OSS both uses IP protection and seeks to move away from it since OSS continues to be subject to copyright protection, but by allowing licensees to freely use and make modifications to the OSS, this detracts from the primary IP protection of exclusivity. As OSS becomes more popular, it would be worthwhile to consider issues relating to the possible benefits of using OSS such as potentially lower cost of innovation, and the drawbacks such as reduced incentive to innovate. Competition policy concerns such as enhanced access to hi-tech products would be an important part of such a study. Particular CA concerns could include questions such as whether OSS is a "relevant market" that is distinct from the market for traditional software.

2. Business Methods

In one sense, business method patents are no different from other patents except that the subject matter of the patent relates to a system of doing business. However, the jurisprudential extension of patent protection to business methods – particularly in respect of high tech/Internet business methods - has garnered considerable attention in the United States where business methods have received patent protection.¹⁷³ For instance, the Amazon.com "1-click" patent (U.S. Patent No. 5,960,411) concerns the methodology whereby information associated with a user is pre-stored by a web site, and the user may thereafter order items from the web site with only one click of the mouse.¹⁷⁴ In Canada, the Federal Court, Trial Division has held that business methods are not patentable.¹⁷⁵ Given that the grant of patent protection entails the ability to exclude others from using the patented business method in question, business method patents could potentially have a tremendous impact on the scope and pace of technological innovation. An academic study could be undertaken to examine the likely impact on innovation of a number of policy alternatives towards business method patents in order to provide some guidance as to which policy should be adopted in Canada so that innovation and competition are bolstered – not weakened – by the patent system. In this regard, Canada's international treaty obligations should also be taken into account. For instance, TRIPS requires that Canada treat different technologies equally.¹⁷⁶

3. Extension of Royalties Beyond the Life of a Patent

Generally patent licensing agreements require payment of royalties until the expiry of a patent or until it is found to be unenforceable or invalid. However, one issue that has competition implications is where the patentee requires a licensee to make royalty payments even after the expiry of the life of the patent. This could be considered a misuse of the monopoly right granted by a patent or an attempt at tying of a patented product (the product when the patent is still in force) and an un-patented product (the same product when the patent has expired).¹⁷⁷ On the other hand, it could be argued that no competition concerns arise from requiring royalties to be paid beyond the life of the patent because during the life of the patent the patent holder has the statutory right to determine the terms of the license by virtue of being the patent holder, and once the patent has expired, nothing prevents others from exploiting the patent.

Indeed, these different arguments are brought to the fore by the differing manner in which courts in the U.S. and Canada have examined such situations. In the U.S., the Supreme Court has held a patentee's use of a royalty agreement that extends beyond the life of the patent is unlawful per se as such a device would subject the free market visualized after the expiry of the patent to "monopoly influences".¹⁷⁸ In contrast, in Canada it has been held that the obligation to pay royalties arises by virtue of the licensing agreement and not the patent itself, and therefore if the agreement so specifies, the obligation to pay royalties may validly extend beyond the life of the patent and this would not be in restraint of trade or unreasonable or unconscionable or contrary to public interest.¹⁷⁹

III. Future Challenges For Competition Law And Policy Makers

A. Commercial Practice Matters

1. Tying Arrangements

Tying (or "tied selling") is the supply of one product (the tying product) on the condition that the buyer takes a second product (the tied product) as well or on terms that induce the buyer to take the second product as well.¹⁸⁰ Tying is addressed by Section 77 of the CA.<

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