Competition law and intellectual property (I)
Ian S. Forrester Q.C.

In the early days of European law, intellectual property rights were an inconvenience for the achievement of the Treaty's prime competition law goal, which was market integration. Intellectual property rights were seen as the way by which companies might partition the common market to prevent free movement of goods between the 6 (and latterly the 9) Member States. The concern was not baseless, but resolving it required considerable encroachments on classical IP privileges. IP rights in Europe are territorial; so far there has been full harmonisation only in the area of Community trademarks, biotechnological inventions and plant variety rights (legislation on a Community patent is pending). Companies sought to use IP fights to prevent parallel trade in genuine products either to protect higher prices in the country where prices were higher, or to protect their territory in situations where the rights to sell a product had been divided among unrelated parties.



Thus the abuse of IP fights, as an instrument of territorial division was one concern. Another, which is today more controversial in classical competition law, is the abusive use of IP rights by a dominant company. As we shall see, the disparate nature of Europe's IP rights (and the surprising privileges they can confer) has been critical in permitting the development of European competition law in this field.



The first phenomenon is illustrated by the early cases of Sirena v Eda and Hag . In Sirena, the rights to use a trademark to a particular cosmetic brand had been sold by a US company to different companies in Italy and Germany before the entry into force of the Treaty of Rome. The Italian company applied for an injunction to prevent imports of the German cream into Italy. The European Court was asked for its advice on whether the agreement to split the trade mark rights could infringe Article 85 and whether the use of the trade mark to block imports could be abusive under Article 86. The Court ruled that Article 85 applies if the effects of the agreement to partition the common market were still in force, irrespective of the circumstance that the agreement between the Italian and the German owner and the American company were separate. 



The judgment contains a passage exemplifying the suspicion which the Court had of trademark rights:



The exercise of a trade-mark right is particularly apt to lead to a partitioning of markets, and thus to impair the free movement of goods between states which is essential to the common market. Moreover, a trade-mark right is distinguishable in this context from other rights of industrial and commercial property, in as much as the interests protected by the latter are usually more important, and merit a higher degree of protection, than the interests protected by an ordinary trade-mark.



The ruling never really answered the question of when the use of a trademark right was abusive under Article 86 (although it did not rule this out). The Sirena judgment is now ignored, an early judicial error in which the Court muddled what subsequently became clear.



In Hag, the ownership of a trademark on a famous German coffee brand, Hag, had been split between Germany and the Benelux as a result of expropriation of enemy property in the Second World War. The German company tried to sell its coffee in Luxembourg but imports were blocked by the Benelux rightholder on the grounds that they infringed its Luxembourg trademark. The Court could not apply Article 85 since there was no agreement between competing companies giving rise to the discrepancy. It therefore decided to apply the Treaty's rules on free movement (Articles 30-36, now Articles 28-30) to condemn the use of national trademark rights in this case, as having the effect of partitioning the common market.



The Court reasoned as follows:



The exercise of a trade mark right tends to contribute to the partitioning off of the markets and thus to affect the free movement of goods between Member States, all the more so since - unlike other rights of industrial and commercial property - it is not subject to limitations in point of time.



Accordingly, one cannot allow the holder of a trade mark to rely upon the exclusiveness of a trade mark right - which may be the consequence of the territorial limitation of national legislations - with a view to prohibiting the marketing in a Member State of goods legally produced in another Member State under an identical trade mark having the same origin (emphasis added)



Thus, in the Court's view, the common origin of the Hag trademark justified the application of the Treaty's rules on free movement to prevent the Luxembourg owner of the Hag trademark from blocking imports of Hag coffee manufactured by a different company in Germany. As a result, different coffees from different producers were sold under the same brand. (The Court feebly suggested that using national flag labels would be a way of alerting consumers.) The Hag case shows the zeal of the Court in the 1970s to hinder any use of IP rights to thwart a Community goal. (The zeal tide subsequently ebbed, as we shall see.)



The law was therefore clear: the use of an IP right to hinder cross border trade in genuine goods, even if done unilaterally, was to be viewed sceptically. It was challengeable, in the absence of an agreement, not under the competition rules, but under the rules on free movement of goods. There was a problem for the Court, to define and rationalise its theory. IP rights were created by national law and could not be abolished by Community law. How could the conflict be reconciled



In the Centrafarm cases , the Court developed its jurisprudence on the overlap between intellectual property rights and free movement of goods. It developed a theoretical distinction between the existence of an IP right and its exercise (although the existence v. exercise dichotomy had been used by the Court already in the golden oldie Etablissements Consten and Grundig v Commission ). The existence of a right was protected and immune from challenge under the rules on free movement of goods; whereas the exercise of a right was not. The notion of core rights was developed in these cases: European law could not affect the specific subject matter, or the very core of the intellectual property right, but it could affect adjoining rights.



The specific subject matter of a patent right was found to be the following :



In relation to patents, the specific subject matter of the industrial property is the guarantee that the patentee, to reward the creative effort of the inventor, has the exclusive right to use an invention with a view to manufacturing industrial products and putting them into circulation for the first time, either directly or by the grant of licences to third parties, as well as the right to oppose infringements.



This meant that once a patent holder put his product on the Community market for the first time, then he had benefited from the patent (whose existence was therefore respected) and Community law could prevent that patent holder from using the patent to prevent parallel trade. Once the patented invention was voluntarily put on the market in one Member State, then the patent holder could not object to an arbitrageur buying the product in that Member State and reselling it in another one. This was the now-familiar principle of exhaustion, which dates back to 1871 in Belgian law. A similar technique was applied to the specific subject matter of a trademark right to ensure that trade marks could not be used to partition the common market. The principle of exhaustion was applied also in cases where the Member State in question granted inadequate protection to the patented invention. 



The focus in these early cases was on ensuring that companies could not use IP rights to prevent free movement of goods. For this reason, early judgments such as Sirena v Eda and Hag gave a very low value to trademark rights, an error which the Court of Justice has since corrected . The Centrafarm cases recognized the need for IP rights, but found a way to respect them while giving priority to free movement of goods.

 

However, the dispassionate observer would conclude that IP rights, although nominally respected by the Treaty, were subject to significant constraints to pursue Community law goals.



Volvo v Veng competition law and licensing of IP rights - was the door shut or ajar



The early cases did not analyse the relationship between IP rights and competition law in fields unrelated to parallel imports or other distribution issues. None of the cases gave any indication as to whether the reliance on IP rights could be abusive or whether the refusal to license IP rights could be abusive. Moreover, there was no indication was to whether the notion of core (specific subject matter) and non-core rights applied only to free movement cases, or whether this analysis also applied to competition cases. These uncertainties persisted in the minds of many for several years, until the Court of Justice decided the Volvo v Veng case, and have persisted since then.



This was the first case in which the Court considered whether a refusal to license an IP right could be abusive. The case concerned the front wings of Volvo 200 cars (on which Volvo held a registered design), which in effect gave a monopoly in a utilitarian three-dimensional shape which presented no patentable features. Veng imported these products, manufactured without authority from Volvo, and markets them in the United Kingdom. Volvo instituted proceedings against Veng for infringement of its exclusive rights. There are two famous paragraphs in the judgment :





8. It must also be emphasized that the right of the proprietor of a protected design to prevent third parties from manufacturing and selling or importing, without its consent, products incorporating the design constitutes the very subject-matter of his exclusive right. It follows that an obligation imposed upon the proprietor of a protected design. to grant to third parties, even in return for a reasonable royalty, a licence for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right, and that a refusal to grant such a licence cannot in itself constitute an abuse of a dominant position.



However:



9. It must however be noted that the exercise of an exclusive right by the proprietor of a registered design in respect of car body panels may be prohibited by Article 86 if it involves, on the part of an undertaking holding a dominant position, certain abusive conduct such as the arbitrary refusal to supply spare parts to independent repairers, the fixing of prices for spare parts at an unfair level or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation, provided that such conduct is liable to affect trade between Member States.



The Court found that no such conduct was present in the instant case, and therefore answered the case in the following terms:



The refusal by the proprietor of a registered design in respect of body panels to grant to third parties, even in return for reasonable royalties, a licence for the supply of parts incorporating the design cannot in itself be regarded as an abuse of a dominant position within the meaning of Article 86.



The Court's ruling cannot be criticized. Veng wanted to copy Volvo's design to make cheaper spare parts for Volvo cars. Veng had no intention to innovate, lit was merely trying to free ride on Volvo's efforts to develop an original design for its cars.



After this judgment, many asked whether the Court had intended to close the door and to prevent companies from relying on competition law to attack a refusal to license an IP right. But the fact that it had expressly said that an abuse could be present in some circumstances (even though they were absent in the particular case), led many commentators to believe that the Court wished to leave the door open to argument along those lines in future cases. Could a bare to license be abusive Possibly, though probably not unless other elements were present.



Magill - the door was in fact ajar and competition law can constrain the exercise of IP rights



The Magill case made it clear that the Court had intended to leave the door ajar in Volvo v Veng and that a refusal to license an IP right could, in the very particular circumstances of that case, constitute an abuse. The Court explicitly rejected the immunity argument advanced by the copy

rightholders in Magill:



With regard to the issue of abuse, the arguments of the appellants and IPO wrongly presuppose that where the conduct of an undertaking in a dominant position consists of the exercise of a right classified by national law as copyright , such conduct can never be reviewed in relation to Article 86 of the Treaty.



Admittedly, in the absence of Community standardization or harmonization of laws, determination of the conditions and procedures for granting protection of an intellectual property right is a matter for national rules. Further, the exclusive right of reproduction forms part of the author's rights, so that refusal to grant a licence, even Wit is the act of an undertaking holding a dominant position, cannot in itself constitute abuse of a dominant position (judgment in Case 238/8 7 Volvo, cited above.



However, it is also clear from that judgment (paragraph 9) that the exercise of an exclusive right by the proprietor may, in exceptional circumstances, involve abusive conduct.



In Magill, where the rightholders (the TV companies) had relied on their copyright in listings of TV programmes to prevent Magill from publishing a comprehensive weekly TV guide, the Court agreed with the Commission that exceptional circumstances were present .



First, the righholders' refusal to license therefore prevented the appearance of a new product, a comprehensive weekly guide, which the broadcasters did not offer, for which there was no substitute and for which there was a potential consumer demand. The Court found that such a refusal constituted an abuse.



There was also an element of discrimination in that the same TV listings were given away for free to newspapers who published TV listings on a daily basis. Thus, the BBC (for example the same applied to RTE and to ITN) was the sole source of listings as to its own programmes and used its copyright over such material to prevent the emergence of a weekly magazine competing with its own single-channel guide, Radio Times. The Court also found that there was no justification for the refusal to license either in the activity of television broadcasting or in that of publishing television magazines.



Moreover, there was leveraging to monopolise a neighbouring market in that by their conduct, the TV companies had reserved to themselves the after market of weekly television guides by excluding all competition on that market since they denied access to the basic information which was the raw material indispensable for the compilation of such a guide.

 

It is clear that the combination of downstream monopolisation, discrimination, and prevention of the emergence of a new product is a rare occurrence. The other exceptional aspect about the case is the right invoked. The order in which TV programmes are to be shown during the forthcoming week is not something with intrinsic artistic value. After the week has passed, the schedules are of no value, lit does seem strange that a list of programmes and dates and hours would be eligible for copyright protection in the sense that the broadcasting rightholder could prevent anyone else revealing in writing the titles, dates and times of its programmes. A patent on a high-tech invention, the trade mark on a leading consumer product, or the copyright on an article in a newspaper are completely different animals.



Indeed, many Member States (indeed all of them except the UK and Ireland) do not recognize copyright in TV listings. This factor distinguishes European law from US law: there is still a wide variation between EU Member States in relation to when IP rights can be obtained, and the rights attached to them. This is particularly the case as to copyright.



The low intrinsic value of the right was not expressly mentioned by the Court in that case (its role is not to comment on the appropriateness of national copyright rules). But it is, in my view, clearly part of the equation. lit would only be in the rarest of circumstances that the European Commission and Courts would have even considered ordering the licensing of a genuinely innovative patent or copyright in which a company had invested significant sums in R&D.



The IBM undertaking a controversial ray of sunlight



On 1 August 1984, the Commission accepted a so-called unilateral undertaking from IBM to provide other manufacturers with the technical interface information needed to permit competitive products to be used with IBM's then most powerful range of computers, the Systeml3 70. The Commission thereupon suspended the proceedings under Article 82 which it had initiated against IBM in December 1980. 



IBM agreed to provide interface information to software developers by specific benchmark dates, such as as soon . . . as such interfaces had become reasonably stable but in any event no later than the date of general availability and to announce changes to an existing interface that would make System/370 products attaching to such existing interface inoperable sufficiently in advance of general availability. That information would be provided either through established documentation and related materials (such as source code) or through some other adequate means, including newly prepared documents containing only the interface information. Any company that was doing business in the EC and developing relevant products, including U.S. and Japanese companies, could ask IBM for such interface information. IBM would charge reasonable and non discriminatory fees for the information.



IBM was required to support international standards for open system interconnection for products, systems, and networks of different manufacturers. In addition to signing the Undertaking, IBM agreed to a system of oversight that required the company (i) to meet with DG Comp every year to take stock of the implementation of the Undertaking and its effects, and (IP) to present DG Comp with an annual report describing in detail IBM's response to each question or request received under the terms of the Undertaking. IBM would also discuss the outcome of these cases with DG Comp.



After five years, the company could have ended this arrangement. But IBM seemed to recognize that the EC process had created a new level of comfort for companies that made third-party products for the IBM mainframe platform and, in the eyes of some observers at least, helped protect IBM from potential liabilities. Thus, IBM voluntarily permitted the agreement to run for 11 years - six more than the minimum requirement.



The IBM Undertaking represents a very heavy remedy for an IP company. IBM had developed its dominant standard System/370 thanks to its own financial and creative efforts. Nonetheless, the Commission relied on the competition rules to ensure that compatible software could be developed by any third party and not only by IMB's licensees or partners.



The notion of interoperability has been subsequently incorporated into EU copyright legislation on computer programs. Article 6 of Council Directive 9 1/250 (EC software Directive) on the legal protection of computer programs allows reproduction of the code and translation of its forms when these are indispensable to obtain the information necessary to achieve the interoperability of an independently created computer program. (also referred as decompilation)



Decompilation does not require authorisation from the rightholder. However, it must be performed by the licensee or by another person having a right to use a copy of a program, or on their behalf by a person authorised to do so (Article 6.1(a)) and authorisation from the rightholder is required when, inter alia, the interface information is used for the development, production or marketing of a computer program substantially similar in its expression, or for any other act which infringes copyright. (Article 6.2(c)).



Contrary to the IBM Undertaking, the Directive does not prohibit software companies controlling a dominant technology (i) denying access to interface information or (IP) announce changes to an existing interface that would make third parties' software no longer interoperable. Delayed or discriminatory access to interface information may eliminate competition from third party developers to the advantage of products licensed or developed by the company controlling the dominant standard. The fact that the Directive applies to all computer programs, without distinguishing between dominant standards and compatible applications may explain this omission.



In addition, it is unsettled whether Article 6 may be invoked by companies to develop a product competing with the decompiled program. Article 6 refers to interoperability with other programs, without distinguishing between programs competing or not competing with the decompiled program. It might be argued that the notion of interoperability should not apply in these cases, since the manufacturer of the competing program acts as a free rider to benefit from the network effects generated by the company which has been the first mover in the market. However, this issue has never been litigated before the Commission.



So far, the notion of interoperability has only been applied to computer programs subject to copyright. However, following the availability of patent protection to computer programs under certain EU jurisdictions (notably the UK), this notion could be extended to patented invention. Indeed, it might be argued that a 20-year monopoly over interface information is sufficient to discourage third parties from developing innovative software which may be competing with complementary software developed by or in partnership with the company having a monopoly over a dominant software.