Compulsory Liability Rule and Liability Rule by Default Regimes
(1)
Munich, Germany
In Chap. 2 it was shown that there is a degree of inefficient overuse of property rules in the current German law system and that the same would apply to the future system under the regulation on the European Patent with Unitary Effect. Considerations regarding constraints such as distributional preferences and higher-ranking law have shown that such inefficient use is also not necessary. The analysis in Chap. 3 suggests that current private liability rules result in a reduction of the overuse of property rules. Although a more intensive use of private liability rules seems possible and should be encouraged, this is not a solution to all the problems raised above because patentees will switch to a liability rule if they profit from it and will not take into account what would be better for society. Therefore, in some cases, compulsory liability rules and liability rules by default, which need to be implemented by the legislature, may be necessary to come closer to striking an optimal balance between exclusivity and non-exclusivity with regard to economic efficiency. As already mentioned, the current compulsory liability rule mechanisms in the German patent law system, including those derived from antitrust law, are almost never used and so far have not led in a single case to the replacement of a property rule by a liability rule; liability rule by default mechanisms essentially do not exist. The questions that can be raised are, therefore, whether courts should make more intensive use of existing legal provisions—meaning especially whether a different interpretation of the existing statutes would be possible—or if the statutes should be amended.
Therefore, as a first step, the current legal situation is analysed (Sect. A.); this analysis forms the basis for deriving both general suggestions and, to some extent, suggestions for the improvement of concrete systems. Different mechanisms that are currently available are then evaluated. Whereas private liability rules can exist cumulatively, some compulsory liability rule mechanisms may only apply alternatively when addressing a concrete problem; therefore, it is important to choose the best mechanism (Sect. B.). Finally, perspectives are explained as to how the economic effects of the patent system can be improved by these mechanisms (Sect. C.). The chapter ends with a presentation of the results (Sect. D.).
A. Current Legal Situation and Its Disadvantages
It was stated above that German law contains compulsory liability rules that are currently of extremely low relevance because they are rarely applied and may only have, if at all, a psychological function.1 In the following discussion, this work takes a closer look at the different existing mechanisms. The analysis will first answer the question of what purpose these mechanisms have, what problems they already address and, very importantly, why these systems currently have such low relevance. All answers are directly or indirectly connected to the law and, due to lack of evidence, have nothing to do with a general negative moral judgement vis-à-vis claimants applying for a compulsory licence2 which, presumably, should be viewed as being beyond the law. Therefore, all questions can be answered in a joint analysis, that is, by distinguishing between mechanisms inside and outside patent law. Inside patent law means provisions that are a part of patent law statutes, which can be categorised according to those on compulsory licences in the public interest (Sect. 1.a.), those regarding dependent inventions (Sect. 1.b.) and limitations of the effect in the case of national emergency (Sect. 1.d.).3 The first two share common rules which are also analysed (Sect. 1.c.). Provisions outside patent law, but with influence on patent law, are those in antitrust law. These provisions do not explicitly mention compulsory licences or other forms of compulsory liability rules, and their interpretation depends on the courts; the distinction will be between the European law (Sect. 2.a.) and the German law (Sect. 2.b.). Since the regulation on the European Patent with Unitary Effect does not contain any compulsory liability rule mechanisms so far, one cannot draw any specific conclusion regarding this proposal here.
1. Mechanisms Inside the Patent Law System
a. Compulsory Licence in the Public Interest
Section 24(1) Patent Act determines that a compulsory licence “shall be granted […] if public interest commands the grant of a compulsory licence”.4 For the semiconductor industry there is a limitation that originates from Article 31(c) TRIPS: “a compulsory licence […] may only be granted if the grant is necessary to remove an anticompetitive practice on the part of the patentee that has been established in judicial or administrative proceedings” [Section 24(4) Patent Act].5 Compulsory licensing in the case of lack of or insufficient exploitation, according to Section 24(5), is considered as a special case of a compulsory licence in the public interest6 because society does not normally profit from an exclusive right if it is solely used for blocking. Section 24(5) determines that “when a patentee does not work the patented invention or does not work it predominantly in Germany, compulsory licences under the provisions of Subsection 1 may be granted to ensure an adequate supply of the patented product to the domestic market. Importing shall insofar be deemed to constitute working of the patent in Germany”.7
The reasons this provision currently does not lead to the grant of compulsory licences may be due to the following considerations. The first reason is the restrictive interpretation by the courts of the term public interest. Interpretation by a court should lead to a balance of the interests of the patent owner and society, especially with respect to proportionality8; the term is subject to change and should be applied with regard to the facts of each individual case.9 The courts currently judge the interests of patent owners very highly. It is relevant to mention first that, according to the German Federal Supreme Court, older decisions issued before 1945 in which several compulsory licences were granted, should not be followed without further discussion on determining what the public interest is.10 The same condition therefore applies to the grant of a compulsory licence by decisions of the German Supreme Court of the Reich [Reichsgericht (RG)], for the following reasons: better supply of the domestic market,11 a hazard for an entire branch of industry,12 prevention of closure of a company or dismissals of greater extent,13 improvement of occupational safety,14 improvement of public health15 and securing the supply of electricity.16 As a consequence, one may assume that these reasons are no longer sufficient and the requirements for fulfilling the condition of public interest have been raised. The courts determined that particular reasons, such as technical, economic, socio-political and medical ones, must be identified.17 Although the misuse of a patent, which can play a role, is not necessary—such a condition can neither be derived from the Basic Law, nor from Article 5A(2) Paris Convention18—very importantly, according to the Supreme Court, there is a limitation for economic reasons. An exclusive or monopolistic position on the market is not sufficient to affirm the public interest because the legislature decided to grant patents as exclusive rights to reward patent owners for disclosing their inventions.19 Reaching a balance between static and dynamic efficiency, therefore, seems not to be the major goal. Of special importance, leading to a very restrictive interpretation, is proportionality, because the exclusive right is protected by the principle of ownership and granting a compulsory licence is regarded as a severe attack on the patent owner’s position.20 Therefore, a compulsory licence can only be granted if there is no other equal or less severe measure available to achieve what is determined as being in the public interest.
Moreover, there is a significant degree of legal uncertainty about this issue because the legislature used the general term public interest, which is only partly concretised in Section 24(5) Patent Act and has been interpreted by the courts, but still remains very imprecise. It is not known what a typical case for the grant of a compulsory licence would be. Additionally and with respect to Subsection 5, it is uncertain what is meant by the fact that a patented invention must be worked predominantly in Germany and what an adequate supply is. These terms require interpretation by the courts, but until now neither the German Federal Patent Court nor the Supreme Court has decided such a case.
Additionally, one may argue that the current interpretation of the conditions laid down in Section 24(1) Patent Act can only concern a few cases because, presumably, private companies are not interested in serving the public interest, but in making profits. Only if the interests of a potential licensee coincide with the interpretation of public interest, as explained above, will someone apply for a compulsory licence that will be granted. An analysis of compulsory licensing proceedings in Germany from 1951 to 1975 confirms this view and shows that, in almost all cases, potential licensees claimed to act in the public interest, but were regarded as being interested solely in profiting from inventions that had been marketed successfully.21 This licensee attitude is apparently also true for the most recent decision regarding compulsory licences because the claimant seemed to have a considerable economic interest in using the patented invention.22
b. Compulsory Licence Regarding Dependent Inventions
Section 24(2) Patent Act, which is consistent with the requirements laid down in Article 31(l)(i) and (ii) TRIPS, determines that “when the person seeking a licence is unable to exploit an invention for which he holds protection under a patent of later date without infringing the patent of earlier date, said person shall be entitled to the grant of a compulsory licence from the owner of the patent of earlier date if […] the invention of said person includes, in comparison with the invention under the patent of earlier date, an important technical progress of considerable commercial significance. The patentee may request the grant of a counter-licence under reasonable conditions by the person seeking a licence for the use of the patented invention of later date.” The provision “shall apply mutatis mutandis if a plant breeder cannot obtain or exploit a plant variety patent without infringing an earlier patent” [Section 24(3) Patent Act].23
Section 24 Patent Act does not require a public interest as explained above; this is clear because a reference in Subsection 2 to Subsection 1 was deleted in 2005.24 The consequence of this amendment should have been the facilitation of the grant of compulsory licences, particularly in the field of biotechnology.25 However, as explained above, the number of grants still amounts to zero—this provision is also very restrictive and imprecise. Whereas it should be relatively easy to prove that the use of one patented invention would infringe on another one, it can be very complicated to show that important technical progress of considerable commercial significance will be made. An interpretation by the courts is required to determine what important technical progress is and what considerable commercial significance means. The courts have not yet decided such a case; additionally, the wording leads to the assumption that this provision should be applied only in rare cases. Interestingly, the jurisdiction before 1945 already regarded considerable progress for the general public to be sufficient,26 which is wider than the conditions that can be derived from the current wording,27 and with which the legislature apparently did not agree. Additionally, it may be disadvantageous that the provision requires the applicant to own a formal patent for the dependent invention.28 Therefore, one may conclude that, contrary to the intention of the legislature, the new provision does not lead to more compulsory licences than before and that terminology may be one reason.
c. Common Rules
Compulsory licences according to Section 24(1), (2) and (5) Patent Act share common rules. These rules may also have an influence on the number of applications for compulsory licences and, therefore, also on their grant. The following analysis involves conditions for compulsory licenses [Sect. (1)], reasonable remuneration [Sect. (2)] and important procedural rules [Sect. (3)].
(1) Conditions for Compulsory Licences
The common conditions for compulsory licences that may potentially have a certain influence on the number of grants are the following two.
Section 24(1) Patent Act and Article 31(d) TRIPS prescribe that a compulsory licence is “a non-exclusive authorisation to commercially use an invention”.29 It would not make sense to grant compulsory licences as exclusive licences because this would only partially mitigate the problems caused by the grant of an exclusive right. Additionally, this would restrict the patent owner’s right without a material reason. Therefore, at first glance, this condition does not seem to have any influence on the number of applications or grant of compulsory licences. But of relevance is something that is not part of this provision per se, yet may have a significant negative influence on the number of grants: it is impossible to obtain a compulsory licence for the know-how that is often necessary to exploit the patented invention.
According to Section 24(6), first sentence, Patent Act, “the grant of a compulsory licence to a patent shall become permissible only after the patent has been granted.”30 This stipulation concerns patents granted by the DPMA and the EPO [Arts. 2(2) and 74 EPC]. This time frame may lead to a lower number of applications for compulsory licences and, therefore, to a lower number of grants because one has to take into account a final judgement and, since reaching legal certainty can take quite a while, a preliminary grant may be unlikely. Also, the patent expires after 20 years at maximum without taking supplementary protection certificates into account. In the only case in which a compulsory licence was granted by the German Federal Patent Court, the patent was granted on 28 June 1989, the claimant asked for a licence by letter dated 20 March 1990, the Patent Court issued its decision on 7 June 1991 and the Supreme Court decided on 5 December 1995.31 Therefore, it took more than 5 years before legal certainty was reached. If applicants were allowed to apply earlier for a compulsory licence, a compulsory liability rule could also apply earlier.
(2) Reasonable Remuneration
Determination of the remuneration should take place, as already stated repeatedly, at an efficient economic point, which involves assessment costs.32 The factors for the remuneration may influence the number of applications for compulsory licences. If it were commonly known that courts relatively over-compensate patent owners or do not respect the interests of the licensees, the number of applications might decrease and vice versa. Legal uncertainty may also play a role. Section 23(6), fourth sentence, Patent Act determines that the patentee shall be entitled to a remuneration from the holder of a compulsory licence that is reasonable under the circumstances and taking into consideration the commercial value of the compulsory licence. “If there should be a significant change in the circumstances decisive for the determination of the amount of this remuneration, each party shall be entitled to demand a corresponding adjustment”.33
The legislature lets the courts decide how the term reasonable should be interpreted; the sole restriction is, consistent with Article 31(h) TRIPS, that the commercial value of the licence should be taken into consideration.34 The Federal Patent Court, which only granted a compulsory licence in one case, referred to the jurisdiction of the Supreme Court of the Reich and stated that remuneration should depend on the interests of the parties involved; the circumstances of each individual case should be taken into consideration. On the one hand, the patent owner must receive appropriate compensation and, on the other hand, the licensee must be able to maintain his business.35 One may ask what a reasonable licensee and a reasonable licensor would agree on.36 Relevant may also be what the patentee and a contractual licensee concluded,37 the extent of the intended use,38 the importance of the patent and whether it entitled the patent owner to demand monopoly prices.39 The basic conditions regarding employees’ inventions should also be transferable because of the similarity between the situations.40 This may also be true for the jurisprudence regarding Section 23 Patent Act, the calculation of compensation in the case of infringement and that regarding contractual licences.41 The remuneration may be a one-time or a recurring payment42 which could depend on the selling price and be fixed at between 1 and 10 % thereof.43
Although the courts seem to emphasise the aim of rewarding the inventor when asking whether the patent owner is able to demand monopoly prices and what the importance of the patent is, the courts also take the interests of the licensee into account and decree what the parties have agreed on. This can be determined according to common rules such as under Section 23 Patent Act or the obligation to pay damages in the case of an infringement. Whether the remuneration amounts to 1 or 10 % of the selling price can make a big difference. Additionally, legal uncertainty exists because there has only been one grant in more than 60 years, and there is uncertainty whether the courts would still decide in the same way, although a change is considered unlikely. However, all these factors can only be guidelines and the determination is always dependent on the circumstances of each single case44 and is therefore difficult to predict. So the patentees may fear the uncertainty but normally trust that the courts make a decision that takes their interests into account. If this assumption is true, it is an empirical question that has not been answered yet.
(3) Relevant Procedural Rules
The evaluation of the incentives to file an application for a compulsory licence depends on the procedural rules. The rules that may have a negative influence are the following: Section 81(1), first and second sentences, Patent Act determines that proceedings regarding the grant or withdrawal of a compulsory licence, or regarding adaptation of the remuneration determined by a judgement for a compulsory licence shall be instituted by bringing legal action. The action shall be directed against the person recorded in the patent register as patentee or against the holder of the compulsory licence. So a court, namely the Federal Patent Court in the first instance, decides in contradictory proceedings about both the grant of a compulsory licence and the conditions that apply. As a consequence, the proceedings involve costs, especially court and attorney fees. At least the court fees usually depend on the amount in dispute,45 although both may be partially reimbursed depending on the extent to which a party is successful [Section 99(1) Patent Act; Section 91 et seq. German Code of Civil Procedure]. Some potential claimants do not want to risk paying these fees. Others may even prefer to attempt to challenge the validity of the patent by filing an opposition or initiating nullification proceedings. Opposition may be cheaper, easier46 and, in the event of success, more advantageous because the use of the formerly patented technology is allowed without the obligation to pay licensing fees.47 These mechanisms are currently used to a certain extent.48 Compulsory licensing proceedings may be considered as the “next instance” after nullification or opposition proceedings.49 Again, others may prefer infringing the patent and hoping that the patent owner will not notice. This practice is common due to the so-called not-invented-here syndrome,50 meaning that the potential licensee begrudges the patentee his invention. In such cases, the licensee would not accept a licensing offer and especially would not ask for a licence, but would use the invention nevertheless.51 It may also play a role that a court decides about the grant of a compulsory licence and not the patent office or another administrative body, because contradictory proceedings typically take longer and have a lower probability of success.
Section 85(1) Patent Act determines that the plaintiff may, at his request, be allowed by provisional disposition to use the invention if he credibly shows that the conditions laid down in Section 24(1)–(6) Patent Act have been met and that an immediate grant of permission is urgently required in the public interest. In comparison with normal proceedings, this provision contains both facilitations and restrictions. The claimant must only credibly show that the conditions for the grant of a compulsory licence are fulfilled instead of proving it. This means that the claimant is allowed to present affirmation in lieu of an oath and statements from agencies that are concerned with the alleged public interest,52 a level of proof that is not allowed in normal proceedings. But the claimant must also show that an immediate grant is urgently required in the public interest, which means that the immediate allowance to use the patented invention is necessary in order to prevent the occurrence or eliminate the existence of severe disadvantages, and that it would be unjustifiable to wait any longer.53 So far, the courts have never granted a preliminary compulsory licence. The Federal Supreme Court denied the grant of an injunction in two published decisions due to the lack of urgency.54 For instance, in the second case, it was certain that the patent would elapse around 1 month later and it was considered as justifiable to make the claimant wait.55 Despite the facilitations, a successful application for an injunction can be difficult because the claimant must show not only that the conditions laid down in Section 24 Patent Act are fulfilled, but also the urgency. As a consequence, especially claimants who would only profit from a fast decision may decide not to initiate compulsory licensing proceedings.
d. Limitation of the Effect in the Case of National Emergency
Section 13 Patent Act determines that “a patent shall have no effect should the Federal Government order that the invention is to be used in the interest of public welfare. Nor shall the effect of a patent extend to any use of the invention ordered in the interests of the security of the Federal Republic by the competent highest federal authority or, on the latter’s instructions, by a subordinate agency.” “The patentee shall have a claim against the Federal Republic for reasonable compensation.”56 Administrative courts, in particular the German Federal Administrative Court (Bundesverwaltungsgericht), judge the validity of the administrative act [Section 13(2) Patent Act] and the civil courts judge the amount of compensation (Subsection 3, second sentence).
Especially the terms public welfare and security require interpretation by the courts. Since there are no cases in which the administration has made use of the provision since 1945, one can derive from decisions of the Supreme Court of the Reich and the literature the following. The term public welfare, which is defined as being narrower than the term public interest in Section 24(1)(2) Patent Act,57 may include the prevention of danger to public health, the environment and occupational safety, and in exceptional cases could possibly concern other areas, such as basic needs in the field of education.58 The freedom of competition seems not to be part of it.59 The term security includes risks from inside and outside Germany, especially disaster management and civil protection.60 Section 13 Patent Act cannot be applied due to the principle of ownership and proportionality if there are alternatives.61
According to this interpretation, the provision does not address problems that involve the central analysis of this work. But the mechanism of this provision should nevertheless be taken into consideration when deciding about optimisation of the patent law system. Section 13 Patent Act has not been applied since 1945 because it is interpreted very restrictively, meaning it is interpreted in such a way that addresses only those situations in which the public interest is seriously affected and no other solution than limiting the effect of a patent is available. Such situations have not occurred during this period of time. Moreover, the current general terms bear a risk of legal uncertainty. Additionally, an application could have been denied due to expected negative effects on investment from inside and outside Germany, because it could appear that the state would impair the free market economy.62
2. Antitrust Law
a. European Antitrust Law
The antitrust law jurisprudence of the ECJ has never judged the possible application of a compulsory liability rule regarding patent rights; neither have the German and European antitrust authorities nor the German courts ever decided such a case.63 For a long period of time such a possibility in the area of IP law, especially as derived from Article 102 TFEU, was generally denied.64 However, now several commentators argue that this should be possible and there are judgements by the ECJ and the European Court of First Instance (CFI), which is now called the European General Court, in the area of copyright law in which a compulsory liability rule was applied. The European Commission also supports this use of the compulsory liability rule according to, inter alia, a discussion paper on the application of [ex-]Article 82 of the Treaty to exclusionary abuses.65 All supporters seem to share the opinion that more economic considerations must be taken into account when applying European antitrust law (the so-called “more economic approach”).66
Generally, Article 102 TFEU requires a dominant position within the internal market or in a substantial part of it, an abuse by one or more undertakings of that dominant position and an effect on the trade between member states; some examples are mentioned in which a misuse also has to be proven. The wording of this provision does not mention anything about compulsory licensing. Therefore, the main legal questions to be answered here are, under what circumstances a dominant position exists [Sect. (1)] and when an owner of an IP right can be viewed as abusing his dominant position by refusing to license IP rights (under reasonable conditions) and prohibiting their use [Sect. (2)], because foremost in such a constellation the application of a compulsory liability rule could be the right remedy to prevent anticompetitive behaviour.67 After the analysis proposes answers to these questions based on the current jurisprudence, some important procedural rules are explained [Sect. (3)] and the whole situation is evaluated [Sect. (4)].
(1) Dominant Position
Generally, a dominant position in the market is a position of economic strength enjoyed by an undertaking, which enables it to prevent effective competition from being maintained in the relevant market by giving it the power to behave to an appreciable extent independently of its competitors, customers and ultimately its consumers.68 Of importance in assessing the existence of a dominant position are two factors: determination of the relevant market and the relationship between the market shares of undertakings in the relevant market.69 The relevant market combines the product and the geographic market. A relevant product market comprises all those products and/or services that are regarded as interchangeable or substitutable by the consumer by reason of the products’ characteristics, their prices and their intended use. A relevant geographic market comprises the area in which the firms concerned are involved in the supply of products or services and in which the conditions of competition are sufficiently homogeneous.70 The comparison of market shares is crucial for determining competitive strength both in general and with respect to the next largest competitor.71 The importance of market share may depend on the specific market; but significantly high market shares are usually sufficient to prove the existence of a dominant position.72
Although the relevant market is determined according to these general rulings, there are some peculiarities if an analysis also involves IP rights. At first, the following needs to be stated: regularly, a single IP right does not lead per se to a dominant position73 because a legal monopoly is not equivalent to an economic monopoly; instead, frequently, a bundle of IP rights forming a technology is relevant. One may derive, for instance, from Article 1(1)(b) and (h) Regulation 772/2004/EC74 that technologies consisting of, inter alia, patents, utility models, designs, topographies of semiconductor products, supplementary protection certificates and plant breeder’s certificates have relevance in the field of European competition law.75 Additionally, it is of fundamental importance that normally at least two markets must be taken into consideration if the first one usually has an influence on the second one. This is, on the one hand, the market for IP rights or technologies themselves (input market) and, on the other hand, the market for products and services in which the IP right is used (output market).76 This differentiation can also be seen in Article 3(3) Regulation 772/2004/EC. Moreover, the type of subject matter protected by an IP right can influence the determination of the relevant market. The market for technologies and less artistic copyrights, such as software, is normally broader, meaning that there is often a higher degree of interchangeability and substitutability between the different forms of subject matter, which may be the case, for example, between variants of production processes.77 Nevertheless, when artistic works or non-recurring information, such as information relating to programme listings of broadcasting companies,78 are concerned, the market may be limited to exactly these works and information.79 The situation can be similar with regard to trademarks and designs.80
(2) Abuse of a Dominant Position
Identifying an abuse of a dominant position by means of a refusal to license (on reasonable conditions) is legally more complicated than determining a dominant position; especially the relationship between IP rights (currently mainly national) and European antitrust law poses several problems. According to the ECJ, EU law (as derived from Article 345 TFEU) should not affect the existence of national IP rights but could have an influence on the exercise of them.81 Such influence can only be very limited because preventing third parties from manufacturing and selling or importing constitutes the very subject-matter of an exclusive right that may not be affected. This is particularly the case if the patent owner were obliged to grant a licence in return for reasonable remuneration; a refusal to grant such a licence cannot in itself constitute an abuse of a dominant position82 which is also linked to the (negative) freedom of contract.83 This should only be possible under exceptional circumstances84; in RTE and ITP (Magill) the ECJ defined four conditions that must be satisfied in order to affirm an abuse of a dominant position. The case concerned a situation in Ireland and Northern Ireland in which the company Magill TV Guide wanted to market a comprehensive weekly television guide, which at the time was not available because each television station claimed copyright protection for its own weekly programme listings and prevented their reproduction by third parties.85 The European Commission found a breach of Article 102 TFEU and ordered that the TV stations had to supply third parties, on request and on a non-discriminatory basis, with their individual weekly programme listings and permit reproduction of those listings by such parties; if the TV stations chose to grant reproduction licences, any royalties requested should be reasonable.86 The ECJ confirmed this view and based its analysis on the following four conditions which were also held to be fulfilled: “(1) the product protected by an IP right must be indispensable for the potential licensee to act on the secondary market, (2) the refusal to license is preventing the emergence of a new product for which there is a potential consumer demand, (3) it is unjustified and (4) it is such as to exclude any competition on a secondary market”.87 These criteria were affirmed in a later decision (IMS–Health v. NDC)88 concerning the use of a brick structure developed by IMS to provide German regional sales data on pharmaceutical products. This brick structure, a database that may be protected by German copyright law, became the normal industry standard and IMS refused to license it to a competitor.89
In another case that also concerns copyright law, the opinions of the Commission and the CFI diverged in the grounds but not in the result. The facts were the following: incompatibilities existed between Microsoft Windows and competitors’ operating systems and servers. Microsoft, which also produces servers, denied the disclosure of certain communication protocols that would have made it possible to eliminate these incompatibilities. The protocols are protected by copyright law. The Commission, which argued interestingly that the criteria developed in Magill need not necessarily be applied because these criteria may not be suited to judging every single case, obliged Microsoft to disclose the information.90 The CFI confirmed the result, but held that the criteria should be applied and were fulfilled.91 It is also important to mention that Microsoft accepted the judgement by not appealing to the ECJ.
(3) Important Procedural Aspects
Regarding the procedures for reaching a decision about whether a compulsory liability rule derived from European competition law is applicable, one must especially note the following. Very importantly, there are two alternative proceedings. Either the European Commission or the national antitrust authorities—in Germany the German Federal Cartel Office (Bundeskartellamt)—orders the application of a compulsory liability rule or, alternatively, the potential licensee claims before a national court that the patent owner is not acting in accordance with antitrust law and applies for a compulsory licence.
With the first alternative, the Commission or the German Federal Cartel Office may decide to initiate proceedings of its own initiative or a third party may file a complaint to the Commission [Article 7(1) Council Regulation (EC) 1/200392] or a request to the German Federal Cartel Office [Section 54(1) Act Against Restraints of Competition]; both are, however, only proposals for the authorities to act.93 A subjective right to initiate formal proceedings does not exist. The German antitrust authorities and courts are also allowed to apply European antitrust law [Arts. 5–6 Council Regulation (EC) No. 1/2003]; Article 11(6) Council Regulation (EC) No. 1/2003 determines that initiation of proceedings by the Commission relieves the competition authorities of the member states of their competence. This alternative has the disadvantage that the authorities are not obliged to initiate formal proceedings but, if they do so, the potential licensee need not bring evidence because the authorities will investigate the situation on their own [Article 17 et seq. Council Regulation (EC) No. 1/2003]. However, in spite of this facilitation, proceedings could often be expensive for the potential licensee, especially involving attorney fees, because he may pursue his interests by trying to influence the authorities. It may frequently take some time to reach legal certainty, especially if one party appeals to the European courts.
The second alternative is a constellation in which contradictory proceedings take place starting before a national court, meaning that national civil procedural law applies. The plaintiff would have to apply for the grant of a compulsory licence which may either be based according to German law on a claim for damages, which would require default, or for the removal of an unlawful situation94 in connection with European antitrust law [Section 33(1) Act Against Restraints of Competition]. The advantage of this alternative for the potential licensee is that the courts are obliged to decide the case, but proceedings are normally also very expensive involving high court and attorney fees and take some time until legal certainty is reached. Preliminary decisions on granting a compulsory licence are also very difficult to instigate, as explained with respect to Section 85 Patent Act, because very important interests of the licensee must be presented (Secs. 935 and 940 German Code of Civil Procedure).
(4) Evaluation of the Situation
Although the ECJ has apparently defined distinct criteria that make the interpretation of Article 102 TFEU easier, clarity only seems to exist with respect to determining whether there is a dominant position or not. Beyond that, the decisions of the courts have been criticised by several commentators and a number of issues are still unclear. The lack of predictability, on the one hand, involves the criteria laid down by the ECJ to questions regarding EU law and jurisprudence; on the other hand, it involves the possibility of invoking the jurisprudence in all areas of IP law, especially patent law.
The first issue is that the criteria are unclear as to when exceptional circumstances exist95 and this requires further interpretation.96 Moreover, it is debatable whether the new product rule and the requirement of leveraging (second and fourth conditions) are required cumulatively or alternatively. Most commentators interpret the decisions in such a way that the requirements apply cumulatively,97 and this interpretation is presumably, or sometimes explicitly, based on the fact that the courts affirmed the four conditions in all their decisions. However, one may also argue that the conditions only need to be fulfilled alternatively because of the wording of the Microsoft decision98 and the circumstance that the Magill decision referred to a very specific situation and, therefore, application of the criteria cannot be invoked.99 Also problematic is the criterion of the indispensability to act in the secondary market (first condition), because the courts seem to interpret this criterion broadly in such a way that a competitor consequently has a higher chance of success in obtaining a compulsory licence if his products are bad enough that he cannot exist in the market without access to the information protected by an IP right, which is detrimental to innovation.100
It is also debatable what influence Article 345 TFEU has and especially whether or when the ECJ acts ultra vires by transforming national exclusive rights into non-exclusive ones. One may argue that the differentiation between the existence and the exercise of a right is not generally appropriate101 or may at least be very imprecise at the moment102; moreover, exclusivity is normally the fundamental element of an IP right. Alternatively, one may argue that several undefined legal terms in EU law, such as misuse, may be interpreted in favour of the opinion that there is no acting ultra vires103; additionally, the purpose of IP rights may not be affected if the owner of the right uses it foremost for blocking.104 An exact border has not, however, been drawn so far.
The second main issue is whether all considerations and the application of the criteria can be generalised and especially transferred to the area of patent law. On the one hand, decisions have always been issued with respect to the facts of each individual case, and previous cases referred to a very specific constellation which can be seen, for example, by the argumentation of the European Commission regarding the Microsoft case.105 On the other hand, many commentators assume that it does not make a difference if a copyright or a patent is involved.106 Also, the discussion paper of the European Commission does not differentiate when citing Magill and IMS Health.107 Unclear is whether there are other constellations that could also lead to a compulsory licence derived from Article 102 TFEU.
The connection between the jurisprudence in Magill and subsequent cases and the essential facilities doctrine is also imprecise, which may lead to further legal uncertainty. The doctrine originates from US law and means that abuse of a dominant position may also exist even without any discriminative or other anticompetitive behaviour if a firm with a dominant position in the market owns an essential facility, but denies access to it (under reasonable conditions) and, thus, a potential competitor is not able to enter a relevant market.108 Some commentators think that, due to the similarities between the doctrine and the constellations in the above-explained decisions, the ECJ presumably wanted to broaden application of the doctrine.109 Others feel that there must be a difference because the ECJ did not mention the doctrine explicitly in the relevant judgements.110
The discussion paper of the European Commission does not improve the situation because only some points of the relevant decisions are briefly cited and the conditions under which a refusal to license should be considered as an abuse are not further specified.111 As a result, one may conclude that the question remains open: under what circumstances with regard to European antitrust law is a property rule replaced by a liability rule?112
Proceedings for application of a compulsory liability rule are normally very expensive and take some time before legal certainty is reached. In combination with unpredictability and lack of clarity, the risk of litigation is immense.113 These constitute potential reasons why no compulsory liability rules have ever been applied regarding patents based on Article 102 TFEU and why this cannot be expected in the near future if the courts do not change or clarify their positions.
b. German Antitrust Law
German jurisprudence with respect to liability rules regarding patents affected by antitrust law is also relatively new; until recently, i.e., before 2002, this matter was not discussed by the courts and so far very few decisions exist. As mentioned above, the courts have not dealt with direct grants, but defendants have been allowed to claim that a compulsory licence could have been granted to prevent an injunction being issued after the patent owner initiated infringement proceedings. The relevant German antitrust law provisions are Secs. 19–20 Act Against Restraints of Competition. According to Section 19, the abusive exploitation of a dominant position by one or several undertakings is prohibited (Subsection 1); also defined is when an undertaking is or is assumed to be dominant in a market (Subsections 2 and 3); in Subsection 4 some examples are mentioned in which a misuse should especially be affirmed.114 Section 20(1) provides that dominant undertakings are not allowed to “directly or indirectly hinder in an unfair manner another undertaking in business activities which are usually open to similar undertakings, nor directly or indirectly treat it differently from similar undertakings without any objective justification”.115 In the following analysis, the German jurisprudence that refers foremost to Section 20 is explained [Sect. (1)] and then the situation is evaluated [Sect. (2)]. Regarding important procedural aspects, one can refer to the explanations made above concerning the European law116 because the same is true here except that not the European but only the national authorities may act.
(1) The Jurisprudence
There are no differences in comparison with the European case law that are worth mentioning regarding determination of a dominant market position. More interesting is the question, under which conditions the existence of anticompetitive behaviour can be affirmed, because German jurisprudence has dealt with different constellations from the ECJ. Whereas, for several years, the topic was debated based on a few court decisions117—especially on a case that concerned limiting the amount of a claim for damages due to the fact that a compulsory licence could have been granted118—the situation with respect to limiting injunctive relief only recently became clearer in the Orange–Book–Standard decision of the Federal Supreme Court.119 Before that decision, the Court had already explicitly affirmed that provisions on compulsory licences in the area of patent law were not conclusive, and that antitrust law was also relevant and could therefore affect the exclusivity of patents.120
The Orange–Book–Standard decision concerned a constellation in which the claimant owned a patent for an invention essential to the production of CD-Rs and CD-RWs according to the so-called Orange-Book-Standard. The claimant argued that the defendants were infringing the patent and asked, inter alia, for an injunction. The defendants stated particularly that the claimant had a dominant position on the market and discriminated in the sense of Section 20(1) Act Against Restraints of Competition121 by only allowing other undertakings and not the defendants to use the patented invention against remuneration.122 Generally, the Supreme Court held that there may be cases in which a compulsory licence could be granted and, as a consequence, injunctive relief must be denied. The Court concluded that an undertaking misuses its dominant position by requesting an injunction if it refuses to grant a licence under non-discriminatory conditions without unfair hindrance.123 But, very importantly, the following two additional conditions must be fulfilled: (1) The potential licensee must make an unconditional offer to conclude a licensing contract containing reasonable conditions. The patent owner is not obliged to accept an offer on condition that a court denies infringement of the patent. (2) The potential licensee must act in accordance with the proposed licensing contract if he already used the patented invention before the patentee accepted his offer. This means in particular that the potential licensee must either pay the proposed licensing fee to the patent owner or must provide security for it; the potential licensee is, however, also allowed to let the patent owner determine remuneration at his reasonably exercised discretion, which also means being in accordance with antitrust law.124 In the concrete case, the Supreme Court denied an injunction because of the absence of the additional two conditions and, as a consequence, did not analyse whether the further conditions laid down in Section 20 Act Against Restraints of Competition were fulfilled. However, due to the court decision, it is now at least in practice beyond dispute that with respect to patents a property rule can be replaced by a liability rule derived from Section 20.
(2) Evaluation of the Situation
As with European antitrust law, the situation has apparently improved to the extent that the Supreme Court concretised the very general antitrust law provisions and confirmed the opinion that a compulsory licence can be derived from German antitrust law. Generally, it was positively remarked that the new jurisprudence may more reasonably balance the interests of the involved parties and the general public125 because, inter alia, the patent owner can rely on being paid by the licensee. In addition, in the potential licensee’s favour, the amount of a reasonable remuneration can be investigated by a court without the risk of an injunction being issued.126 On the other hand, the debate showed that there are still several questions that remain unanswered and also new questions that lead to a significant degree of legal uncertainty. This uncertainty may be the main reason why the possibility of applying a liability rule based on German antitrust law should still be considered as being of little relevance. Moreover, competition law is applied in a very restrictive manner—arguably unnecessarily restrictive,127 which may be the second main reason. Other factors may also strengthen these effects and result in enormous litigation risks; these are, again, the time and money involved in waiting for a court decision to be issued. More concretely, one could observe the following.
With respect to the question of legal uncertainty, one can distinguish between two questions: whether the Federal Supreme Court has defined clear criteria and whether a direct grant of a compulsory licence or an application in other constellations would therefore be possible. The first question has been debated by several commentators who especially criticise the two additional conditions explained above, which the Court has defined but which cannot be derived directly from the wording of any existing legal provision. With respect to a reasonable offer, the point in time when such an offer must be made and to what extent a court must investigate its reasonability is still not clear. It is beyond doubt that the potential licensee must make an offer before using the patented invention. This is, however, only possible if he knows or could have known about the patent situation. It is unclear how such knowledge should be determined exactly and, if this element is not fulfilled, how much time should elapse before he is obliged to make an offer.128 Questionable with respect to the reasonability of an offer is whether a court should investigate to what extent that condition is fulfilled, or should only analyse whether the offer is evidently not reasonable.129 Open questions also exist about the possibility of providing security, the correct doctrinal derivation of such a condition, the exact amount of security required, the way security should be provided130 and how the patent owner obtains it.131 Additionally, questions about the territorial limitation of the licence have arisen because it is common and reasonable for parties to conclude a licensing agreement that is not limited to one country and, therefore, not to the territory where the infringement was alleged.132 Also questionable is whether a potential licensee who offers to conclude a licensing contract is allowed to claim non-infringement or nullity of the patent.133 Moreover, it is also currently unclear at which point in time the potential licensee is obliged to fulfil his obligations to pay remuneration; this is especially financially risky for small undertakings that are short of funds.134 More generally, it is unclear whether the application of the additional criteria was simply erroneous; one could argue that it was incorrect to apply German law, as the Supreme Court did, and not European antitrust law.135 If European law had been applied, one could conclude from the jurisprudence of the ECJ, as explained above, that the potential licensee must be allowed to use the patented invention against reasonable remuneration without fulfilling any further conditions if the patentee is not acting in accordance with antitrust law.136
The second question regarding legal uncertainty goes beyond the decision of the Supreme Court. It is unclear whether a direct grant of a compulsory licence based on German antitrust law would be possible, and also whether further cases in which a compulsory licence could be granted can be derived from German antitrust law. There are good reasons to assume this, but a court has not decided so far and clarification carries financial risks.
The current application of competition law is also very restrictive, especially due to the additional two criteria. Their application depends solely on the circumstance whether the defendant continued to use a patented invention and is faced with a (potential) injunction. If the defendant stopped use, he could have brought an action for damages against the plaintiff; to succeed in the action he only has to show that the plaintiff’s general licensing terms and/or his refusal to modify them are abusive under relevant competition law provisions.137 In either alternative the plaintiff does not act in accordance with competition law; the infringement of the patent alone is what leads to a shift in the burden of proof (the defendant has to show the conditions that the patentee has to accept in any event), and especially why patent law should prevail over competition law.138 Moreover, the court valued the interests of the patent owner higher in controlling the use of his invention than the interest in innovative standardisation (including the risk of being inefficiently over-compensated due to, inter alia, network effects), which is undoubtedly an essential element of the system of competition because market actors profit from well-functioning standardisation, from its acceptance by industry, and from access to the use of standards.139
3. Interim Results
This chapter aimed at showing why compulsory liability rules have almost no relevance in the field of German and European law. These results may be generalised such that if these conditions were present in other legislations, they would also have low relevance there. To clarify, it would be wrong to conclude that all these aspects need to be altered due to exclusivity being too dominant at present, because this could lead to a system that contains too many non-exclusive elements.
Regarding compulsory liability rule mechanisms inside the patent law system, one can conclude the following. German law provides for compulsory licensing in the public interest, with regard to dependent inventions and limitations to the effect of a patent in the interest of public welfare and national security. Several factors, which are admittedly based partly on assumptions and would require further empirical evidence, were identified as to why compulsory liability rules currently have very little relevance. On the one hand, there are legal reasons, which partly have a microeconomic dimension, namely the following:
The restrictive and unclear interpretation of the terms public interest [Section 24(1)(2) Patent Act] and public welfare (Section 13 Patent Act).
The restrictive and unclear wording of Section 24(2) Patent Act, in which important technical progress of considerable commercial significance and the existence of a formal patent is required.
The possibility of not being able to license know-how.
The time period during which an application for a compulsory licence can be filed [Section 24(6), first sentence, Patent Act].
Uncertainty about the amount of remuneration, high court and attorney fees, and that a court rather than an administrative body decides about the grant.
The difficulties in applying successfully for a provisional grant.
One consequence of this lack of clarity may be that potential licensees prefer challenging the validity of a patent. On the other hand, political and macroeconomic aspects should be relevant because the application of a liability rule—especially with regard to Section 13 Patent Act and, therefore, a constellation in which the state would be the driving force—may be considered as a negative signal to investors from both inside and outside Germany. Generally, economic considerations seem to be of minor importance in this area of law. In contrast to these considerations, the psychological effect on patent owners is mentioned; they are willing to conclude licensing agreements in order to prevent the application of compulsory liability rules and proceedings in general. With respect to the above-mentioned aspects, these effects may exist but should not be very strong.
With regard to antitrust law, a distinction exists between the jurisprudence in European law and German law, although both the European and the German statutes are similar and do not contain any explicit information about the application of compulsory liability rules. Economic considerations seem to be of more relevance in the area of antitrust law, in contrast to patent law. According to European case law, which refers to situations in which a patent owner who is dominant on the market generally refuses to license, the major point is that, with respect to Article 102 TFEU, abuse of a dominant position must be determined. This determination is currently carried out by analysing whether four criteria can be affirmed and predominantly concerns the situation on a secondary market. German case law concerns the situation in which a patent owner abuses a dominant position by refusing to grant a licence under non-discriminatory conditions and without unfair hindrance. The court determined with respect to Section 20 Act Against Restraints of Competition that injunctive relief is not available in the case of patent infringement if a compulsory licence could have been granted; the grant should be possible if the conditions laid down in this provision and two additional conditions explained above are fulfilled. The reasons that compulsory licensing derived from antitrust law (European as well as German) does not play a role, or at least currently only a minor role, may be the following. On the one hand, there is still a very high degree of legal uncertainty even though the very general antitrust law provisions have been concretised by the courts. On the other hand, the terms specified by the courts under which a compulsory licence can be granted are interpreted rather restrictively. Both drawbacks involve enormous litigation risks and, therefore, also financial risks, although antitrust authorities may issue decisions. Additionally, it often takes some time until a final decision is issued. All these factors may deter potential claimants from initiating proceedings and also prevent successful proceedings.
B. Different Mechanisms, Practical Relevance and Evaluation
The German law and the regulation on the European Patent with Unitary Effect contain no liability rule by default mechanism and, as explained, the German law contains only a few compulsory liability rules. These rules will be categorised in this analysis as compulsory licensing provisions, limitations to the effect of patents and limitations to injunctive relief. There are many different ways to implement such mechanisms in a legal system. This work distinguishes between the following categories of compulsory liability rule mechanisms: compulsory licences (Sect. 1.), automatic compulsory licences (Sect. 2.), limitation of the effect of a patent (Sect. 3.), compulsory patent buyout (Sect. 4.) and limitation of injunctive relief (Sect. 5.). Apart from these, mechanisms that can be categorised as liability rules by default (Sect. 6.) are taken into consideration here because they also do not depend on the initiative of the patent owner, although they are legally different from compulsory liability rules and require distinct legal and economic considerations when they are implemented. They may also be used to solve problems caused by property rules. Not all definitions provided in the following discussion may be commonly accepted and categorisation may take place in another way.140 This approach, however, should provide more clarity than is currently the case because the terminology in the entire context varies, especially regarding different legislations and areas of IP law141; sometimes even variants of private and compulsory liability rule regimes are confused.142 Specifically, the differences between compulsory licensing and other categories are unclear and the term compulsory licensing is particularly often used as equivalent to a compulsory liability rule.
Each mechanism, according to how it is defined below, can be distinguished from every other mechanism by at least one decisive difference that can have particular consequences legally and economically. This is especially true when the following aspects are taken into consideration: who the potential driving forces of the decision are, who is allowed to use the invention (besides the patentee), whether a significant degree of flexibility is provided, what the effect on the patent is, what the usual point in time of this effect is, what the usual method of determining the amount of remuneration is and in what area(s) of law the liability rule mechanisms are normally found. The following discussion provides examples of the patent systems and contexts in which these mechanisms are currently used, as well as showing the practical relevance of all these mechanisms.
A concrete legal situation in which a liability rule is considered preferable to a property rule might be affected by several mechanisms, but due to legal clarity it is usually considered preferable if only one of them comes into consideration. In some cases a combination might also be advantageous in terms of economic efficiency. The mechanisms can have procedural variants, too. Each of these mechanisms, or each variant of them, has its advantages and disadvantages, the foremost of which are economic. For instance, as explained above,143 enforcement and administrative costs are important for deciding between property and liability rules. However, these factors may also have relevance for the choice between different forms of liability regimes. Therefore, the above considerations are also taken into account here.
The purpose of the following considerations is, therefore, first to suggest a categorisation for the different forms of compulsory liability rules in the area of patent law, which may generally be appropriate for implementation in a modern patent law system.144 Moreover, the purpose of this section is to show which system may be optimal under what conditions, including liability rule by default regimes, and therefore useful for making further considerations. The discussion ends with the results (Sect. 7.).
1. Compulsory Licence
A compulsory licence may be defined as a mechanism by which—within a patent system with basically exclusive rights—a third party can be allowed to use a patented invention in return for remuneration without the patent owner’s consent if certain conditions defined by the legislature, which provide a significant degree of flexibility, are fulfilled and an organ of the state (a court or administrative body) confirms their fulfillment after the third party has filed an application. The user is normally only allowed to use the patented invention after such approval. The amount of remuneration will normally be determined in the grant proceedings in order to prevent additional costs. As explained above, compulsory licensing provisions are already part of the German and European patent and antitrust law systems; they also exist in several other patent law systems, as indicated by Article 5A(2) Paris Convention and Article 31 TRIPS. Besides the above-described categories for compulsory licences, there are also others, such as those that address more specific problems, but still provide a significant degree of flexibility. Examples are compulsory licences concerning public health issues or in the area of nuclear energy.145
In general, compulsory licensing mechanisms are suited to situations in which it is economically efficient for third parties to receive access to the patented invention whereby the patent owner receives remuneration. However, since situations are difficult to define in advance, the advantage of compulsory licensing mechanisms is that they allow a certain degree of flexibility and make individual and, therefore, tailored decisions possible. The effect of patent protection depends on the interrelationship of several factors: the market position of the would-be innovator, the characteristics of the relevant technology and the cost, risk, and potential payoff of innovation. In conclusion, these factors may be decisive for the question of whether the application of compulsory liability rules is beneficial,146 which requires looking at the concrete circumstances of each case. Additionally, competitors may often be in a good position to identify situations in which switching to a liability rule is more efficient, as could be the case in specific hold-out situations and where other anticompetitive behaviour can be identified.
Disadvantages are, however, that proceedings are potentially costly and time-consuming because many actors are involved and a lot of questions may be in dispute. Therefore, on the one hand, potential applicants may refuse to initiate proceedings and, on the other hand, certain patentees may lower their investment in research and development if they expect that proceedings could be initiated. Another consequence is that compulsory licensing is not perfectly suited to improving situations in which high transaction costs are one reason that a transfer does not take place. It is also correct that compulsory licensing cannot be expected to play any major role in solving anticommons problems.147 Moreover, achieving an efficient outcome also depends on the factor of whether a competitor has an incentive to initiate proceedings exactly in those situations from which society would profit; it may be complicated to provide such incentives. It may also be problematic that the application of a liability rule under a compulsory licensing regime depends on many factors which result in a significant risk of legal uncertainty caused by the very flexibility provided by such a provision. However, to provide legal certainty, the courts could develop certain case types which could later be transferred by the legislature to patent law, as was done with the German Act Against Unfair Competition (Gesetz gegen den unlauteren Wettbewerb).148 In this act a general clause still exists [Section 3(1)], but several cases were added in which the requirements of the general clause must particularly be fulfilled (Section 4 et seq.).