Intellectual Property and Competition Policy: Constructing the Interface

The relationship between intellectual property and competition policy has gone through different cycles at different times in different jurisdictions. At some periods the mere ownership of an intellectual property right has been equated with market power, and its actual or threatened exercise or non-exercise with abuse. At other times courts and regulators insist that intellectual property be treated no differently from other assets or business advantages. (Regulatory neutrality, when espoused, has generally been seen as a corrective to earlier periods of hostility to intellectual property rather than actively pursued as an objective in its own right.) The last phase in the cycle comes when intellectual property is privileged in various ways over other potential sources of market power whenever the activities of right holders come under regulatory scrutiny. Each of the five jurisdictions we have selected for analysis is currently at a different stage in this last cycle, with some edging back towards neutrality and others swinging definitively away from it.

An economic analysis of the effect of intellectual property rights on competitive markets would need to be able to explain and predict the likely reactions of particular market players to the actual and hypothetical expansion or contraction of legal protections for innovation and creativity in particular markets. Care must be taken, however, that in identifying potential market participants and describing and predicting their behaviour, one does not also identify with their interests. Competition policy is about protecting the process of competition itself, not persons.

To intellectual property owners, competitors are potential infringers. That competitors may themselves be downstream innovators or creators should not be forgotten. Building on what has gone before is how market economies develop. Innovation is both sequential and cumulative. Extending intellectual property owners’ rights to control adaptive or derivative use can get in the way of this process. The tactical use of blocking patents can have a similar effect.² Looking only at the interests of current right owners obscures a very important truth. If downstream innovation or creativity is blocked by the existence of an upstream intellectual property right, any resulting loss of innovative efficiency will have to offset whatever gains in innovative efficiency it is sought to attribute to the existence of the intellectual property right in the first place. Such netting out will not be easy given the relative ‘softness’ of innovative efficiency as a concept.³ Tackling one half of the problem does not make the other half go away.

Innovative and creative products need consumers just as much as any other goods and services. Consumers tend to get short shrift from both competition law and intellectual property. As we saw in chapter three, many economists would deny their interests any part in shaping competition policy. Their voice is not directly heard in infringement proceedings either. Even when their interests can be factored indirectly into judicial decision making (as they are occasionally in the course of legal argument made on behalf of others), consumers and users tend to be disadvantaged by the unequal status that comes from posing adverse consumer outcomes as defences rather than incorporating them in liability establishing rules. This matters greatly when it is only the defence that picks up competition values.⁴

One of the adverse consequences of personalising contributions to innovation and creativity in the form of a property right granted to a first owner is that it ignores the effect of more widely dispersed but nonetheless important stakeholders. It cannot always be assumed, for example, that it is only right owners or derivative users who are responsible for creating the net increase in social value attributable to the right. A properly inclusive economic analysis would recognise the contributions of:

a) the owners of the technology through which the protected work or product is disseminated;

b) the creative predecessors on whose effort the inventor or author builds (not all such predecessors will themselves be protected by intellectual property rights);

c) wealth creators in society as a whole, ie anyone who contributes to the consumer surplus which makes possible the purchase of the protected work or process.⁵

The obvious difficulty with this way of thinking is that the more widely the economic net is cast, the more fuzzily imprecise the analysis. On the other hand, if policy makers ignore these dispersed stakeholders entirely, they run the risk of unfairly tipping the balance of argument in the direction of right holders by leaving qualitatively important (if not always easily quantified) factors out of the equation.

Property is a much-debated construct in all legal systems, and it is not our intention to traverse that debate in detail here. For the necessarily limited purposes of this book, we make the following assumptions and reservations about the nature and role of property rights:

a) That ‘property’ is a bundle of rights, not an object or a thing.⁷

b) That ‘property’ can have different meanings in different legal contexts, and may be used for different legal purposes. Thus while trade secrets may be granted property status when instituting a system of registrable personal property securities,⁸ this usually has little or no impact on judges’ propensity to act as though they were mere liability rules or obligations on other occasions.⁹

d) That while economists can tell us a great deal about the consequences of allocating property rights, both the act of allocation and the subsequent categorisation of property rights are tasks for lawyers. Distinctions that are important to one group may be irrelevant or distracting to the other. ‘Property’ does not equal ‘asset’, still less ‘competitive advantage’.¹¹

e) That while the triad of assignability, exclusivity and severability may be taken as indicia of property, the absence of one or more of them is not necessarily fatal to the existence of a property right in a particular case.

What is the significance of these overlapping ambiguities for competition enforcement? Simply this: even if using property as a shield against regulatory intervention could be justified on economic grounds, property is too unstable a concept to provide a workable dividing line between immunity (actual or presumptive) and intervention.

For all of the above reasons, even a purely juristic analysis of the nature of intellectual property would have to concede important differences between it and other forms of property. Juristic differences, however, do not and should not bind the regulator. The point we are seeking to make here is not that intellectual property can never be a fully credentialed member of the property club (in some jurisdictions this would be to fly in the face of statutory affirmation that copyright, designs and patents are indeed ‘property’¹⁸), nor that intellectual property can never share ownership features with other forms of property, but rather that neither similarity nor difference should be allowed to impede competition authorities. Perhaps the final word on this vexed subject can be left to a Canadian judge who (speaking of copyright, but the logic could be applied equally to patents or designs) pointed out that copyright law is neither tort law nor property law in classification but is statutory in origin, and it follows accordingly that copyright legislation simply creates rights and obligations upon the terms and under the circumstances set out in the statute.¹⁹

The distinction between legal and economic monopolies pulls in two directions. The first (and most frequently invoked) is as a corrective to the wrong-headed notion once widely accepted by courts and regulators in the United States that intellectual property rights confer market power in themselves. The second and equally important (but less often referred to) iteration of the distinction is to reject the equally baseless assumption that any act done (or not done) in pursuance of a legal monopoly can never adversely affect the competitive process.

Thus far we have assumed a common set of justifications across all manifestations of intellectual property. This is not, however, how the law and economics debate about intellectual property rights has by and large proceeded. Courts, competition regulators and commentators have approached different rights differently. Sometimes this is a matter of the legal form in which the right is cast. On other occasions it reflects the different rationales underpinning each right. While both factors are relevant to the refusals to license debate, they can distort the analysis if they suggest either that particular rights are intrinsically more virtuous or more vicious in competition terms, or that some rights are inherently more vulnerable to over-regulation than others.

Again, while arguments can be (and have been)³⁸ made for privileging rights that are registration based over self-constituting rights, it is not clear what the act of registration has to tell us in competition terms, unless it is perhaps that the right, since it has been ‘paid for’ by prior disclosure (in the case of patents), should be more immune from ‘confiscation’ or ‘suppression’ than one (as in the case of copyright or layout designs for integrated circuits) where no such ‘price’ is demanded. Whether this embellishment adds anything of substance to the ‘regulation equals confiscation’ argument is doubtful, unless perhaps it could be argued that by extracting disclosure while reneging on the promise of protection, the State stands convicted of double dealing and duplicity. Such attempts to introduce an ethical dimension into the debate are drawing a very long bow. Rights to extract minerals or petroleum also involve disclosure (sometimes public) but carry with them no corresponding immunity from regulatory oversight. No doubt all property owners would wish to hold their rights free of interference by competition authorities, but this is a hope not a right, and any push on their part against full exposure to regulatory oversight would in no way be strengthened because their right is guaranteed by a State agency in return for payment.

A better way of looking at the interaction of intellectual property rights and competition policy would be to ignore juristic form and focus on the activity that a particular rule seeks to encourage or enhance. This would make economic dissection of the intellectual property corpus considerably easier. Legal rules would then be split into the following families:

(a) Rules directly fostering innovation and creativity

It is these rules on which economists have lavished most attention. Copyright and patent are the two traditional prototypes. To them may now be added sui generis rights protecting layout designs for integrated circuits, plant varieties and novel but non-functional designs. While these rules have the common objective of encouraging various forms of innovative and creative endeavour, they proceed towards that end by two quite distinct means. Some (patents, plant varieties and registrable designs) create true legal (but not necessarily economic) monopolies which outlaw parallel creativity or invention. Potentially infringing processes, shapes or products do not cease to become so because they have been arrived at independently. By contrast, copyright and layout designs law forbid only imitative uses of the protected work, not independent creativity as such.⁴¹ While this tells us something about the permeability of the barriers to entry in each case, the reluctance of the courts to give much credence to claims of independent creation means that would-be entrants are unlikely to find it markedly easier to create around a copyright than to invent around a patent.

(b) Reputational rules

(c) Fair dealing rules

There are two aspects to this. Some jurisdictions may recognise intellectual property rights unknown in other jurisdictions (database rights in Europe, publicity rights in the United States⁵¹). Alternatively, different jurisdictions may draw the boundaries between rights in different ways (the lines between design and copyright, for example). One of two things will then happen. Competition rules that do manage to operate in similar ways across jurisdictions may have the unintended effect of evening out the economic effects of these differences between intellectual property regimes. Conversely, where competition principles themselves vary from jurisdiction to jurisdiction, they will magnify any problem caused by misaligned intellectual property rights.⁵²

Signatories to the World Intellectual Property Organisation Copyright Treaty 1996 (WCT) are required to provide ‘paracopyright’ laws enabling copyright owners to block access to, and the copying of, their works in electronic form using technological protection measures (TPMs). In some jurisdictions (most notably the United States and the European Union) paracopyright protection extends copyright owners’ control over their works significantly beyond that which has traditionally obtained under copyright legislation,⁵³ going well beyond the metaphor of a locked house⁵⁴ that would simply see someone stopped from circumventing a TPM to access a work. United States paracopyright rules⁵⁵ blithely state that they do not affect the normal fair use defence to copyright infringement, but this is little comfort to users prevented by a TPM from gaining access to a locked-up work to make fair use of it. Europe’s paracopyright provisions are more draconian, lacking this broad (if often useless) fair use exemption. They make no allowance for the common copyright exemptions for research or private study, criticism or news reporting, rendering European users liable for infringement unless they can come within one of a raft of 20 or so very narrow exemptions, all bar one of them only voluntary for Member States to implement into their national legislation.⁵⁶ Paracopyright thus poses two dangers for the evolution of a coherent competition policy. The first is that courts and regulators allow the automatic extension of copyright’s already over-privileged status in many competition regimes to this new area. The second is that by allowing copyright owners to thwart or bypass fair dealing and fair use rules, paracopyright severely limits copyright’s ability to control anti-competitive behaviour through its own internal mechanisms.⁵⁷

Competition lawyers are now used to asking whether and how competition rules should be adjusted to take account of the actual or supposed idiosyncrasies of intellectual property. The question after all has practical outcomes. Intellectual property lawyers seldom have occasion to put the question in reverse and ask whether the content of an intellectual property right should be adjusted to reflect the needs of competition policy.

One of the more unfortunate consequences of treating property and regulation as polar opposites is that this way of thinking obscures the extent to which individual intellectual property regimes themselves reflect (or can be made to reflect) competition values. Very occasionally this is explicit, as in the recent enactment in Australia of provisions in the patent statute enabling the Federal Court to issue a compulsory licence⁵⁸ and revoke a patent after that grant if the patentee is acting in contravention of that jurisdiction’s competition statute.⁵⁹ More commonly, competition values lie silent within other provisions until teased out by courts during infringement proceedings.

(a) Compulsory licensing provisions in patent and design law

(b) Collective copyright licensing

Copyright licences and licences of performers’ rights are not uncommonly administered by collecting agencies on behalf of dispersed groups of right holders. In jurisdictions such as the United Kingdom and New Zealand such schemes are subject to confirmation and variation by a specialist tribunal at the behest of actual or would-be licensees.⁶⁴ The tests applied by such bodies are those of reasonableness and non-discrimination, and they tend to focus on the interests of stakeholders represented before them rather than on the impact of those stakeholders’ actions on the competitive process itself. Whether and to what extent this form of mini-regulation is subject to competition principles is seldom made clear.

(c) Abuse of rights doctrines

Commonwealth courts have been much slower to invoke abuse of rights theories, at least in cases involving intellectual property. In these jurisdictions their use appears to have been confined to two limited situations. The first involves mostly unsuccessful attempts to invoke the so-called ‘spare parts’ rule enunciated by the House of Lords in British Leyland v Armstrong, Patents Ltd.⁷⁰ The second concerns isolated refusal to protect business confidences where potential breaches of competition law are said to be involved. The former has been outflanked, at least on its United Kingdom home ground, by the construction of a statutory bypass.⁷¹ Even in its heyday the Law Lords’ decision found few emulators among other Commonwealth judges,⁷² or indeed any application outside the narrow field of indirect copyright protection for mass-produced articles.⁷³

Whatever their future in particular jurisdictions, abuse of right doctrines are an undesirable development. The benefits they confer on one group of stakeholders (potential infringers) seem out of proportion to any proven harm to the competitive process. The existence of two sets of related, but on key issues divergent, rules on the American pattern is not reassuring. Judges who are called on to deal with this particular side wind in the course of ordinary infringement proceedings will be doing so without the procedural and evidentiary aids more usual in full-blown competition litigation. In particular, the opportunity for input from economists would appear to be limited, at least in jurisdictions outside the United States. Adjectival issues apart, the chief difficulty with the abuse of rights approach is conceptual. It is nothing more than the ‘right equals market’ fallacy writ large.

(d) Core concepts as competition enhancers

Every intellectual property right has a set of inbuilt constraints intended to limit its scope and potential application. Some are limited in time. Others, while potentially immortal, may be lost through disclosure, inaction or inappropriate use. In addition to temporal limitations, each set of rights has a core concept which restricts the subject matter to which the right may be applied. Patents and copyright were not originally designed to protect ideas as such. Reputational rights were not intended to be cut loose from the reputations they were created to defend. In this prelapsarian world, facts were thought to be free, and mere information was protected only in the service of some notion of fair dealing (however inarticulate) or because of the original form in which it was expressed. It was also thought important that the boundaries between the various forms of intellectual property be preserved so that core concepts did not bleed into each other in ways which defeated each right’s distinctive purpose. Copyright was not to be used to confer patent-like protection on functional aspects of works without the patent penalties of disclosure and registration. Know-how had to be kept secret, or be constrained by patent claims and specifications. Courts and legislators were content to leave the shape and get-up of goods to be protected by copyright or registered design law rather than have those things become reputational indicators in themselves. Judges were generally at pains to preserve these distinctions whenever it was obvious they were under threat (this was not always the case). And legislators generally did not disturb this happy state of affairs. Intellectual property statutes remained discrete and internally self-referencing.

Absent an express statutory power to intervene in infringement proceedings or suspend the competition inquiry until the conclusion of these proceedings, enforcement agencies could be forgiven for ignoring intellectual property’s own self-correcting mechanisms. To do so, however, could distort the competition analysis by overstating the market power attributable to a particular intellectual property right. Equally, though, any erosion of intellectual property’s internal controls should give competition regulators, legislators and policy makers pause for thought. Elsewhere in this book we have argued strongly that intellectual property law cannot simply be assumed always to get it right in competition terms, but neither should we assume that it always gets it wrong. Intellectual property’s internal self-limiting mechanisms have to be part of the analysis.⁷⁹

The second unanswered question is more significant: If over-protection is a regrettable necessity in competition terms, is that necessity justified only to the extent that intellectual property rights stay within their traditional bounds and their internal competition controls remain intact? If existing rules are a less than perfect fit with underlying economic rationales, it is not obvious where any further lowering of transaction costs or gains in innovative efficiencies are to come from if the area of protection is increased.

The debate between quantifiers and categorisers outlined in chapter three has particular resonance when an intellectual property right is introduced into the mix. Categorisers, for example, would say that if the right was lawfully acquired, it cannot be a barrier to entry because anyone could have acquired it. Nor can the right be a strategic barrier. Even accepting the categorisers’ logic, rights such as trade secrets are arguably self-constituting, or so the General Court accepted in its Microsoft decision.⁸⁵

(a) The weak case for intellectual property as a barrier to entry

Attempts are sometimes made to argue that the costs of defeating or bypassing an intellectual property right are deterrents to entry by competitors. Such costs include litigation expenses, research and development of alternative products or processes, and the money expended to fight the branding implications of a trade mark or other reputational right.⁸⁶ These are barriers to entry only in so far as they:

b) bring no collateral advantage beyond bypassing the intellectual property right; and

c) are quantifiably high enough to deter entry,⁸⁸ or qualitatively different from the costs already borne by the incumbent.⁸⁹

Only rarely will the costs of bypassing or contesting the right qualify on all three grounds. Most would-be entrants would spend something on product differentiation or research and development even if the incumbent held no intellectual property rights, and some such expenditure would be recoverable on exit from the market. Even litigation costs are a problematic barrier, since it cannot be assumed that competition with the incumbent necessarily means contesting the right. Potential competitors may be able to compete using non-infringing products or processes.⁹⁰ The structural uncertainties associated with vague rules are perhaps more plausibly described as entry barriers. They certainly increase the right holder’s opportunities for gaming,⁹¹ but the cure cannot lie in clarifying the content of the right by over-extending it. The gaming would then be over, but only because the right holder had won the game.

(b) The strong case for intellectual property as a barrier to entry

Intellectual property is much more convincingly described as a barrier to entry not when it raises the costs of potential infringers per se, but when it raises them to levels which are quantitatively high enough (for the ‘quantifiers’) or qualitatively different enough (according to the ‘categorisers’) to cause real problems in real cases. This is most likely to occur when the right in question is used in such a way as to:

a) inhibit the creation of new markets by limiting derivative or developmental use of protected products or processes;

b) facilitate market segmentation by erecting geographic obstacles to product movement. Parallel importing restrictions, because they are built into intellectual property regimes themselves, can have the same effect as a purely contractual territorial restriction (the line between action and inaction is wobblier than usual here);

Economic explanations as to why something like an intellectual property regime had to exist were for a long time stable if never quite unanimous.⁹⁶ In more recent years the expansion of intellectual property protection has led to a divergence of views among economists.

All economists agree that intellectual property rights increase price and reduce consumer choice, at least in the short term.⁹⁷