WORLD TRADE
ORGANIZATIONWT/WGTCP/W/105
23 October 1998
(98-4137)
Working Group on the Interaction
between Trade and Competition PolicyOriginal:  English
COMMUNICATION FROM THE REPUBLIC OF KOREA
The following communication, dated 29 September 1998, has been received from the
Permanent Mission of the Republic of Korea with the request that it be circulated to Members.
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Relationship between Intellectual Property Rights and Competition Policy
1. Intellectual Property Rights viewed from Competition Policy Objectives
1. While intellectual property right laws seek to protect the rights of right-holders by imposing
certain restrictions on competition, competition laws  aim at maximizing economic efficiency through
free competition within the market.  Intellectual pr operty rights award technological innovators legal
monopoly power, while competition laws regulate monopoly for the purpose of obtaining fair and free
competition.  Consequently, intellectual property right laws and competition laws are potentially in
conflict with each other.
2. The potential conflict between intellectual property right laws and competition laws, as
described in a background paper published by the OECD Secretariat in October 1997 (OLIS:
7 October 1997), often creates problems in the formulation and enforcement of competition laws and
policies.
Short-run Static Efficiency and Long-run Dynamic Efficiency
The dynamic efficiency argument that intellec tual property rights promote innovation cannot
always be justified for restricting competition in the short run.  Competition laws and policiesmust weigh the short-term static efficiency against the long-term dynamic efficiency to
determine whether a given practice is legitimate or not.
Monopoly Power and Intellectual Property Rights
The competition authorities should remain aler t to the monopoly power granted to intellectual
property.  Yet intellectual property rights per se  do not provide a dominant position.
Verification should be made to determine whether there is any substitute in competition with
the intellectual property in question.WT/WGTCP/W/105
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Unique Economic Features of Intellectual Property Rights
Due to the low marginal cost of imitation and appropriation of an intellectual property, the
owner of the property often includes certain restrictions in licensing contracts.  Normally,
such restrictions are subject to the competition authority's regulation.  It should be noted,however, that while such restrictions play an important role in maximizing profits for the
right-holder, they may also contribute to increasing consumer welfare.
Distinguishing Horizontal Practices from Vertical Practices
A competition authority should realize that in cases of vertical transaction of technology, anti-
competitive use of intellectual property rights could be beneficial to efficient use of theintellectual properties.  Exclusive dealing, ro yalties irrespective of total sales, and tying
arrangements in using assets, labour and intellectual property rights can be grouped into this
category.  The rule of reason should be applied in evaluating these practices by the
competition authorities.  On the other hand, strict enforcement of competition law is
necessary to regulate horizontal practices such as licensing contracts intended for marketsegmentation and price-fixing among competitors by means of pooling and cross-licensing,
exclusive territories and grantbacks.
3. The potential conflict described above calls for a close coordination between the intellectual
property rights authorities and competition authorities.  In Korea, the Fair Trade Commission and the
Korea Intellectual Property Office have established a mechanism through which they consult with
each other to coordinate their policies in an efficient manner.
2. TRIPS Agreement and Competition Policy
4. In the TRIPS Agreement, there are several provisions that are closely related to competition
policy.  Article 6 on the principle of exhaustion, Article 31 on compulsory licensing (other use
without authorization of right holder) and Article 40 on control of anti-competitive practices incontractual licences are a few examples that deserve an examination from competition perspective.
5. During the Uruguay Round negotiations on the TRIPS Agreement, the developed and
developing countries took different approaches.  Reflecting the interests of intellectual property right
owners, the developed countries advocated the restri ction of the abuse of compulsory licensing and of
each country's discretionary power to regulate competition-restrictive provisions in licensing
contracts.  They also rejected the argument of international exhaustion of the rights.  The positions ofthe developing countries regarding these issues were exactly the opposite.
6. The provisions of the TRIPS Agreement relate d to competition policy reflect the compromise
reached between these differing positions of the developed and developing countries.
Principle of Exhaustion
The TRIPS Agreement makes no clear stipulation on the principle of exhaustion and parallel
imports.  Instead, it stipulates that the issue of the exhaustion cannot be subject to disputesettlement procedures, and for this reason, the Member countries can make their own
independent decisions regarding the principle of exhaustion.  Therefore, if there exist great
differences among the Member countries in the application of the principle of exhaustion, the
flow of technological transfer and distributi on of the goods in question may be distorted.WT/WGTCP/W/105
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Compulsory Licensing
Compulsory licensing aims at diffusing technology which can provide benefit to the public by
way of preventing patent holders from exclusively hoarding the patents and licensing
contracts with unreasonable terms and conditions.  Nevertheless, indiscreet use of compulsorylicensing can discourage efforts for innovation.  For this reason, the TRIPS Agreement sets
forth detailed conditions for the use of compulsory licensing.
Control of Anti-Competitive Licensing
Article 40 of the TRIPS Agreement recognizes each Member country's right to enact relevant
laws and regulations on the control of anti-competitive practices in contractual licensing.  But
it illustrates only three types of such practices: exclusive grantback conditions; conditions
preventing challenges to validity; and coercive package licensing.
3. The Application of Korea's Fair Trade Act on Intellectual Property Rights
7. In principle, Korea's Fair Trade Act does not apply to the practices recognized as exercise of
intellectual property rights.  However, the Act prohibits unfair international contracts for introductionof technology-based intellectual property rights.  Therefore, anti-competitive practices concerning
intellectual property rights are partially regulated under the Act.
8. Article 32 of the Fair Trade Act, stipulates that certain types of international contracts should
not contain the actions which are declared unfair in the Act, including unduly collaborative acts,unfair business practices, resale price maintenance, etc.  Based on this article, the Korea Fair Trade
Commission has put into force "Notification on Types of and Criteria for Unfair Business Practices in
International Contracts".
9. The notification covers IPR-related international contracts such as patent rights contracts,
copyright licence contracts, know-how licence contracts, franchise contracts and trademark licence
contracts, etc.  The notification stipulates that, when deciding whether a contract is unfair or not, the
contract's effect on competition, its duration, and the situation of the affected market must be taken
into consideration as well as the contract itself.  The application of this notification, therefore, is based
on the rule of reason.
Types of Unfair Business Practices in International Contracts
• Restrictions on the sources from which a party may purchase raw materials, parts,
manufacturing equipment, etc.
• Restrictions on export destination.
• Restrictions on customers and sales quantity.
• Restrictions on the method of sales and designation of the sales price.
• Restrictions on the use or handling of a competing technology.
• Unfair interference with parallel imports.
• Restrictions on the use of a patent right, etc., after the expiry of that right.WT/WGTCP/W/105
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• Charging of royalties on non-licensed products and packaged technology.
• Restrictions on the improvement, research and development of the licensed technology.
• Restrictions on the transfer of improved technology.
• Imposition of advertising and publicity expenses.
• Unfair calculation of royalties and imposition of minimum royalties.
• Unfair contract termination or unfair dispute resolution provisions.
• Imposition of no-contest obligations.
10. Under Article 34 of the Fair Trade Act concerning unfair international contracts dealing with
intellectual property rights, the Korea Fair Trade Commission has the authority to order correctivemeasures such as cancellation and modification of the contracts.  Between 1981 and 1997, the
Commission ordered corrective measures on 1,581 cases.1
11. The Korea Fair Trade Commission has also esta blished the "Guideline for Types of Special
Unfair Trade Practices regarding Parallel Imports" to determine whether an action restricting parallel
imports is legal or not.  A situation might arise where prohibition of parallel imports may constitute anabuse of trademark rights.  For example, the right-holder may hinder parallel imports that are legal or
refuse timely supply of goods for licensees that sell parallel imports.  Such actions may be deemed
illegal under the Fair Trade Act.
12. Franchising involves permission to use business secrets and know-how as well as trademarks.
Its vulnerability to abuse is the reason for regulation by the Korea Fair Trade Commission although,
in principle, the Fair Trade Act does not apply to intellectual property rights.
4. Conclusion
13. Solutions to the potential conflict between intellectual property right laws and competition
laws should be based on the axiom that intellectual property right laws should not grant excessive
protection or undue monopoly power to intellectu al property right holders.  In other words,
competition or antitrust laws should play the role of arresting excessive protection of intellectual
property rights.  At the same time, a mechanism should be designed to prevent the abuse ofintellectual property rights.
14. In order to promote both technological innov ation and competition, a proper balance must be
achieved in pursuing the objectives of intellectual property right laws and competition laws, takinginto consideration specific conditions of each country.  Closer coordination between intellectual
property rights authorities and competition authorities is important to this end.
                                                     
1 For example, the copyright contract between "Mincom" and Applied Learning International Inc. of
America had a clause stipulating that "Mincom cannot establish sub-agents without a written agreement ofApplied Learning International". It was deemed as an unfair trade practice and the Korea Fair Trade
Commission ordered correction of that clause. The contract for setting up import agent relationship betweenInkel P.A. Ltd. And Electro-Voice of America had a prov ision that "in certain circumstances, Electro-Voice has
the right to cancel the contract after a written noti fication".  The Korea Fair Trade Commission ruled that
imposing such a provision constituted an unfair trade practice and ordered its deletion.WT/WGTCP/W/105
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15. Ways to enhance international efforts to harmonize differences among countries in the
enforcement of their relevant domestic laws and policies should also be explored.  In addition, the
development of clearer disciplines within the TRIPS Agreement on the interaction between
intellectual property rights and competition merits further examination in the WTO.
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