Source: https://pl.b-ok.org/book/610751/a7b1ba?dsource=recommend
Timestamp: 2020-06-05 07:14:44
Document Index: 704705921

Matched Legal Cases: ['sui generis', 'Sui generis', 'Art.\n12', 'Art. 31', 'Art. 27', 'Art. 28', 'Art. 33', 'Art. 1', 'sui generis', 'sui generis']

Intellectual property rights competition | Steven D. Anderman | download
Strona główna Intellectual property rights competition
0521863163
9780511275456
competition1824
market1210
patent1093
trade1055
intellectual property755
licensing675
court661
product545
agreements525
article507
competition law458
goods449
trade mark411
parallel405
policy388
patents371
antitrust337
iprs334
licence325
guidelines317
competitors299
transfer285
exclusive279
monopoly266
conduct258
parallel imports257
restrictions250
parties241
ipr234
infringement232
intellectual property rights229
patented227
competitive227
courts225
dominant223
licensee213
ibid197
market power197
competition policy194
services193
invention190
inc187
provisions185
trade marks179
european177
Australia, Ireland and Singapore. By setting out the legislative and
judicial and administrative alternatives available in those constituencies
with some experience of dealing with the interface, this research study
provides a reference work which can be used as a resource to throw light
on how the two fields of law can be adapted to create a coherent whole in
the particular circumstances of any one legal system.
In the third part of the book a number of issues closely related to the
interface between competition law and intellectual property rights are
examined. Separate chapters analyse: (i) the issue of parallel trading and
exhaustion of IPRs, a system of legal rules that creates its own interface
with the exercise of IPRs alongside the competition rules, (ii) the issue
of technology transfer showing the important differences between international IP licensing and foreign direct investment as well as highlighting how limits on technology spillover are set in bilateral investment
treaties, and (iii) the economics of the interface between intellectual
property and competition law to suggest how economic thinking may
find a way of interacting with legal argument in this field.
T H E IN T E R F A C E B E T W E E N
RIGH TS AND
Cambridge, New York, Me; lbourne, Madrid, Cape Town, Singapore, São Paulo
Information on this title: www.cambridge.org/9780521863162
978-0-511-27399-5 eBook (EBL)
0-511-27399-1 eBook (EBL)
978-0-521-86316-2 hardback
0-521-86316-3 hardback
The competition law/IP ‘interface’: an introductory note
p a r t i Intellectual property rights and competition law
in the major trading blocks
EC competition policy and IPRs
STEVEN D. ANDERMAN AND HEDVIG SCHMIDT
Competition policy and its implications for intellectual
The interface between competition law and intellectual
p a r t i i Intellectual property rights and competition law
in smaller and medium sized open economies
Intellectual property rights and competition in Australia
Irish competition law and IP rights
The interface between intellectual property law and
p a r t i i i Issues related to the interface between intellectual
property rights and competition law
MIRANDA FORSYTH AND WARWICK A. ROTHNIE
The relationship between intellectual property law and
competition law: an economic approach
P I E R R E R É G I B E A U A N D K A T H A R I N E R O C K E T T
is Professor of Law at the University of Essex. He has
been an expert on competition policy to the Economic and Social
Committee of the European Union since 1984. He is currently advising the
IP Academy and the Intellectual Property Office of Singapore on the
interface of IP with the new Singapore competition law while also advising
the Singapore Competition Commission on the implications of the new
Competition Act and the preparation of Block Exemption Regulations and
is a Lecturer in Law at the University of the South Pacific
where she teaches criminal law and is currently developing a course in
intellectual property law in the South Pacific. She studied at the University
of Melbourne, and as a postgraduate at the University of Connecticut. She
is currently completing a PhD at the Australian National University on the
relationship between the customary justice system and the state justice system
is Senior Fellow in the Faculty of Law, University of
Melbourne. She is an expert on competition law. She is a member of the
trade practices committee of the Law Council of Australia, a body which
advises the government on proposed changes to competition law. Recent
publications include: ‘The Benefits and Costs of Copyright: An Economic
Perspective’, ‘The Treatment of Natural Monopoly under the Australian
Trade Practices Act: Four Recent Decisions’ and ‘Intellectual Property and
Price Discrimination: A Challenge for Australian Competition Law’.
studied at the Universities of Konstanz, Edinburgh
and the London School of Economics. He lived and worked in Japan for
three years, and between 1992 and 2005 headed the Asian Department of
the Max Planck Institute for Patent, Copyright and Competition Law in
Munich. He is now a Member of the Boards of Appeal at the European
Patent Office in Munich. He is the editor of the Max Planck Institute’s
Asian Intellectual Property Series and the Asian editor of the Max Planck
Institute’s publication IIC.
R O H A N K A R I Y A W A S A M is a Lecturer in Law, Director of the Program in
Information Technology, Media and E-Commerce Law, and Member of the
Human Rights Centre at the University of Essex. He qualified as a technology
lawyer with Denton Hall (Denton Wilde Sapte) and has worked as a consultant
with several global law firms, and as an external consultant to the United
Kingdom’s Department for International Development and Office of
Telecommunications, and also Cable & Wireless.
I M E L D A M A H E R is Sutherland Professor of European Law, University College
Dublin. She was Director of the Centre for Competition and Consumer Policy,
Regulatory Institutions Network, at the Australian National University. She
has published extensively on competition law and EU law and is author of
Competition Law: Alignment and Reform (1999). Recent publications include
‘Innovation, Competition, Standards and Intellectual Property’ (co-edited
with Peter Drahos, 2004) and ‘The Interface of EC Competition Law and
Intellectual Property Rights: The Essential and the Innovative’ (2005).
is a member of the Faculty of Law at the National University
of Singapore. His current research interests include the anti-competitive
consequences of expanding intellectual property protection to include industry
standards and other new subject matter. He is a Fellow of the Singapore IP
Academy where he teaches Patent Law and Antitrust Law in its Graduate
Certificate in Intellectual Property Programme, and has given public seminars
to civil servants, legal professionals and non-lawyers in and around Singapore.
R U D O L P H J . R . P E R I T Z is Professor of Law and Director of the IProgress Project
at New York Law School. Before entering the legal profession, he was a software
engineer and programmer for mainframe computer systems. He has been
Visiting Professor at LUISS, Rome, and at the University of Essex,
and lectures regularly in Europe and the United States. He has written on
competition law as well as intellectual property rights and cyberlaw. He is
currently at work on an IP project entitled The Political Economy of Progress.
P I E R R E R É G I B E A U is a Reader in Economics at the University of Essex. He has
been on the faculty of the Sloan School of Management (MIT), Kellogg School
of Management and Institute for Economics (Barcelona). He is a fellow of
the Centre for Economic Policy Research. His research interests include the
economics of technology and intellectual property, the internal organisation of
firms, competition policy and international trade policy. He is the Managing
Editor of the Journal of Industrial Economics.
is a Senior Lecturer at the University of Essex. She has
previously served as a visiting Assistant Professor at the Institut d’Analisi
Economica, in Barcelona and an Assistant Professor at Northwestern University.
Her interests are in the field of industrial organisation, particularly the
economics of new technologies. More specifically, her work has been in the
areas of licensing strategy, the economics of patents, the interface between
intellectual property and competition policy, and organisational issues raised
by new technologies.
practices intellectual property law, having spent ten
years at Mallesons Stephen Jaques in Melbourne as a Senior Associate and
Partner, and, since 2002, as a barrister. He teaches patents in the postgraduate
program at the University of Melbourne, having previously taught copyright
and designs. Publications include Parallel Imports (1993) and, with Valentine
Korah, Exclusive Distribution and the EEC Competition Rules (2nd edn, 1992).
HEDVIG K. S. SCHMIDT
is a Lecturer in Law at the University of Southampton
where she teaches courses in EU law and European and international competition
law. She has previously worked as a research fellow at BIICL, which included
organising and teaching at a seminar for national judges in competition law
sponsored by the European Commission. In 2005 she received an award to visit
the Max Planck Institute for Intellectual Property, Competition and Tax Law in
Munich and further her research into the interface issues of intellectual property
and competition law.
This work owes its origin to the Singapore IP Academy, which was established
in January 2003 as a result of a national initiative. Acknowledging the value
and importance of intellectual assets and creativity as primary sources of
wealth and competitive advantage, the broad objective of IP Academy is to
contribute to the building of a thriving culture that encourages the management
and harnessing of innovation, and the resultant IP rights for the achievement of
success in this global, knowledge-driven economy. Although at present it is
largely funded by the Singapore Government, it is an independent body.
Professor Gerald Dworkin and Associate Professor Loy Wee Loon were IP
Academy’s founding directors from January 2003 to December 2004. They
have been succeeded by Professor David Llewelyn as director and Ms. Ng Lyn
One aspect of the IP Academy’s work is training. A broad range of courses,
of varying lengths, are being provided for all those who can benefit from an
understanding of intellectual property. At one extreme are university-based
courses. For example, the Graduate Certificate in Intellectual Property provides a foundation course suitable for those seeking to qualify as registered
patent agents in Singapore, and the MSc in IP Management is targeted at mid
to senior management, executives and professionals with a background in
science, technology or engineering who wish to specialize in the management
of IP in a technology-related business. At the other extreme are a stream of
short courses, for example Negotiating Skills for IP-Related Technology
Transactions and Performing Arts Management: Copyright and Performing
Rights for Practitioners.
The other major aspect of IP Academy’s work is ‘Thought Leadership’,
namely the promotion of research. Its research projects take on a multidisciplinary focus straddling management, social, economic and legal perspectives. The research faculty supports both local and regional development
of best practices in IP policy and endeavours to improve the ability of
businesses, professional research institutions and other creators of IP to
exploit and commercialise their IP.
Shortly after the IP Academy began its work, the government announced
that it was proposing to introduce a framework of competition law for
Singapore. Because of the close relationship between competition and intellectual property law, this development provided an excellent opportunity for
the IP Academy to promote its research programme and to assist those
responsible for determining the nature of such legislation.
The IP Academy was fortunate in enlisting Professor Steve Anderman to
lead an internationally based team to provide an examination of this interface
between competition and intellectual property rights in different legal systems. It was hoped that the outcome of the study would produce findings and
set out policy options of relevance to those responsible for the drafting and
implementation of competition legislation in Singapore; an opportunity to
provide customised national legislation in its broader international context.
As the policy formulation and draft legislation proceeded, some of the
research work and the experts involved fed in their own contributions, at the
very least to better inform and assist the decision makers. Thus, in the early
stages, there was an expert Roundtable meeting: ‘Issues at the Interface
between Intellectual Property and Competition Law: Dealing with the
Residual Conflicts’. This was followed by a conference for the Singapore
legal profession and others: ‘The New Competition Bill and its Implications
for Intellectual Property Rights’.
The Singapore Competition Act is now in place. It is hoped that the IP
Academy played a useful role in assisting the way in which the legislation was
framed. The IP Academy is most grateful to Steve Anderman and to all his
colleagues who embarked upon the project with such enthusiasm. It is to be
hoped that the work which they have done will be of interest and of value to a
wider international audience.
The competition law/IP ‘interface’:
Competition policy and intellectual property rights (IPRs) have evolved
historically as two separate systems of law. Each has its own legislative goals
and each its own methods of achieving those goals. There is a considerable
overlap in the goals of the two systems of law because both are aimed at
promoting innovation and economic growth.1 Yet there are also potential
conflicts owing to the means used by each system to promote those goals. IP
laws generally offer a right of exclusive use and exploitation to provide a
reward to the innovator, to provide an incentive to other innovators and to
bring into the public domain innovative information that might otherwise
remain trade secrets. Competition authorities regulate near monopolies,
mergers and commercial agreements with the aim of maintaining effective
competition in markets. This regulation occasionally results in limits being
placed on the free exercise of the exclusive rights granted by IP laws.
In recent decades, competition authorities and courts have prohibited
conduct by intellectual property owners which was otherwise lawful under
intellectual property rights legislation, because it contravened the rules of
competition law. This has occurred in four main spheres of activity of IP
owners. First, cases have been brought by the competition authorities in the
USA, the EU and Japan to place limits on the anticompetitive commercial
conduct of individual owners of IPRs where they protect a market standard or
de facto monopoly.2 The competition issue presented in these cases has
generally been the IP owner’s exclusionary conduct towards innovators and
potential competitors on markets which are secondary to and dependent
upon an IPR protected industrial standard or de facto monopoly. The anticompetitive conduct has tended to take the form of a ‘refusal to deal’, ‘refusal
to license’, ‘refusal to provide proprietorial software interface codes’, or a ‘tiein’ or illegal ‘bundling’, but the act is prohibited because it is viewed as an
attempt to ‘lever’ the IP reinforced market power in the ‘primary’ market into
exclusionary conduct in the secondary market.3 Secondly, the competition
authorities in the USA, the EU and Japan have created a detailed framework
of regulation for certain terms of bilateral IPR licensing agreements, whether
by means of official guidelines or legislation. Thirdly, the practices of collecting societies, R&D agreements and patent and technology pools have raised
the issue of the appropriate treatment of cooperation between competitors in
IP related fields under the competition rules. Finally, in the field of mergers
and acquisitions, the owners of intellectual property rights have found that
competition authorities have intervened on occasion to limit IPR owners
from acquiring competing technologies4 as well as to require compulsory
licences of IPRs to third parties as a condition of merger approval.
As modern commercial practices involving the use of intellectual property
rights have encountered these forms of ‘second tier’ regulation by competition authorities, concerns have been raised about the nature of the accommodation between the two systems of law.5 First, to what extent and on what
basis do the competition authorities and the courts have authority to limit the
exercise of intellectual property rights in these ways? If IPRs are granted
by laws which have their own elaborate system of checks and balances, why
is it necessary for competition law to add a second layer of legal regulation to
the exercise of IPRs? It appears as if the competition authorities in a number
of jurisdictions take the view that their role is a form of public law regulation
while the exercise of an IPR is essentially the exercise of a private property
right. Certainly, in the USA and the EU, the competition authorities have
at times described IPRs as ‘essentially comparable’ to any other form of
private property for the purposes of the competition rules.6 To what extent
do legislation and judicial decisions support the competition authorities in
Secondly, despite the use of this description, when competition law is
actually applied to the exercise of IPRs, in these same jurisdictions, concessions
are often consciously made within the competition rules to the unique nature of
intellectual property rights: to their legislative and, in the USA, their constitutional basis as well as to their contributory role in the process of innovation.
Indeed, the compatibility between the aims of the two systems tends to ensure
that the normal exercise of the prerogatives of intellectual property rights is
consistent with the competition rules. The competition rules applied to IPRs,
either explicitly or implicitly, almost inevitably acknowledge a form of ‘comity’
between the two systems of law. Yet, the forms of comity developed within the
competition rules in different legal system have tended to differ from system
A third issue raised by the emergence of an extra layer of regulation of IPRs
by the competition authorities is to what extent could and should the various
IPR laws themselves, the patent, copyright, and design rights laws be
reformed in order to reduce the extent of the ‘external’ regulatory role now
played by competition law. To what extent does the experience of interface
cases suggest that the IP laws can enhance the nature and degree of comity by
embarking upon a process of ‘internal’ reform? Some issues of reform that
have been considered are: (i) the optimum width and duration of patent and
copyright protection; (ii) the issue whether industrial copyright laws should
provide for compulsory licensing where innovation is improperly obstructed
by IP owners along lines similar to patents; (iii) the extent to which industrial
copyright such as software programs and databases should be subject to
interoperability obligations under IP law; and (iv) the extent to which IP
laws can and should acknowledge when the IPR itself creates a monopoly and
place limits on the scope of the IP protection. Underlying these enquiries is
perhaps the largest policy issue of all: what is the most appropriate relationship between competition policy and IPRs in a growing industrial economy?
If we look at the major legal systems with extensive experience of the
coexistence of the two fields of law, the EU, the USA and Japan, we can see
considerable variation in their chosen forms of accommodation. The major
legal systems have generally accepted that there are cases where the market
maintenance concerns of competition law can prevail over the exercise of
IPRs associated with substantial market power. However, the nature of this
accommodation varies considerably with each system; both in terms of
method and where the line is drawn. Moreover, the experience of these
countries makes it plain that the true extent of variation cannot be appreciated by a cursory examination. To see it clearly and accurately requires a
look in some depth. For example, in Japan, at first sight its competition law
gives an extensive legislative immunity to intellectual property rights; the
Japanese Antimonopoly Act exempts intellectual property rights from the
scope of its application. Yet, on closer examination, the provision has not been
interpreted as an overall exemption to all exercises of intellectual property rights
but can be limited in cases of private monopolisation or undue restraint of trade
(See Chapter 4). In the EU and US, in contrast, there are no explicit legislative
immunities in the competition rules of Articles 81 and 82 of the European Treaty
or Sections 1 and 2 of the Sherman Act. Instead, the general competition rules in
both legal systems have been given judicial and administrative interpretations
that result in their application to the exercise of IPRs in extreme cases. Both
systems have created wide general norms of competition law which if not
modified can apply to limit the exercise of IPRs. Yet, on closer examination,
the application of the general competition rules in the US and the EU has
resulted in the evolution of judicial and administrative doctrines which apply
special rules and even self-denying ordinances acknowledging to a considerable
extent the sui generis nature of IPRs, their constitutional foundations in the USA
and their legislative foundations in the EU. Sometimes these forms of comity are
given expression in special rules explicitly designated for IPRs. One example is
offered by the ‘exceptional circumstances’ test devised by the European Court of
Justice when applying Article 82 to an issue of abusive refusal to licence by an IP
owner. More often, there are powerful partial immunities or safe havens built
into the logic of the general competition rules when they are applied to the acts
of the conduct of the IP owner. Often this is the logical outcome of the two
systems of law pursuing similar aims. For example, both US and EU competition law make it clear that if a company grows by internal investment in R&D
and IPRs to a position of significant market power that is perfectly lawful under
the competition rules. Moreover, if the owners of IPRs wish to charge high
prices for their successful products protected by IPRs, the risks of investment
ex ante will be respected by the competition rules in each legal system albeit in
different ways. The normal exercise of IPRs is by judicial doctrine viewed as
lawful under the competition rules but each system has its own line where the
exercise of an intellectual property right is not viewed as normal under the
countries in grappling with the problems of reconciling the two systems and
dealing with interface issues. The book is divided into three parts. The first
two parts of the book indicate the variation in legislative models as well as
the wide variety of judicial and administrative doctrines that have been used
to attempt to deal with problems raised at the interface between intellectual
property rights and competition law. The jurisdictions selected for study are
the three major trading blocks with the longest experience of case law: the EU
(Chapter 2), the USA (Chapter 3) and Japan (Chapter 4) and three less
populous countries with open economies, Australia (Chapter 5), Ireland
(Chapter 6) and Singapore (Chapter 7).
In these parts, the intent is not to attempt to arrive at a definitive model of
reconciliation between the systems of legal regulation or even a recommended ‘best practice’. The examination in depth of the different jurisdictions
makes it plain that each system must determine its own appropriate accommodation. It is true that recently, efforts have intensified in different jurisdictions to find the most appropriate basis upon which to combine the two
policies into a coherent whole for the purposes of innovation policy. In the
USA the Antitrust Division of the Department of Justice and the Federal
Trade Commission have held extensive hearings on the interface issue.7 In the
EU the Technology Transfer Block Exemption Regulation has recently been
significantly reshaped and a series of conferences have been held with the
aim of obtaining a clearer idea of the best way to apply competition law to
the commercial exercise of intellectual property rights.8 In Australia the
Intellectual Property Review Committee was established both to review IP
laws from the standpoint of competition and to recommend a reform of the
width of the exemption the Trade Practices Act gave to the exercise of
intellectual property rights. In many countries with new competition laws
which have already enacted IP legislation, such as India, China, Singapore
and Hong Kong, there is a need to shape the overall system to deal with the
inevitable conflicts that can arise when the exercise of IPRs runs into the
buffers of the competition rules. Finally, in the USA, EU and Japan, the interest
in the interface has been whetted by the growth of digital multi-media technology and the potential legal roadblocks in the new technological environment.
Nevertheless, it seems almost inevitable that the optimum method of reconciliation will differ for each national system depending upon its legal culture and its
state of economic development.
Hence the overall aim of this book is the more modest one of setting out
the array of options on offer, the legislative and judicial and administrative
alternatives available in those constituencies with some experience of dealing
with the interface. The intention is to produce research findings in sufficient
depth so that the experience of the selected legal systems can be understood
and used as points of reference by competition authorities and the parties
involved in interface disputes. This is a research study that should be viewed
as a reference work and a resource to be adapted to the particular circumstances of any one legal system.
In the third part of the book we look at a number of issues closely related to
the interface between competition law and intellectual property rights. Chapter 8
analyses the issue of parallel trading and exhaustion of IPRs, a system of legal
rules that creates its own interface with the exercise of IPRs alongside the
competition rules. Chapter 9 discusses the issue of technology transfer showing
the important differences between international IP licensing and foreign direct
investment as well as highlighting how limits on technology spillover are set in
bilateral investment treaties. Finally, Chapter 10 examines the economics of the
interface to suggest how economic thinking may find a way of interacting with
legal argument in this field.
II. A note on the compatibilities between the two
systems of legal regulation
Even without a legislative immunity for IPRs, the case law interpreting the
competition legislation in the countries studied demonstrates that the competition rules create certain self-denying ordinances to ensure that there is an
extensive reconciliation between the two systems of legal regulation. This is
entirely to be expected since, within each legal system, the different means
used by intellectual property rights legislation and competition law operate in
many ways in conjunction rather than in conflict with each other. IP laws,
such as patent and copyright laws, confer an exclusive right to exploit an
invention or creation commercially for a limited period as an incentive to
creation and innovation. These rights are essentially ‘negative’ rights; they
prevent copying of the protected innovations. They do not ensure profitability but if the IPR is combined with a successful product, the legal exclusivity provides a stimulus to innovation by acting both as a reward to the
inventor/creator and as an incentive to innovation more generally. In the case
of patents, without the protection of exclusivity, firms may choose to keep
their innovative ideas secret as opposed to disclosing them in their patent
claims. This stimulus to the spread of information is also a stimulus to innovation resulting in new products and processes entering existing markets and
creating new markets. In these ways, intellectual property rights can actually
enhance the forces of competition.
Moreover, each IP law, as well as competition policy, strikes its own
balance between protecting early innovators and protecting the claims of
‘follow on’ innovators. IP laws, such as patent and copyright laws, strike
an ‘internal balance’ between the rewards for ‘the improvements on earlier
invention by later innovators’, and the rewards to ‘early innovators . . . for the
technological foundation they provide to later innovators’.9 As Merges and
Nelson have pointed out: ‘Ultimately it is important to bear in mind that
every potential inventor is also a potential infringer. Thus a strengthening of
property rights will not always increase incentives to invent; it may do so for
some pioneers, but it will also greatly increase an improver’s chances of
becoming enmeshed in litigation.’10 In copyright, the idea/expression dichotomy operates to ensure that copyright contributes to common knowledge
while protecting the originator or creator from copying the expression of his
or her work. In other words, IP laws usually attempt to strike a balance
between providing sufficient incentives to innovation by the creator/inventor
and avoiding the protection of any single innovation operating as a disincentive to cumulative ‘follow on’ innovation.
At the same time, the basic doctrines of modern competition law work in
conjunction with IP laws by acknowledging their positive role in the process
of innovation in at least five major respects. First and foremost, both the US
and the EU competition laws accept that the achievement of an economic
monopoly by means of investment R&D and intellectual property rights is a
legitimate course of conduct for a firm, a form of ‘competition on the merits’.
Secondly, and relatedly, both EU competition law and US antitrust law
acknowledge that the pricing of IPRs, even by dominant firms, must include
a return which adequately reflects the reward/incentive function of IPRs as
well as the ex ante investment risks of their owners. Thirdly, the competition
laws in both systems in most cases give recognition to the right of IPR owners
to prevent copying even if the exercise of this right denies access to markets to
competitors. Fourthly, the competition laws in both systems no longer
automatically assume that the legal monopoly conferred by IP laws, such as
patent and copyright legislation, automatically amounts to an economic
monopoly or even confers market power. That issue is left to be established
empirically. Finally, in their analysis of IP licensing agreements both systems
of competition policy work with the presumption that the licensing of IPRs is
in general pro-competitive in its effects.
Nevertheless, as we have seen, modern competition policy, does act in
reserve to prevent the excesses of private property owners in order to maintain effective competition on, and access to, markets,11 operating as a ‘second
tier’ of regulation of intellectual property rights.
It is also worth noting that the Agreement on Trade Related Intellectual
Property Rights (TRIPS) spells out at various points that there is a role for
competition policy to supplement the intellectual property rights policy of
the Treaty. In formal terms, it does not require such laws. It permits them. For
example, Article 8 (2) TRIPS states that ‘Appropriate measures, provided
they are consistent with the provisions of this Agreement, may be needed to
prevent the abuse of intellectual property rights by right holders . . .’ Article 8
also makes it clear that in principle Member States may enact legislation to
prevent practices by the right holder that adversely affect the international
transfer of technology. Moreover, in Article 40, the TRIPS agreement specifies the types of licensing practices or conditions relating to intellectual
property rights which restrain competition and impede the transfer and
dissemination of technology including exclusive grant-back conditions, coercive package licensing and clauses preventing challenges to the validity of the
IPR. Nevertheless, as this note and the following studies will show, it is wise
not to have a system of IPR legislation which is unaccompanied by a system of
III. The changing nature of the interface between
the exercise of IPRs and competition policy
in the major competition law systems
From the early years of the twentieth century, the conflict between the
exercise of IPRs and competition policy tended to be exaggerated by judicial
and administrative doctrines initially in the USA and later in the EU. During
these and later decades, patents were equated with monopolies12 and patent
licensing was subject to tight restrictions by competition law, initially following a doctrine of patent misuse,13 and latterly by the regime of the ‘Nine
No-Nos’ in the USA and its counterpart in the EU.14 Since the 1970s, a new
antitrust legal framework has emerged in both trading blocks with a greater
appreciation of the economic benefits of IPRs and a move away from any
automatic association of real market power with exclusive IP rights.15 This
change was prompted in part by judicial and administrative acceptance of the
law and economics analysis of the ‘Chicago School’,16 initially in the USA and
later in the EU. Yet the Chicago School’s initial success in restoring greater
economic realism has been followed by a ‘post-Chicago School’ view emerging both in the USA17 and in the EU18 that acknowledges that not all IPRs are
monopolies but recognises that some can be. There are cases where IP owned
assets make a right holder dominant in a product market in established
sectors of industry and such cases can be found not infrequently in the ‘new
economy’, particularly in the copyright protected information technology,
media and telecommunications sectors. Moreover, patent protected products
and processes in the biotechnology sectors may also be potentially subject to
the limits of this competition policy/intellectual property law interface.19
The concern of competition authorities with IPR protected dominant
market power in the form of industrial standards particularly in the sectors
of the ‘new economy’ can be traced to two developments. First, there has been
an unprecedented expansion of IPR protection to a whole new range of
products in the knowledge economy.20 Existing protection regimes such as
patent and copyright have been extended to accommodate new technology
such as biotechnology in the EU Biotechnology Directive, and information
technology in the new EU Copyright and Related Rights Directive for the
Information Society, as well as the Digital Millennium Copyright Act in the
USA. Copyright and patent protection have been extended to new areas such
as computer software and business methods. Sui generis protection has been
extended to databases and semiconductors.
This expansion of functional coverage of IPRs in recent decades has been
fuelled by an increased awareness in the US and EU of the role of intellectual
property rights in information goods as a significant source of wealth creation and a basis for success in international competition21 as well as an
increased concern to protect such informational rights against the ease of
illegal copying of such goods.22 The arguments of certain scholars, particularly but not exclusively in the USA, for acceptance of a stronger ‘property
rights’ conception of IPRs have contributed to a wider acceptance of this
concept.23 During the last two decades, the US judiciary have made a number
of decisions resulting in greater ease of obtaining patents24 and greater ease of
enforceability of IPRs,25 as well as a wider view of protected subject matter in
copyright.26 In the USA, a new Federal Court of Appeals specialising in patent
and other IPR matters was established in the 1980s27 and during its period of
tenure the number of patents granted in the USA has risen at a steep rate.28
The decisions favouring a wider IP protection over other balancing contentions have not been unanimous,29 but the accretion of landmark cases
widening intellectual property protection in the USA have amounted to a
noticeable judicial pattern, even if there are cases going the other way.30 By
and large the EU has followed suit by widening its definitions of patentability
and copyright, if not quite so extensively as the USA.31
Along with this expansion of their functional coverage, IPR protection
regimes have also been extended geographically as minimum standards
through the medium of the TRIPS agreement within the framework of the
World Trade Organisation (WTO). The impetus for this globalisation of IPR
legislation has come from the large IP owning corporations wishing to
protect their investments in R&D from copying, particularly in developing
countries with weaker IP legislation. The emergence of TRIPS has been
described as ‘a process whereby the wish lists of various intellectual property
lobby groups are inscribed into public international law’.32 In the 1980s, the
US Government brought IP protection within the GATT and used its s. 301
procedure to obtain bilateral agreements to protect US IPRs. By 1993, the
USA, supported by the EU and Japan, was able to secure a TRIPS agreement
as part of the WTO agreement of 1994. These highly developed countries had
accepted the economic arguments that the return to such investments by the
larger corporations helped to maintain the growth and development of their
economies in the face of world competition.33 The TRIPS agreement imposes
high minimum standards34 upon its members for all forms of IPRs based on
the Berne and Paris Conventions as well as most of the rights.
The second development, particularly in the highly industrialised countries, is that the expansion of IPR protection, along with its increased incentives for R&D investment, has also produced certain risks to cumulative
innovation in the high technology sectors. There has been a noticeable
tendency for particular markets in the USA, EU and Japan to be characterised
by individual market leadership reinforced by IPR protected industrial
standards.35 The phenomenon of a product achieving such a market position
normally calls for careful monitoring by the competition authorities.36 The
risks from a competition policy point of view arise from the possibility that
the market power inherent in a market standard might be abused to preclude
access to downstream related markets. In such situations, the owner of the
‘system’ which has achieved the status of an IP protected industrial standard
tends to look proprietorially at the development of improvements and new
products relating to the ‘system’. As Ordover and Willig put it, in a situation
where the incumbent market leader has high sunk investments and is confronted by risks of leaks to free-riding competitors, there is a tendency to look
more closely at a strategy of capitalising on vertical integration to develop
modular applications related to the market standard.37 In the recent US
Microsoft case, for example, the Federal District Court that tried the case
accepted that the market share of the Windows operating system was 94 per
cent of all Intel chip PCs worldwide. In respect of modular applications, MS
Word had fended off Word Perfect to gain about 90 per cent of the word
processing market and Microsoft’s Internet Explorer had captured more than
80 per cent of the web browser market from the previously dominant Sun
Microsystem’s Netscape Navigator (50 per cent).38
It is true that some vertical business strategies can, on balance, be procompetitive where they are based on genuinely innovative products.39
Moreover, they can help to create and maintain useful industrial standards
in related markets. Yet, in network industries where the incumbent enjoys a
monopoly, with substantial ‘network effects’ and a large installed base of
users, the possibility of anticompetitive strategies cannot be ruled out.40
Similarly, where a base product such as a biotechnological patent gets into a
strong position to control follow-on research and development of related
products, competition concerns may arise.41
The strategies of owners of IPR protected industrial standards can take the
form of vertical foreclosure by exclusive contracts, the tying-in of one product with the sale of another, or ‘bundling’, and refusals to deal or license, all
means by which the owner of the industrial standard can lever its monopoly
on an upstream market into a monopoly on the downstream/dependent
The vertical foreclosure of downstream markets by owners of industrial
standards in upstream markets entails two risks to innovation. The main risk
is that the process of further innovation will be restricted to the R&D of the
owner of the upstream industrial standard and thereby deprive a wider circle
of developers from contributing to the next stages of innovation.42 A second
risk is that the ‘network effects’ barrier to entry can result in technologically
inferior products ‘tipping’ certain downstream markets and technologically
superior products being lost.43
Some economists, such as Schmalensee and Evans, have objected to this
type of competition concern claiming that the process of competition in
markets in the new economy is different in kind to that in the old
because it takes the form of different technological systems competing for
the market rather than the traditional form of competition in the market.44
Competition in high technology markets, they say, consists of a rivalry
between products designed to replace one another rather than remain in
competition in the same market and these forces make monopolies fragile
and transitory.45 They describe this form of competition as ‘dynamic competition’, or ‘Schumpeterian’ competition, because it involves a process of
‘creative destruction’ which strikes ‘not at the margins of the profits of
existing firms but their foundations and their very lives’.46 There has even
been a suggestion that these forces of competition can make markets selfregulating.47 In the IT field there is undoubtedly some evidence of dynamic
competition, i.e. succeeding generations of products achieving industrial
standard status only to disappear and be replaced by competitors: Wang
and dedicated word processors gave way to CP/M and Wordstar. Wordstar
in turn was ousted by MSDOS/Word Perfect and Lotus 1-2-3, which in turn
was displaced by MS Windows, MS Word and MS Excel, etc.48
It is misleading, however, to portray copyright and patent protected
industries as presenting a picture of endless winner-take-all races.49 In the
first place, we can see a pattern of protracted competition between IP
protected products in systems in a number of highly concentrated industrial
sectors: mobile telephones, computer games, PC hardware, ISPs on the
Internet, pay TV, motion pictures and music recordings.50 In these sectors,
there is still competition, albeit reduced to a few suppliers, between firms in
the market. The pattern of highly concentrated industries can be seen both at
national and international levels.51 Secondly, there are sectors where there are
market standards, some persisting through several generations. Microsoft has
maintained its Windows operating system/middleware from Windows 3.0 to
Windows XP and now accounts for more than 90 per cent of Intel chip driven
PCs worldwide. Intel microchips have provided several generations of
Pentium processors that now power almost 90 per cent of all PCs worldwide.
Far from copyright protected innovation producing life-threatening dynamic
competition on ‘new economy’ markets, the picture seems to be a familiar
one of highly concentrated industries and industrial standards. Despite the
undoubted consumer benefits created by these industrial standards, and the
stimulus to investment in technological development provided by IPRs,
the ownership of industrial standards in the new economy can also confer
inordinate market power. In other words, it is difficult to accept uncritically
that every transaction which is viewed as anticompetitive in the short run can
be justified by reference to its long term effects where the long term benefits
are difficult to predict and the costs of restrictions on competition are
tangible and immediate.52
Moreover, this type of individual market dominance can be prolonged by
the presence of a new type of demand side barrier to entry in the form of
‘direct network effects’53 and ‘indirect network effects’, sometimes referred to
as ‘network externalities’54 in the sale of complementary products in ‘systems’.55 ‘Direct network effects’ are the effects on demand for a ‘system’
product, or network, by the purchase of a network product by more users.
The inherent interoperability of the product means that the more buyers of
the product there are, the more attractive it will be to all users, new and
existing. A good example of this is the fax machine, ATM machines,56 mobile
telephone or even software such as Word or Lotus 1-2-3.57 Direct network
effects can operate as a barrier to entry when one product has become an
industrial standard simply because they raise the ante for entry. The new
entrant faces the task of generating a comparable critical mass of customers
for their product as a condition of entry.58
‘Indirect network effects’ or ‘network externalities’, arise from the effect a
larger network has on the production of complements. Some innovative
system products experience a lift off in their rivalry with other products as
an increase in demand for one or more of their cluster of ‘complementary’
products sets off an increase in the demand for their core product in a
mutually reinforcing way. Werden has persuasively argued that indirect
effects ‘may pose more formidable entry obstacles than direct ones because
an entrant may find it difficult to enlist the support of essential complementers’.59 It has been suggested by economists that indirect network effects
were a major factor allowing MS-DOS to dislodge the previously dominant
CP/M as Microsoft and independent application developers created so many
applications that users preferred MS-DOS to its rival, although the disparity
in cost and bit technology between the two were also important factors.60 In
the Microsoft case in 1996, the US District Court found that the network
effects of applications compatible with Windows on PC users created an
‘applications barrier to entry’ to other PC operating systems.61 The network
effects barrier to entry is enhanced by ‘switching costs’62 and the difficulties of
new entrants obtaining support from unreceptive, existing producers of
complementary products, particularly when they ‘must enlist multiple independent complementers’.63
In situations where systems achieve the status and power of market standards and are IP protected the issue arises for all economically mature legal
systems – what is the appropriate method to reconcile the respective concerns
of competition and IP policy? How should competition policy and IPR policy
apportion responsibility to ensure open access to market standards for
modular applications makers, who seem to be indispensable to cumulative
innovation in systems industries with an industrial standard? To what extent
should competition law operate as a default mechanism when IP laws facilitate rather than limit an abuse of market power?
IV. The relevant principles of IP law and innovation
IPR specialists have often stressed the importance of IPRs as an incentive to
innovation because of their reward to invention and creativity.64 Without
adequate incentives, the proponents of the traditional IPR view assert,
research and development investment would decline and with it the innovative capacity of an economy.65 The classic empirical case for this comes from
the pharmaceutical industry where the millions of pounds, dollars and euros
of expenditure on research and development would not occur unless the
companies making the investment could be certain of exclusive rights to
returns and protection from competitors for a period of time sufficient to
recoup their investment and gain a profit.66 This model of IP legislation as
catalyst for innovation by the inventors of novel products or processes,
however, offers an unduly narrow perspective of both the process of
innovation and the role of intellectual property rights. We can see this by
looking more closely at patent and copyright laws.
A. Patent laws
As is well known, patent law provides an exclusive right to exploit, i.e. make,
use and sell, a novel invention67 for a limited period both as a reward to the
inventor and as a wider incentive to investment in research and development.
Yet, the wider incentive to investment in research and development is not
synonymous with the reward to the pioneer inventor. All patent laws have
built into their design a demonstrable interest in encouraging further generations of innovation as well.68 In the first place, the time limit for exclusivity of
20 years is established to ensure that after a limited period for profit taking,
the invention can be replicated and used more generally. Perhaps equally
importantly, the disclosure obligations in the patent claim are meant to
release information about the patented invention to expand knowledge
within the technological community and stimulate research during the protected term of the patent. Economists such as Kenneth Arrow69 and Robert
Merges70 have conceptualised the patent as a trade off of the exclusive right
for both its incentive effects and its disclosure of information on technological
change.71 Cornish, a noted IP legal academic, cautions against exaggerated
expectations but accepts that ‘[p]atents do make available a large quantity of
information about the latest technical advances and they are regularly consulted by those concerned with development in many industries’.72 Article 29.1
of TRIPS, reflecting the majority of patent systems, emphasizes this function of
the disclosure obligation: ‘disclosure must be sufficiently clear and complete for
the invention to be carried out by others’.73
Moreover, the scope of the exclusive right conferred by a patent is limited
by the statutory defences to infringement, including the ‘experimental’ use
defence which is designed to prevent the patent right being used to inhibit
scientific development,74 the ‘prior use’ right and the ‘personal use’ right.75
Furthermore, as we shall explore later in this chapter, where the scope of
patents is defined narrowly this can help to ensure that a balance is struck
between the protected product and subsequent streams of innovation.76
Consequently, the theory behind the award of a patent can be seen not only
to be to provide a reward to the pioneer inventor and create an incentive
merely for a pattern of serial invention. The initial grant of exclusive rights
has a wider remit; it is shaped to encourage other, cumulative streams of
innovation to flow as a result of any individual invention, along with the
original inventor’s own development of its protected product.77
In addition, many patent laws in Europe and elsewhere in the world, along
with policies of excluding certain fields of technology, and Crown use,78 have
long had a policy of compulsory licensing in extreme cases where exploitation
of the intellectual property right inter alia operates to block the development
of other technology.79 Under the UK Patent Act, 1977, as amended in the
light of the TRIPS agreement, for example, the comptroller has a discretionary power, upon application by an aspiring licensee,80 to grant a compulsory licence where, inter alia, a refusal to grant a licence on reasonable
terms has the effect of impeding the exploitation of other new technology. In
such a case it is possible for third parties to obtain a compulsory licence
subject to an obligation to cross-license their own patent on reasonable
terms.81 A second ground for a compulsory licence is the fact that a patent
is not being worked at all and it can be shown that there is demand within the
UK for a patented product.82 A third basis for a compulsory licence arises
when a report of the Competition Commission has decided that the patentee
is engaging in an anti-competitive practice against the public interest. In such
a case, the appropriate minister is given the power to apply to the comptroller
to have the patent endorsed as a licence of right.83 This offers an example of
the links between the internal checks and balances of patent law and the
external tier of regulation provided by competition law.84
Applications for a compulsory licence are in fact rarely made, and even
more rarely granted,85 partly because applicants face the double burden of
proving a statutory ground and then convincing the comptroller to exercise
his discretion, but a claim for a compulsory licence can be used as a bargaining chip for a cross licence and the grounds for compulsory licences must be
taken into account by patentees in their commercial decisions.
The legislation on the Community Patent86 also contains provisions for
compulsory licensing which ‘are designed to provide guarantees against
abuses of the rights conferred by the patent’. It too is based on the requirements of Article 5 of the Paris Convention and Article 27(1) and Article 31 of
the TRIPS Agreement.87
The Community Patent’s provisions allow the Commission to grant a
compulsory licence of a Community patent:
(i) When licensing is needed to use a second patent involving an important
technical advance of considerable economic significance in relation to the
invention claimed in the first patent, subject to an obligation to crosslicense;
(ii) In times of crisis or extreme urgency, or to remedy a practice determined
by judicial or administrative process to be anticompetitive.88
Consequently, the Community Patent provides an explicit basis for the
competition authorities to intervene in an extreme case where a patent is
used to block subsequent innovation by other inventors.
A further example89 of this concern is offered by the Biotechnology
Directive in its new regime for compulsory licensing and cross-licensing of
technological inventions. The compulsory licensing rules are concerned with
the relationship between the use of patents and the use of plant variety rights.
Under Article 12(1) where plant breeders cannot acquire or exploit a plant
variety without infringing a prior patent, they may, after a failure to secure a
voluntary licence, apply for a non-exclusive, compulsory licence to use the
invention, subject to the payment of an appropriate royalty and the offer of a
cross-licence on reasonable terms. Under 12(2) the same rules apply mutatis
mutandis where the owner of a patent concerning a biotechnological invention cannot exploit it without infringing a plant variety right. Both rights
also presuppose that the applicant can show that the target IPR for which
they wish a compulsory licence constitutes ‘significant technical progress of
considerable economic interest’ by comparison with their own IPR (Art.
12(3)(a)(b)). The policy underlying these compulsory licensing provisions
is to prevent IPR protection from blocking further innovative development
by other innovators.
The TRIPS agreement90 also endorses a compulsory licensing regime,
subject to a number of conditions: that the applicant must first have applied
unsuccessfully to the right holder for a voluntary licence on reasonable
commercial terms;91 and the right holder must be paid adequate remuneration in the circumstances of each case taking into account the economic
value of the authorisation (Art. 31(h)).
Under Article 31 a compulsory licence may be authorised to permit the
exploitation of a patent (‘the second patent’) which cannot be exploited
without infringing another patent (‘the first patent’) provided that: (i) the
invention in the second patent ‘involves an important technical advance of
considerable economic significance in relation to the invention claimed in the
first patent’; (ii) the owner of the first patent is entitled to a cross-licence on
reasonable terms to use the invention claimed in the second patent; and (iii)
the use authorised in respect of the first patent shall be non-assignable except
with the assignment of the second patent.
Furthermore, under Article 31(k) specific authorisation is given for legislation to provide for a compulsory licence ‘to remedy a practice determined
after judicial and administrative process to be anti-competitive’. In such
cases, certain preconditions are waived and termination of the compulsory
licence can be refused if the authorities consider that the conditions which
led to the compulsory licence ‘are likely to recur’.
Finally Article 30 of the TRIPS treaty states that Members may provide
limited exceptions to the exclusive rights conferred by Article 28 subject to
conditions that reflect the delicate balance that must be struck between
private ownership rights and public interests in drafting and implementing
the exceptions provisions. These exceptions must not unreasonably conflict
with the normal exploitation of the patent or unreasonably prejudice the
legitimate interests of the patent owner, taking account of the legitimate
interests of third parties.
On its face, the TRIPS treaty appears to strike a reasonable balance between
the two dimensions of innovation: reward of limited exclusive rights to
inventors and originators and protection for follow-on invention and origination. Moreover, it appears to offer help to developing countries in the areas
of pharmaceuticals, education, traditional knowledge and the patenting of
living organisms. As is gradually becomingly better understood, however,
there is a huge gap between the rights allowed in the language of the Treaty
and the experience in practice in developing countries.92
The balance in TRIPS between first generation and later generation innovation requires consideration of yet another factor. The TRIPS agreement
spells out at various points a role for competition policy to supplement the
overall intellectual property rights policy of the treaty. Thus Article 8(2)
states that: ‘Appropriate measures, provided they are consistent with the
provisions of this Agreement, may be needed to prevent the abuse of intellectual property rights by right holders.’ Article 8 also makes it clear that in
principle Member States may enact legislation to prevent practices by the
right holder that adversely affect the international transfer of technology.
Moreover, in Article 40, the TRIPS agreement specifies the types of licensing
practices or conditions relating to intellectual property rights which restrain
competition and impede the transfer and dissemination of technology
including exclusive grant-back conditions, coercive package licensing and
clauses preventing challenges to the validity of the IPR.
In these ways, TRIPS embodies a view of property rights that on its face
combines IP rights with restrictions and responsibilities for IP right holders. It
also projects a view of innovation policy that allows Member States to strike a
balance between protection of invention, public health concerns and diffusion
of inventive ideas by a combination of intellectual property rights legislation
and competition policy. The balance struck in the words of the TRIPS agreement cannot be read in isolation from its geopolitical context. The TRIPS
package of high minimum protection in respect of patentability (Art. 27),
patentee rights (Art. 28) and a minimum term of 20 years (Art. 33) has had a
dramatic effect on developing countries, placing them under considerable
pressure to invest their limited resources in legislation and enforcement machinery to implement the increased standards of protection.93
B. Copyright laws
In copyright law, too, there is also a balance struck between protection against
overt copying and use by follow-on innovators of the inventive or creative
idea, but this balance differs in nature from patent law. First and most
fundamentally, even during the copyright terms, most systems of copyright
tend to endorse the idea/expression dichotomy, that is they do not protect the
idea underlying a work but only the original mode or form of expression of
that underlying idea, leaving open to other innovators and creators free access
to and use of the underlying idea.94 Secondly, copyright law contains a
doctrine of ‘fair use’, or ‘fair dealing’, that permits some use for reporting
for news, educational and research purposes, criticism or review as well as
some personal use.95 Further, the copyright term is also limited although the
70 years plus life duration, recently extended from 50 years, seems more
suited to literary than informational copyright protection.96
In the new economy of information technology, there are specific adaptations of the general copyright rules to computer software and databases that
strike their own type of balance between idea and expression.97 The EU
Computer Software Directive endorses the general principle that ‘ideas and
those which underlie its interfaces are not protected’ (Art. 1(2)). The US
Copyright Act 1976 s. 102(b) recognises a similar dichotomy: ‘In no case does
copyright protection for an original work of authorship extend to any idea,
procedure, process, system, method of operation, concept, principle, or
discovery, regardless of the form in which it is described, explained, illustrated or embodied in such work.’98
The EU Computer Software Directive99 also requires Member States to
recognise four exceptions to the scope of exclusive copyright protection: first,
acts by a lawful acquirer of a copyright computer program which are necessitated by use of the program for its intended purposes; secondly, to allow the
making of backup copies by lawful users; third to permit the studying and
testing of a program; and fourth, the decompilation of programs. These
exceptions are regarded as so significant that the Directive does not permit
the parties to contract out of any of them.100
The Directive introduces a decompilation right to assist interoperability of
software programs where the program maker neither publishes information
about access codes nor licenses it.101 Under Article 6(1), lawful software
users102 are entitled to reproduce and translate the form of a software program even without the right holder’s authorisation when such acts are
‘indispensable to obtain the information necessary to write and produce a
new program which will be interoperable with the protected program but will
be independent of it’. This provision permits unauthorised ‘decompilation’
of a program for the limited purpose of creating a new program, i.e. one
which when completed would not infringe the rights of the owner of the
original program.103 Moreover, it offers some protection to the right holder
by requiring the decompiler under Article 6(2)(c) to obtain authorisation
from the right holder when the interface codes are to be used ‘for the
development, production or marketing of a computer program substantially
similar in its expression’.104
The decompilation right is universally applicable to software in the sense
that it applies independently of a finding that the software product has
achieved market dominance.105 Moreover, even where patent protection
applies to a software program, Article 6 will apply. Hence, it can be viewed
as an inherent limit to the scope of IPR protection in computer programs.
Yet, that said, it is important to note that such an inherent limit does not have
the same effect as a provision for a compulsory licence because there is no
enforcement process incorporated in the decompilation right to gain compulsory access to interface codes where they prove elusive. It operates at
the level of a defence to an action for infringement.106 Thus far there has
been no litigation over Article 6. Nevertheless, it is clear to computer program
developers as well IPR owners that it offers an alternative, albeit a sometimes
time-consuming and difficult alternative, to licensing. Article 6 also provides
an incentive to the owners of copyright in computer programs to make
available the source codes so that decompilation ceases to be lawful. Finally,
there is evidence of some owners taking a commercial strategy of providing
interfaces specially designed to allow third parties to interoperate with the
program without access to the IP protected core codes they wish to protect.
Whether this is in response to the legislation implementing the directive or a
response to the possible threat of competition remedies of compulsory code
provision is difficult to say but the design of Article 6 is to promote interoperability by a measure within intellectual property law.
The Community’s Database Directive107 introduces two tiers of protection
for databases: a sui generis form of copyright protection of 15 years for the
contents of databases, if there has been a substantial investment in either
the obtaining, verification or presentation of them;108 and a copyright for
the structure of the database itself, if the selection or arrangement of the
contents is the author’s own intellectual creation. In both cases, after initially
producing a draft contemplating an IPR based right of interoperability, the
Commission opted for a different approach to the limits on possible misuse.
In contrast to the Computer Software Directive, the Database Directive
provides a limited exception for use of the database for the purposes of access
to and use of the contents of the database where a person already has a right
to use it.109 It thus provides an extremely limited research and private study
defence subject to the condition that ‘the source is indicated’.110 The
Database Directive, however, contains no exception for decompilation; nor
does it provide for compulsory licences. Instead, in Article 13 it states that the
provisions of the Directive are subject to the ‘laws on restrictive practices and
unfair competition’.
Recital 43 explains this provision as follows:
in the interest of competition between suppliers of information products
and services, protection by the sui generis right must not be afforded in such
a way as to facilitate abuses of a dominant position.
A similar formula has been adopted in the Regulation on Community
Plant Variety Rights (2100/94); the Directive on the Legal Protection of
Biological Inventions (98/44/EC); and the Directive on the Legal Protection
of Designs (98/71/EC).111
There is thus a striking contrast between the way copyright and patent laws in
their ‘internal’ systems of checks and balances strike a balance between protection of initial innovation and further invention and creativity. Patent law uses
both the device of limiting the scope of protection and providing for a possibility of compulsory licences in cases inter alia where a patent can be shown to
block further inventive development. In this respect, patent law anticipates
some of the ‘vertical’ or downstream consequences of the patent decision.
Copyright law limits the scope of protection by its exceptions for fair use
and its idea/expression dichotomy. It also allows decompilation or reverse
engineering rights to some extent although it contains no provision for
compulsory licensing as such where the copyright coincides with an industrial standard, apart from the special cases of collecting societies. In principle,
if copyright in computer programs were to provide a legal device to ensure
widespread interoperability, there would be little scope for competition law
remedies. The existing decompilation right offers a potential way forward as
a general norm for interoperability of software programs but, in its current
form, it offers no assurance of the supply of code information to competitors facing market standard owners with strategies of control in applications markets. In such cases software developers are left with no option
but to invent around the protected software or turn to competition law
measures for a remedy to the ‘external’ effects of IP protection in appropriate
cases.112
C. The limits of the patent and copyright internal balance
The traditional model of the patent as a stimulus to innovation is based on
the notion that the patent confers an exclusive property right that in economic terms is a barrier to entry offering the inventor the incentive of a
monopoly return. This incentive to invention is necessary because inventive
knowledge requires a fixed investment to create it, whereas the marginal cost
of its transmission is low, its consumption does not exhaust it and charging
for its use is difficult to arrange.113 Without the right to exclude people few
would invest in the research and development to create inventions. The
overall loss, or ‘deadweight loss’, caused by the monopoly is seen by economists as being the price of obtaining the invention in the first place as well as
the disclosure of information about the invention.114 The early theory of
patents and possibly copyright was based on a ‘one property right per marketable work’ image of things.115 This view was later elaborated to extend the
IPR to something more than residing in a marketable product. By drawing
attention to the way IPRs created a market for information, Kenneth Arrow
showed that IPRs could not be viewed simply as coextensive with economic
markets for final (tangible) products.116
Far from amounting solely to an argument for expanding the borders of
the exclusive right, however, this insight also raises the issue of how property
rights are to be allocated among sequential innovators in various industries.117 Where a market, whether old or new, consists of complex ‘systems’
of products, and if in such systems, the development of the technology
involves an accumulation of incremental improvements, the traditional
model of the patent as incentive to single product invention may not be
appropriate as the sole model of innovation.118 While in the context of
pharmaceutical inventions, investment in research and development might
not take place without the incentive of an exclusive right, it is less clear that
the individualistic incentive benefits outweigh the innovation costs in product markets involving cumulative technology and systems of products.119
In such situations, some adjustment of patent granting decisions may be
called for. Some specialists have argued that it would be appropriate to adjust
the length of the patent term in cases where the social benefits are exceeded
by the social costs of the invention.120 Unless we are prepared to accept a
government agency as an appropriate authority to subject each and every
patent award to a public interest audit and award protection of varying
lengths depending upon the results, however, we are left with the ‘one size
fits all’ length of patent terms, except where legislators are prepared to assign
different length terms for special categories of protection, e.g. medical process patents in India.
That being the case, the spotlight must shine on decisions of the patent
authorities’ in respect of the width of each patent.121 On the one hand,
to grant a wide patent claim in a cumulative technology industry entails
a risk that the social and economic costs of the IP protection for one product
will exceed its benefits because it forecloses too many avenues to future
improvement and innovation by later innovators.
Merges and Nelson122 have underlined this point in the following observation:
When a broad patent is granted . . . its scope diminishes incentives for
others to stay in the invention game, compared again with a patent whose
claims are trimmed more closely to the inventor’s actual results. This would
not be undesirable if the evidence indicated that control of subsequent
developments by one party made subsequent inventive effort more effective. But the evidence, we think, points the other way.123
In the new economy of cumulative technology industries, as in the old sectors
of systems products such as motor vehicles and aeroplanes, it has been argued
by economists that there are often palpable innovative advantages if a substantial number of different participants try different approaches simultaneously. On the whole, the obstacles of complexity of system products and
qualitative uncertainties inherent in the innovative process are normally best
overcome by a variety of approaches and numerous participants rather than
single innovators coordinating the efforts of a closed system.124
This may explain why it is that many new industrial standards are being
created by a collective and collaborative process such as joint ventures, patent
pools and cross-licensing arrangements. Recent inventions such as DVDs
and certain semiconductors required wide collaboration with either a pooling
of IP or a generous policy of cross-licensing to achieve their finished form.
In such cases, there may be a pro-competitive motive for, as well as effect
of, this horizontal collaboration that may make such forms of cooperation
between competitors more acceptable to competition authorities in the EU
and the USA.125
To preserve a variety of approaches in innovation, in defining the scope of
individual patents in the new economy, as in the old, there is a need for patent
authorities to be aware of the potential anti-innovative effects of overly wide
patents, i.e. patents that allow a single party to obtain and maintain control of
multiple components of a system. A wide patent entails the risk of limiting
the possibility of diverse approaches to improvements of a system. As well, it
can allow the patent holder to block or delay through litigation innovations
elsewhere in the system which threaten the long-run value of the package of
components which the patent holder controls.126
The significant feature of such blocking tactics is that they may not
necessarily be designed to increase returns on the investment in the original
innovative product; rather they may be aimed at controlling the development
of the system product and its ownership to favour the value of the components under the patent holder’s control.127 This can result in a distortion of
the innovation process by limiting the innovative contribution of competitors. It can also lead to the practice of predatory product innovation, i.e.
creating succeeding generations of market standards which do not interoperate with each other.128
However, there is the complication that other economists have strongly
argued that wide patents offer advantages to innovation. For example Kitch,
in presenting his ‘prospect theory’, has argued that patents which are wide
allow their owners to ‘mine’ them more effectively by ‘offering their holder a
secure opportunity to orchestrate in an orderly fashion the subsequent
development of the original idea’129 and this increases the incentives to invest
in patents. There may well be occasions where market standard owning firms
can go on to further develop a superior standard internally rather than in
a competitive environment for their derivative products in downstream
markets.130
Other research suggests, however, that there is a real risk that too wide
a patent may actually limit the further development of a standard or its
modular applications. In cumulative technology industries, unduly centralised control might in fact have the effect of hindering the development of
improved standards. The existence of diverse suppliers of various components of the system interacting with users may be a more desirable pattern for
the best development of a standard and this appears to be the case particularly
in the software field.131 There are occasions when the owner of an industrial
standard can itself adopt such a strategy by establishing an open system. For
example, Sun Microsystems consciously developed a predominantly open
system for its technical workstations, deciding that greater profits would
be generated by the larger market offered by an open system than by intersystem rivalry between closed proprietary systems. (See too the contrasting
fortunes of Apple Macintosh and Microsoft as a consequence of one adopting
a closed system and the other, at least in its early stages, an open system.) But
genuinely open systems can never be guaranteed by reliance on commercial
strategies in all markets.
Instead, it seems clear that the implications for innovation policy are that
once a technical standard becomes industry wide, and there is no longer any
inter-system competition, there are risks that the standard owner may choose
to engage in conduct that gives it private advantages at the expense of a
potentially richer overall development of the technology. This may not be
inevitable. However, for strategic business reasons, the owners of industrial
standards may find it tempting to close off avenues of innovation that
represent a threat to the profit potential of the standard by reducing the
degree of modularity of the components of the system or by reducing the
possibilities of competitors to achieve compatibility at certain points within
the system.132 This may not always result in a technologically inferior product, and indeed it may sometimes produce a technologically superior product, but it creates the risk that the favoured alternative of the standard owner
may not be the best technological solution. The cases involving Microsoft in
the US and in Europe offer good examples of such conduct. Microsoft
‘customised’ the Java language it supplied with Windows so that it could
not interoperate with other operating systems. This customising made it
impossible for licensees to use Java to bypass Windows and access the
Internet via Netscape. Alternatively, owners of industry wide technical standards may be tempted to engage in ‘predatory product innovation’ by bringing
in new generations of the system that are incompatible with the old.133
Whether or not patent authorities take these issues into account, their
definitions of patent scope can have ‘vertical’ consequences, one of which
might be to inhibit the process of innovation.134 There are fewer controls on
copyright and neighbouring rights at the time of conception. However, in
infringement actions, courts can be made aware of the vertical consequences
of their copyright enforcement decisions.
A major problem for patent authorities therefore is the extent to which they
are able to take into account the potential anti-innovative effects of patents at
the point of conferring a patent. At that stage, it is difficult to differentiate
between ‘good’ and ‘bad’ innovation. It might seem clear that, in most cases,
the narrower the width of a patent, the less will be the opportunity for an owner
of an industrial standard to control a large proportion of the components of
a system and thereby to control the pace and direction of further development
of the original idea in the product or process.135 In cumulative innovation
industries narrower patents will have the advantage of allowing more scope for
related research by a wider group of researchers.
However, the claim is also made that the narrower the width of a patent,
the greater the risk that the inventor will be ‘invented around’ and this may
reduce the reward and the incentive effects of patents according to the traditional model. Moreover, US economists such as Heller and Eisenberg, have
mounted a case based on the risks of too narrow a definition of patent scope,
arguing that unduly narrow patents will result in fragmentation and claiming
that each ‘upstream patent allows its owner to set up another toll booth on
the road to product development, adding to the cost and slowing down the
pace of downstream biomedical innovation’.136
My own view is that while their use of metaphor is imaginative, they
damage their case by making no comparison with the costs of allowing
upstream patent owners to own broad patents. The most important such
cost to consider is to what extent in the particular sector a broad patent would
discourage further innovation, either because of the scope of the patent or the
threat of litigation because of the unclear implications of the wider patent
claim. Without a comparison of such costs, we are left with a not particularly
helpful partial picture.
Moreover, while it is also true that holders of narrow patents in recent years
have a track record of erecting a ‘patent thicket’ around their original invention137 and multiple patents have been more frequently resorted to in recent
years, nevertheless their effect is not necessarily to allow their owner to achieve
the same degree of control over downstream innovation as a wide patent. An
extensive empirical study of the semiconductor industry in the United States by
Hall and Ham suggests that the main aim of firms investing in multiple patents
is not to gain exclusive control of stand-alone inventions, but to ensure that
they have a ‘legal bargaining chip’ for cross-licensing agreements which enables
them to get ‘access to external technologies on more favourable terms of
trade’.138 With large sunk costs in manufacturing facilities and a need to
draw on process and product technologies invented (and patented) by a diverse
array of parties, managers amass large patent portfolios of their own largely to
avoid being excluded or ‘held up’ by other parties.139
A cross-licensing culture has much to recommend it as a platform for
innovation.140 Cross-licensing agreements it should be remembered do not
always conform to the stereotype of ‘closed’ joint ventures between parties
bound by strict non-competition clauses. They can also take the form of
reciprocal agreements not to bring infringement actions against ‘licensees’ in
the course of their separate research and development.
Inevitably however there will be limits to the extent that control of the
width of a patent can ensure that inter-firm downstream competition can
flourish in a situation where the IPR right coincides with an industrial
standard. The patent authorities do not have the degree of law and economics
weaponry to make these sorts of decisions at the time of granting a patent.
And the courts, at least in the EU, do not seem to have the doctrinal wherewithal to strike the necessary law and economics balance within the confines
of patent or copyright law.
As we have mentioned, it is possible to amend IP laws to make the prospect
of competition remote. Narrowing the scope of the protected product,
offering the possibility of compulsory licences and providing for interoperability obligations within the IP laws themselves would have such an effect.
However, insofar as IP laws allow wider protection with blocking potential
even when the IP is associated with significant market power,141 it can fall
upon competition authorities to apply competition policy measures to maintain access to relevant markets. The competition rules tend to operate essentially as a default. And, indeed, the experience thus far suggests that under
most existing IP law regimes the competition rules will continue to have some
role to play because the competition authorities tend to look more often at
the conduct of the IP owner long after the IPR has been granted, whereas with
few exceptions such as compulsory licences etc. the IP authorities concern
themselves with the qualification for the grant and the issues of enforcing its
exclusivity in infringement actions.
Yet, as has been mentioned, there is considerable variation in the way
different systems operate as a default system to the exercise of intellectual
property rights. It is that degree of variation which is the subject of the
1. See e.g. Atari Games Corp. v. Nintendo of America Inc, F. 2d. 1572 (Fed. Cir. 1990).
2. See e.g. Microsoft Corporation v. United States 253 F. 3d 34 (D.C. Cir.) cert.
denied 122 S.Ct. 350 (2001).
3. See e.g. the Microsoft cases in the EU and Japan.
4. See e.g. Tetra Pak Rausing SA v. Commission (Tetra Pak I) [1990] ECR II-309.
5. See e.g. Federal Trade Commission, ‘To Promote Innovation: The Proper
Balance of Competition and Patent Law and Policy’ (2003).
6. See US Department of Justice and Federal Trade Commission Antitrust
Guidelines to Intellectual Property Licensing 1995.
7. DOJ/FTC Hearings on Competition and Intellectual Property Law and Policy
in the Knowledge Based Economy: Comparative Law Topics, 22 May 2002,
8. See e.g. 10th Annual EU Competition Law and Policy Workshop, ‘The
Interaction Between Competition Law and Intellectual Property Law’, 3–4
June 2005, Florence, Italy.
9. S. Scotchmer, ‘Standing on the Shoulders of Giants: Cumulative Research and
the Patent Law’ (1991) 5 Journal of Economic Perspectives 29–30.
10. R. Merges and R. Nelson, ‘On the Complex Economics of Patent Scope’ (1990)
90 Columbia Law Review 839, at 916.
11. The modern phase of competition law which began with the US Sherman Act
in the 1890s has to be seen as a reaction to the experience in the USA with
widespread trusts creating monopolies and cartel and market sharing arrangements in the decades after the Civil War. R. Peritz, Competition Policy in the
United States (Oxford: Oxford University Press, 1998).
See e.g. E. Bement & Sons v. National Harrow Co., 186 U.S. 70, 91 (1902);
United States v. Masonite Corp., 316 U.S. 265, 280 (1942).
See e.g. Motion Picture Patents Company v. Universal Film Company
Manufacturing Company, 243 U.S. 502 (1917).
See discussion in H. Johannes, ‘Technology Transfer under EEC Law – Europe
between the Divergent Opinions of the Past and a New Administration: A
Comparative Law Approach’ (1982) Fordham Corporate Law Institute 65.
See the principles of the US Department of Justice and Federal Trade
Commission, ‘Antitrust Guidelines for the Licensing of Intellectual Property’
(6 April 1995).
See R. Bork, The Antitrust Paradox (New York: Basic Books, 2nd edn, 1978);
R. Posner, Antitrust Law: An Economic Perspective (Chicago 1976).
See e.g. the US Department of Justice and Federal Trade Commission,
‘Antitrust Guidelines for the Licensing of Intellectual Property’ (6 April 1995).
See Deutche Grammophon GmbH v. Metro-SB-Grossmärkte [1971] ECR 487
para. 16; Volvo AB v. Veng (UK) Ltd. [1988] ECR 6211 para. 8; RTE, ITV
and BBC v. Commission [1995] ECR I-743, paras. 45–7. See discussion in
S. Anderman, EC Competition Law and Intellectual Property Rights (Oxford:
Oxford University Press, 1998) Ch. 12.
See e.g. Report of the Royal Society, ‘Keeping Science Open: The Effects of
Intellectual Property Policy on the Conduct of Science’ (2003) 9–10.
See discussion in the report of the Commission on Intellectual Property Rights
(CIPR), ‘Integrating Intellectual Property Rights and Development Policy’
(2002) 2. See too I. Rahnasto, Intellectual Property Rights, External Effects and
Antitrust Law (Oxford: Oxford University Press, 2002) 49–62.
See e.g. OECD, Competition Policy and Intellectual Property Rights (Paris, 1989).
See discussion by W. Cornish and D. Llewellyn. Intellectual Property: Patents,
Copyright, Trademarks, and Allied Rights (London: Sweet & Maxwell, 4th edn,
See e.g. H. Demsetz, ‘Towards a Theory of Property Rights’ (1967) American
Economic Review 347; R. Posner, An Economic Analysis of Law (New York,
1998); M. Lehmann, ‘The Theory of Property Rights and the Protection of
Intellectual and Industrial Property’ (1989) 16 IIC No. 5 525.
The adoption of the presumption of validity and the lowering of the standard
for the test of non-obviousness. See R. Merges, ‘As Many as Six Impossible
Patents for Breakfast: Property Right for Business Concepts and Patent System
Reform’ (1999) 14 Berkeley Technology Law Journal 578.
E.g. the modification of the doctrine of equivalents by the US Supreme Court
in Warner Jenkinson Co. v. Hilton Davis Chemical Co. 520 U.S. 17 (1997) (an
accused product infringes only if it has ‘all elements’ of a claimed invention)
and Boyden Power-Brake Co. v. Westinghouse, 170 U.S. 537 (a patent for a
‘pioneer invention’ is entitled to a broad range of equivalents); see further
discussion in Rahnasto, Intellectual Property Rights p. 54.
See e.g. Lotus Development Corp. v. Borland Int’l Inc., 49 F. 3d 807 (1st Cir.
1995); Sony Corp. v. Universal Studios Inc., 464 US 417 (‘monopoly privileges
that Congress may authorize are neither unlimited nor primarily designed to
provide a private benefit’).
See M. Adelman, ‘The New World of Patents Created by the Court of Appeals
for the Federal Circuit’ (1987) 20 University of Michigan Journal of Law 979.
See Merges, ‘As Many as Six Impossible Patents for Breakfast’.
See e.g. Whelan v. Jaslow F.S.R. 1 (C.A. 3rd Cir. 1987) (dental lab program);
Computer Associates v. Altai, 982 F. 2d 693 (C.A. 2d Cir. 1992) (computer job
scheduling); Sega Enterprises Ltd v. Accolade Inc. 977 F.2d 1510 (9th Cir. 1992)
(reverse engineering as fair use).
See e.g. Diamond v. Chakraubarty, (1980) 447 U.S. 303; State Street Bank &
Trust Co. v. Signature Financial Group, 149 F 3d 1368 (C.A. Fed. Cir. 1998).
See Cornish and Llewellyn, Intellectual Property; L. Bently and B. Sherman,
Intellectual Property Law (Oxford: Oxford University Press, 2001).
P. Gerhart, ‘Why Lawmaking for Global Intellectual Property is Unbalanced’
(2000) European Intellectual Property Review 309.
J. Braithwaite and P. Drahos, Global Business Regulation (Cambridge:
Cambridge University Press, 2000) 61–3.
If a country fails to implement the standards of the agreement, another
member may make a complaint to the WTO and thereby initiate the WTO
dispute resolution procedure that can result in trade sanctions until that
country amends its legislation to conform to TRIPS. The actual impact of
TRIPS on the national legislation of the highly developed members has been
small since these countries had already implemented the relevant conventions.
This procedure has been brought against both developed and developing
countries but the TRIPS agreement operates most forcibly upon the poorer
developing countries. The UK Commission on Intellectual Property Rights has
made the point that inadequate thought has been given to the appropriateness
of the application of Western substantive legal concepts to developing countries: CIPR, Integrating Intellectual Property Rights and Development Policy
(2002) p. 2. The main effect of TRIPS on EU members has consisted of some
modification to their compulsory licensing laws. See e.g. M. Hodgson, ‘Changes
to UK Compulsory Patent Licensing Law’ (1992) European Intellectual Property
Review 214.
See e.g. D. Evans and R. Schmalensee, ‘Some Economic Aspects of Antitrust
Analysis in Dynamically Competitive Industries’, www.nber.org/books/
innovation2/evans 5-1-01.pdf.
See e.g. S. Anderman, EC Competition Law and Intellectual Property Rights:
The Regulation of Innovation (Oxford: Oxford University Press, 2000).
37. J. Ordover and R. Willig, ‘An Economic Definition of Predation: Pricing and
Product Innovation’ (1981) 91 Yale Law Journal 8, 13.
38. See C. Ahlborn, D. Evans and A. Padilla, ‘Competition Policy in the New
Economy; Is European Competition Law up to the Challenge?’ (2001)
European Competition Law Review 156, 160.
39. See e.g. D. Balto and R. Pitofsky, ‘Antitrust and Competition in High
Technology Industries: The New Challenge’ (1998) 43 Antitrust Bulletin
583, 596.
40. A. D. Melamed, ‘Network Industries and Antitrust’, Federalist Society
Eighteenth Annual Symposium on Law and Public Policy: Competition, Free
Markets and the Law, www.usdoj.gov/atr/public/speeches/2428.htm.
41. The Royal Society Report gives as one example the patent held by Myriad
Genetics Inc. on diagnostic testing for mutation in ‘breast cancer genes’.
Keeping Science Open: The Effects of Intellectual Property Policy on the Conduct
of Science (2003) 9–10; see too Wadman, ‘Testing Time For Gene Patents as
Europe Rebels’ (2002) Nature 413, 433.
42. See e.g. R. Nelson and S. Winter, ‘In Search of a More Useful Theory of
Innovation’ (1977) Research Policy 5: 36–7; R. Langlois and P. Robertson,
‘Networks and Innovation in a Modular System: Lessons from the MicroComputer and Stereo Component Industries’ (1992) 21 Research Policy 297.
43. The Betamax/VHS rivalry offers a good example of the phenomenon of ‘tipping’ followed by ejection of a rival product in a competition between ‘closed
systems’ of products, i.e., products which are not interoperable with products
of another system. In that rivalry as we know, Betamax was completely ejected
from the consumer market. See e.g. B. Arthur, ‘Competing Technologies,
Increasing Returns, and Lock in by Historical Events’ (1989) 99 Economic
Journal 116; see too R. Peritz, ‘Towards a Dynamic Antitrust Analysis’, Paper
presented to the American Antitrust Institute Annual Conference, 1 July 2002,
Washington D.C. This conclusion has been disputed. See e.g. S. Liebowitz and
S. Margolis, ‘Are Network Externalities a New Source of Market Failure?’
(1995) 17 Research in Law and Economics 1. However, it has also been acknowledged as a theoretical possibility. See e.g. J. Church and N. Gandal,
‘Complementary Network Externalities and Technology Adoption’ (1993) 11
International Journal of Industrial Organization 239.
44. R. Schmalensee, ‘Antitrust Issues in Schumpeterian Industries’ (2000) 90
American Economic Review (Papers and Proceedings) 192, 193; D. Evans and
R. Schmalensee, ‘Some Economic Aspects of Antitrust Analysis in Dynamically
Competitive Industries’, www.nber.org/books/innovation2/evans 5-1-01.pdf.
46. J. A. Schumpeter, Capitalism, Socialism and Democracy (Harper Collins, 1984)
47. See e.g. D. Teece and M. Coleman, ‘The Meaning of Monopoly: Antitrust
Analysis in High Technology Industries’ (1998) Antitrust Bulletin 801.
48. Liebowitz and Margolis, ‘Are Network Externalities a New Source of Market
Failure?’
49. See e.g. G. Ramello, ‘Copyright and Antitrust Issues’ (2002) 114 LIUC Papers in
52. W. Tom, ‘Background Note’ OECD Competition Policy and Intellectual
Property Rights (1998) 23.
53. This phenomenon of positive ‘direct network effects’ can apply to particular
components of a system as well as a system as a whole. See e.g. Lotus
Development Corp. v. Borland Int’l Inc., 49 F. 3d 807 (1st Cir 1995).
54. G. J. Werden, ‘Network Effects and Conditions of Entry: Lessons from the
Microsoft Case’ (2001) 68 Antitrust Law Journal 87. This mutually reinforcing
process has been described as a ‘positive feedback loop’. In certain cases, this
mutually reinforcing process created by network externalities can gather
momentum or ‘snowball’ to the point where the product and its applications,
i.e. the product system, eventually ‘tips’ a market and becomes the market
standard. In the event competing products or systems can end up being either
ejected from the market or reduced to low market shares irrespective of their
55. Products in the new economy more frequently consist of complex ‘systems’ of
products rather than individual products as in the old. It is true that cars,
aeroplanes and other types of engines were effectively ‘systems’ of products.
However, the more common feature of the old economy was the single
independent product while the more common feature of the new is a ‘system’
of complementary products as exemplified by the ‘systems’ of software or
mixed software/hardware products. In a ‘system’ of products any one product
can only function in conjunction with other complementary products. In the
relationship between PC hardware, operating systems or middleware such as
Windows and applications such as word processing software or web browsers,
for example, no one product has full functionality independently of one or
more of the others.
56. G. Saloner and A. Shepard, ‘Adoption of New Technologies with Network
Effects: An Empirical Examination of the Adoption of Automatic Teller
Machines’ (1995) 26 Rand Journal of Economics 479.
57. See Lotus Development Corp. v. Borland Int’l Inc., 49 F. 3d 807 (1st Cir. 1995).
58. Werden, ‘Network Effects and Conditions of Entry: Lessons from the Microsoft
59. Ibid., at p. 33.
60. See e.g. N. Gandal, G. Greenstein and D. Salant, ‘Adaptations and Orphans
in the Early Microcomputer Market’, (1999) 47 Journal of Industrial
Economics 87.
61. United States v. Microsoft Corp., 84 F.Supp. 2d 9, 20 (D.D.C. 1996).
62. W. E. Cohen, ‘Competition and Foreclosure in the Context of Installed Base
and Compatibility Effects’ (1996) 64 Antitrust Law Journal 535, 541.
63. Werden, ‘Network effects and Conditions of Entry: Lessons from the Microsoft
Case’ at 92–3.
64. See e.g. I. Govaere, The Use and Abuse of Intellectual Property Rights in EC Law
(Sweet & Maxwell, 1996).
65. See e.g. K. Arrow, ‘Economic Welfare and the Allocation of Resources to
Invention’, in R. Nelson (ed.), The Rate and Direction of Inventive Activities
(Princeton: Princeton University Press, 1962).
66. The empirical case has not been entirely conclusive. See F. Scherer and D. Ross,
Industrial and Market Structure and Economic Performance (Houghton Mifflin,
3rd edn, 1990) p. 637.
67. Sometimes this is called a ‘first generation’ product. See B. Dumont and
P. Holmes, ‘The Scope of Intellectual Property Rights and their Interface
with Competition Law and Policy: Divergent Paths to the Same Goal?’
Economics of Innovation and New Technology (2002) 11(2) 149–62.
68. See e.g. Scotchmer, ‘Standing on the Shoulders of Giants: Cumulative Research
and the Patent Law’.
69. Arrow, ‘Economic Welfare and the Allocation of Resources to Invention’.
70. R. Merges, ‘Institutions for Intellectual Property Transactions: The Case of
Patent Pools’, in R. Dreyfuss, D. Leenheer Zimmerman and H. First (eds.),
Expanding the Boundaries of Intellectual Property: Innovation Policy for the
Knowledge Society (Oxford: Oxford University Press, 2001) 123 at 124.
71. Arrow also called attention to the disclosure of information in the patent claim
as facilitating licensing since it offers potential buyers an indication of the
invention. See Arrow, ‘Economic Welfare and the Allocation of Resources to
Invention’.
72. Cornish and Llewellyn, Intellectual Property.
73. See too Articles 27 and 28 of the European Patent Convention.
74. See discussion in Bently and Sherman, Intellectual Property Law pp. 506–9.
75. See e.g. s. 60(5)(b) of the UK Patent Act 1977 and Article 27(b) of the Community
Patent Convention. See W. Cornish, ‘Experimental Use of Patented Inventions
in European Community States’ (1998) 29 IIC 735. Cf. the ‘regulatory exception’ or ‘Bolar’ provision in Article 8 of TRIPs which allows use of patented
inventions by the manufacturers of generic drugs to obtain marketing approval
from public health authorities before the expiry of the patent so that they can
market their versions as soon as the patent expires. See ‘TRIPS and pharmaceutical patents’, WTO OMC Fact Sheet, April 2001.
76. See e.g. Merges and Nelson, ‘On the Complex Economics of Patent Scope’.
77. See e.g. discussion in Rahnasto, Intellectual Property Rights p. 3. The increasing
interdependency between companies suggests a sh