Jonathan DC Turner

Barrister 

INTELLECTUAL PROPERTY, CONTRACTS AND COMPETITION LAW

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This is a copy of a paper given to a seminar of the Chancery Bar Association in May 2001. It is not guaranteed to be up-to-date when downloaded. Copyright is reserved by the author and moral rights have been asserted. The article may be copied and distributed provided this done free of charge and in relation in the whole article, including details of authorship and this notice, without any amendments.

1.             An effective competition law is vitally important to ensure that a free market economy works well and works for the benefit of society as a whole. As long ago as 1602, Popham CJ declared

“there are three inseparable incidents to every monopoly against the commonwealth; the price of the same commodity will be raised, for he who has the sole selling of any commodity may and will make the price as he pleases; that after the monopoly is granted the commodity is not so good and merchantable as it was before, for the patentee, having the sole trade, regards only his private benefit and not the commonwealth; that it tends to the impoverishment of divers artificers who before, by the labour of their hands in their art or trade, had maintained themselves and their families, who now will of necessity be restrained to live in idleness and beggary.”[1]

To which I would add a fourth, that a monopoly creates a state of dependency on the part of workers, suppliers and consumers.

2.             But somehow Britain lost its way at the end of the 19th century. When the Competition Act was finally adopted in 1998 and entered into force in March 2000, we were one of the last major countries to adopt a system of automatic prohibition of anti-competitive practices, although we had benefited to some extent from EC competition law since our accession in 1973. The failure to adopt an effective competition law earlier was, I believe, a principal cause of Britain’s economic decline during the course of the last century.

3.             Private enforcement of competition law is also important. I do not intend to diminish the role of official enforcement. But public resources are limited and not always deployed with perfect efficiency or the enthusiasm that comes when one’s livelihood is at stake. As the 1998 report “Driving productivity and growth in the UK” of the management consultants, McKinsey, put it:

Private law suits …. could greatly increase the information and investigative resources available to the economy, making it more likely that anti-competitive behaviour will be detected or prevented.”

4.             Moreover, private enforcement of competition law is not just a matter of furthering the public interest in preventing anti-competitive conduct. It is also a matter of protecting private rights not to be injured by anti-competitive conduct – rights not to be exploited or driven out of business by an abuse of monopoly or a cartel.

5.             I regret that some aspects of the implementation of the Competition Act may have been influenced by a desire to ensure that the OFT and other regulators are not overwhelmed by work. I fear that the availability of, and impact on, private enforcement may have been overlooked in formulating these measures. I refer in particular to the exclusion of vertical and land agreements (which in my view is wrong in principle and too broad); and to the OFT guidance that a market share of the parties of over 25% is normally required for there to be an appreciable effect on competition as required by the Chapter I prohibition[2]. Fortunately, the latter can be challenged since it is not consistent with the position under article 81 of the Treaty of Rome. The guidance of the EC Commission indicates a 5-10% rule of thumb[3], and the case-law of the European Court of Justice is, if anything, stricter[4]. Section 60 of the 1998 Act requires that there be no inconsistency between the principles applied and decisions reached under the Act and corresponding provisions of Community competition law. In my view, this requires rejection of the OFT guidance on this point, and I hope the UK courts will so conclude.

6.             Intellectual property rights enable and promote competition. They are sometimes seen as anti-competitive monopolies – perhaps justified, but monopolies all the same. This is a misconception. All property is a form of monopoly. Exclusivity is the touchstone of a property right[5]. But competition is made possible by the existence of property rights. Competition in the production of goods would not be possible if one company could simply nick the goods it wished to sell from another company’s yard. Similarly, competition in innovation would not be possible if it were not protected by intellectual property rights, if a company which did not do any innovation, or did it badly, could simply take another company’s work. Furthermore, competition on quality would not be possible if consumers could not tell which company made the goods or supplied the services, if trade marks and other indications identifying who is responsible for the quality of the products could not be relied upon, if one company could filch another company’s reputation by copying its brand.

7.             On the other hand, the fact that property rights enable and promote competition does not mean that they cannot be used anti-competitively. For example, it is, in principle, anti-competitive if the owners of all the diamond mines in the world agree to sell their diamonds through the same organisation. It is no answer to the charge for them to say that they own the diamonds and do not have to sell them at all. Likewise, in general, if competitors agree to pool their patents and to licence them through one of them or through a joint venture. (And likewise, perhaps, if a substantial proportion of specialists in a niche market agree to deal with customers through common staff.)

8.             So from the point of view of the public interest, competition law and intellectual property law have the same objective. It is quite wrong to assume that there is some inherent conflict between them. Equally, it is wrong to suppose that the protection of intellectual property implies the exclusion or curtailment of competition law. On the contrary, competition law and intellectual property law should operate together to promote competition.

9.             What is true is that it may be necessary to balance different forms of competition. This is not unusual in competition law. For example, restrictions on intrabrand competition (between different distributors of the same supplier) have to be weighed against the promotion of interbrand competition (between that supplier and other suppliers) which they enable[6]; while reduced competition on price may be outweighed by increased competition on quality[7]. Similarly, patents (for example) promote competition in innovation at the expense of restricting competition in production. And a patent pool may reduce or eliminate competition between those providing a new technology but increase competition between the new technology and existing technologies.

10.         The question then arises as to how this balance is to be achieved in relation to the forms of competition protected by intellectual property. To what extent should it be achieved through the specific law governing the intellectual property; to what extent by general competition law? To what extent by rules which apply whatever the market position; to what extent by rules which depend on the market position?

11.         Intellectual property laws typically consist primarily of provisions which seek to balance different forms of competition regardless of the market position. Thus patent protection is limited by reference to the inventive contribution of the patentee, in duration (generally to 20 years[8] but with some possibilities for extension) and on condition that a method of carrying the invention is disclosed so that at the end of the period of protection the invention can be used by competitors. Similarly, important exceptions are provided to the protection of designs and copyright to enable competition in replacement parts and interoperable products[9].

12.         However, intellectual property laws may also contain some provisions for adjusting the protection depending on the market position and the way in which the right has been exploited, for example prohibitions of certain contractual terms[10], compulsory licensing in certain circumstances[11] and the possibility of varying the term of the right depending on the extent to which the owner has made a profit[12].

13.         In the case of patents, the current trend appears to be against such provisions and in favour of leaving such adjustments to be dealt with by general competition law. Thus under previous UK patent legislation, the basic term was 16 years but could be extended if the patentee had received “inadequate remuneration”[13]. This approach was replaced by a uniform 20 year term in the Patents Act 1977. More recently, EC legislation has created Supplementary Protection Certificates which effectively extend patents for medicinal and plant protection products where more than 5 years elapsed between the patent application and the first authorisation to market the product in the Community[14]. However, the duration of the extension depends solely on the period between the patent application and the market authorisation[15]. The extent to which the patentee has actually profited from the invention is not taken into account.

14.         Again, until recently, UK patent legislation contained specific provisions prohibiting tie-ins[16] and licences which continued after expiry of the originally licensed patent[17]. These provisions were repealed by the Competition Act 1998[18]. Provisions for compulsory licensing in the event of insufficient exploitation of the invention still exist in the UK patent legislation but have been closely circumscribed, most recently to give effect to the WTO TRIPS agreement[19].

15.         By contrast, in the case of copyright law in the UK, there has been a trend in the opposite direction in recent years. In particular, provisions in the copyright legislation for compulsory licensing under the supervision of the Copyright Tribunal have been greatly extended under the 1988 Act as amended by the Broadcasting Act 1990[20]. This is, I believe, a consequence of the limitations of UK competition law prior to the 1998 Act and the flawed analysis of the Monopolies and Mergers Commission in the television listings and vehicle body panels cases[21]. The MMC incorrectly supposed that an order requiring the television companies or vehicle manufacturers to grant licences would be incompatible with the proprietary rights granted by the copyright legislation and that the only remedy for the anti-competitive practices which they found in relation to the exploitation of these rights in these markets was to amend the copyright legislation[22].

16.         The broad message that I draw from this not entirely consistent situation is that, while intellectual property laws contain their own provisions for balancing different forms of competition, adjustments in the light of the particular market position or the way in which the rights are exploited should be and are to a significant extent left to be dealt with by general competition law.

17.         It follows that exploitation of intellectual property rights in accordance with the applicable intellectual property law may nevertheless conflict with applicable competition law. The question then arises as to how such conflicts should be resolved. In the normal case, where a balance between different forms of competition has been roughly but not completely struck by general provisions of the applicable intellectual property law, and is adjusted by competition law to take into account particular circumstances of the market or the way in which rights have been exploited, the requirements of competition law have to prevail in order to provide the required adjustment.

18.         This position was reinforced in relation to the interaction between Community competition law and national intellectual property rights by the requirement that the common policy on competition be uniformly applied throughout the single market and take precedence over any conflicting national legislation[23]. However, for the reasons which I have sought to explain, the precedence of competition law in a normal case has independent justification and remains applicable in relation to interactions between Community competition law and Community intellectual property rights, and between national competition law and national intellectual property rights. There is, on the other hand, room for debate as to whether the same approach should apply where activities are allowed by provisions of intellectual property law which take the particular market situation into account, for example where a licensing scheme has been approved by, or can be challenged before, the Copyright Tribunal.

19.         The precedence of competition law is reflected in Article 81(2) of the Treaty of Rome and the corresponding section 2(4) of the Competition Act 1998, which provide respectively that any agreements prohibited pursuant to article 81 of the Treaty or the corresponding Chapter I prohibition of the Act are void. In interpreting and applying these provisions, it is fundamental to appreciate that their purpose is to ensure that competition is not prevented, restricted or distorted by the prohibited agreements, no more and no less.

20.         Thus the European Court has held that article 81(2) is to be interpreted as meaning that only those provisions of the agreement which prevent restrict or distort competition contrary to article 81 are void, and that the effects of other provisions of the contract on the parties’ obligations and proprietary rights must be determined under the applicable contract and property laws[24]. The same approach is clearly to be applied under the Competition Act 1998 in accordance with its section 60.

21.         Where the applicable law is English, the English Court of Appeal has held that the non-restrictive provisions of the agreement remain valid unless the contract without the restrictive provisions would fail for lack of consideration or would be so changed in character as not to be the sort of contract that the parties intended to enter into at all[25].

22.         It is well established that provisions of an agreement which were initially valid may become void when the market share of a party or parties changes, so as to bring the agreement within the scope of article 81 or to take it outside the protection of a bloc exemption. More recently, the English Court of Appeal has also held, affirming Laddie J, that a provision which was previously void may become valid because of a change which takes the agreement outside the prohibition or into a bloc exemption[26].

23.         Where agreements relate to intellectual property, the European Court has repeatedly stated that the invocation of an intellectual property right is contrary to article 81 if it is “the object, the means or the consequence of a restrictive agreement”[27]. I do not believe that this formulation was plucked out of the air. On the contrary, I think that it is firmly based on the requirement of article 81(2) of the Treaty of Rome that prohibited agreements must be void.

24.         If the object of an anti-competitive agreement is to enforce an intellectual property right, then to enforce it would be to give effect to the agreement, thus contradicting the requirement that the agreement should be void. For example, two undertakings may agree to pool their patents, to licence them as a package on standard terms to other parties and to enforce them against parties which use any of the patented inventions without taking such a licence[28]. The enforcement of the patents against parties who do not take a standard licence is an object of the agreement. If the agreement is anti-competitive, the enforcement of the patents should not be allowed since it would give effect to the agreement, at any rate as long as the agreement remains in operation.

25.         Similarly, if the enforcement of an intellectual property right is the means of an anti-competitive agreement, enforcing the right will enforce the agreement. For example, separate undertakings may agree to divide up the European market by arranging for each to obtain intellectual property rights in respect of the same or similar subject-matter in their respective territories[29]. Enforcement of those intellectual property rights against parallel imports should not be allowed since it would make the agreement operative and not void.

26.         Again, if the enforcement of an intellectual property right is the consequence of an anti-competitive agreement, to allow it would be to give effect to the agreement. However, I think that “consequence” must be understood in the sense that the anti-competitive agreement is the effective cause of the subsequent enforcement. It is not sufficient if it is merely part of the history. Thus, if an intellectual property right is assigned pursuant to an anti-competitive grant-back provision, whether the permissibility of its subsequent enforcement may depend on whether there is a sufficiently close connection between the acquisition of the right and its enforcement.

27.         Furthermore, it follows from this analysis that the enforcement of the intellectual property right is disallowed if it is the object, means or consequence of a restrictive provision of the agreement. In accordance with the principle of partial validity accepted by the European Court in La Technique Miniere[30], the enforcement of the intellectual property right is not contrary to article 81 or the Chapter I prohibition if it is the object, means or consequence only of other provisions of the agreement which are not themselves objectionable. Only the restrictive provisions are void by virtue of article 81(2) or section 2(4). The effect of their invalidity on other provisions and on dispositions of intellectual property rights pursuant to those other provisions must be determined under the law applicable to the contract and the property rights, taking into account the possibility that the invalidity of the restrictive provisions may have frustrated the agreement or deprived other provisions of substantially the whole consideration for them[31].

28.         I also think that it is also part of the requirement that restrictive provisions are void that the parties should be put in the position in which they would have been had the provisions not been agreed and implemented. Thus if a provision of an agreement provides for the payment of excessive royalties contrary to article 81 or the Chapter I prohibition, in my view the payer is entitled to recover them. I think that the specific requirement of voidness in article 81(2) of the Treaty and section 2(4) of the Act takes precedence over any argument based on the general principle ex turpi causa non oritur actio. In my view, the decision of the Court of Appeal in Gibbs Mew v Gemmell[32] was wrong and I hope and expect that the European Court of Justice will so conclude in the pending reference in Crehan v Courage.

29.         Similarly, if an intellectual property right is purportedly transferred under or pursuant to a restrictive provision contrary to article 81 or the Chapter I prohibition, I think that either the transfer is invalid or the transferee holds the right on trust for the transferor. The latter may be a better solution, since the transferee can still enforce the right against infringers having no entitlement to use the intellectual property in question; but any benefits obtained by the transferee are held on trust for the transferor.

30.         Finally, the requirement of voidness of restrictive provisions of agreements contrary to article 81 or the Chapter I prohibition, and the corollary that an intellectual property may not be enforced if it is the object, the means or the consequence of a restrictive agreement, are not exhaustive of the potential interaction between these provisions and the enforcement of intellectual property rights. In particular, the enforcement of an intellectual property right may be contrary to article 81 or the Chapter I prohibition if the purpose of the action is to force the other party into accepting an anti-competitive agreement. Although this point has not been specifically addressed, so far as I can recall, in any decision of the European Court of Justice, it was accepted in principle, in my view rightly, by the English Court of Appeal in British Leyland v TI Silencers[33].

© Jonathan DC Turner 2000

[1] Case of Monopolies, Darcy v Allen 1 WPC 1

[2] OFT401 paras 2.19 – 2.20

[3] Notice on agreements of minor importance which do not fall under Article 85(1) of the Treaty establishing the European Community OJ [1997] C372/13

[4] Case 5/69 Volk v Vervaecke [1969] ECR 295, Case 19/77 Miller v EC Commission [1978] ECR 131, Case 30/78 Distillers v Commission [1980] ECR 2229, Cases 100-103/80 Musique Diffusion Francaise v Commission [1983] ECR 1825

[5] Street v Mountford [1985] AC 809

[6] See the EC Commission Communication on the application of the Community competition rules to vertical restraints OJ 1998 C365/3

[7] See e.g. Case 26/76 Metro v Commission [1977] ECR 1875 at paras 20-22

[8] This is the minimum period under the WTO TRIPS Agreement art. 33

[9] Copyright Designs and Patents Act, s. 50B, 213(3); Registered Designs Act 1949, s. 1(1)

[10] e.g. Patents Act 1977, s.44 and 45 (now repealed), Copyright Designs and Patents Act 1988, s. 296A, 296B

[11] e.g. Patents Act 1977, s.48-59, Copyright Designs and Patents Act 1988, s.116-152 (copyright), 237-244 (design right), Registered Designs Act 1949 s.10

[12] Patents Act 1949 s.23

[13] Patents Act 1949, s.23

[14] Regulations 1768/92 and 1610/96

[15] Art.13 of each regulation (see previous note)

[16] Patents Act 1977, s.44

[17] Patents Act 1977, s.45

[18] s.70, 74(3)

[19] s.48, 48A and 48B of the Patents Act 1977 as amended by SI 1999 No. 1899

[20] s.116 sq

[21] See Jonathan DC Turner, Copyright and Competition in Ancillary Markets: Why the MMC is Wrong [1985] EIPR 325

[22] [1985] Cmnd 9437, 9614

[23] See e.g. Case 12/74 Commission v Germany [1975] ECR 181

[24] Case 56/65 La Technique Miniere v Maschinenbau Ulm [1966] ECR 235, [1966] CMLR 537, Case 319/82 Société de Vente de Ciments et Betons v Kerpen & Kerpen [1983] ECR 4173, [1985] 1 CMLR 511

[25] Chemidus Wavin v TERI [1978] 3 CMLR 514

[26] Passmore v Morland [1999] 3 All ER 1005, [1999] 1 CMLR 1129

[27] Case 40/70 Sirena Srl v Eda Srl [1971] ECR 69 at 82, [1971] CMLR 260 at 273, 274, ECJ; Case 15/74 Centrafarm BV v Sterling Drug Inc [1974] ECR 1147 at 1167, [1974] 2 CMLR 480 at 506, ECJ; Case 86/75 EMI Records Ltd v CBS Grammofon A/S [1976] ECR 871 at 907, [1976] 2 CMLR 235 at 266, 267, ECJ; Case 144/81 Keurkoop BV v Nancy Kean Gifts BV [1982] ECR 2853 at 2873, [1983] 2 CMLR 47 at 83, ECJ.

[28] Cf Philips v Ingman [1999] FSR 112

[29] Cases 56, 58/64 Grundig and Consten v EC Commission [1966] ECR 299 [1966] CMLR 418, Case 144/81 Keurkoop v Nancy Kean Gifts [1982] ECR 2853 at 2873, [1983] 2 CMLR 47

[30] Case 56/65 [1966] ECR 235, [1966] CMLR 537

[31] cf Chemidus Wavin v TERI [1978] 3 CMLR 514

[32] [1999] ECR 97, [199] 1 EGLR 43

[33] [1981] 2 CMLR 75

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