But occasions are not few, when IPRs are exercised in a manner which leads to attenuate the scope of competition. To exemplify, Exclusivity affords an opportunity to the right holder to manoeuvre the prices in a manner which enables her not only to recoup the R&D costs but also reap unprecedented profits. Moreover, IP owners often engage in exclusionary conduct towards innovators and potential competitors on markets which are secondary to and dependant upon an IPR protected industrial standard or de facto monopoly. This anti-competitive conduct has tended to take the form of refusal to deal or refusal to license. Such conduct whittles competition and results in fetters being placed on the free exercise of exclusive rights granted by IP laws.
One such fetter is that of Compulsory licensing which can be seen as a potent tool for mitigating the rigours of abuse of dominant position by arbitrary refusal to deal or license, thereby rectifying market failure.
This paper deals with this tool of compulsory licensing. It defines the term as well as expatiates upon its rationale, whilst delving into the question as to how it mitigates, cures or recuperates the perils of anti-competitive activities. It offers an insight into the American and European position, with the aid of case law, in order to explain how this tool is put to practical application.
Compulsory Licensing - Meaning And RationaleCompulsory licenses are "involuntary contracts between a willing buyer and an unwilling seller imposed or enforced by the state." Compulsory licenses are basically the abrogation of an IP right - an extra-ordinary legal instrument whereby the State allows itself or third party (typically the competitor) to have access to, produce, use or sell the IP protected product or process without the consent of the IP owner. Such mandatory and involuntary licenses as compelled by law may be granted with respect to patents, copyrighted works or other exclusive rights. In case of patents the Compulsory license provides a safeguard against lack of use of a patented invention or misuse of the patent holder's monopoly rights in order to protect the public interest. The same principle may be applied in case of copyrights and other exclusive rights.
It is pertinent to mention that the power to enact laws on compulsory patent licensing arises from several international agreements such as the World Intellectual Property Organization (WIPO) Paris Convention for the Protection of Industrial Property , the relevant provisions of which were incorporated into the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).
TRIPS provides a leeway to the Member States to smoothen the creases created by potential conflict between competition policy and IP law. Articles 8, 31 and 40 deserve a special mention. Members may adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development. Further, TRIPS handles compulsory licenses as an exception to the agreement's minimum requirement that all Member States afford a patentee a right of exclusivity during the complete patent term. TRIPS portends a set of circumstances that establish a floor at which any Member State is allowed to issue compulsory license. The compulsory licenses that are allowed fall into two categories—where there is an overriding public interest or where the patent rights are being used in an anticompetitive manner.
In the realm of national laws, following are the examples that specify when Compulsory licenses can be issued:
# Refusal to enter into a voluntary licensing agreement on reasonable commercial terms (e.g. in the German and Chinese patent laws);
# Public interest (e.g. in the Swedish law);
# Public health and nutrition (e.g. provisions in the French law )
# National emergency or situation of extreme urgency;
# Anti-competitive practices on the part of patent holders
# Dependent patents;
# No or insufficient working of the invention in the national territory.
Thus, it is evident that compulsory licensing can potentially combat some of the most pernicious circumstances including anti-competitive practices. For our purpose such activities as having a dampening effect on competition are the main focus of attention. The following chapters throw some light on the position in US and EU; in order to understand how involuntary licensing may cure anti-competitive behaviour of IP owners and what are the conditions which define the ambit and scope of such licensing.
The American Approach towards Compulsory LicensingAs a general matter, the US antitrust laws do not impose on individual firms, even monopolies, a duty to do business with anyone or otherwise to make other facilities available . The position can be succinctly summarized with the aid of the following case
Hartford-Empire Co. v United StatesThe court asserted that a patent owner is not in a position of a quasi-trustee for the public or under any obligation to see that the public acquires the free right to use the invention. He has no obligation either to use it or grant its use to others.
However, there have been some decisions over the years - sometimes termed essential facility cases - imposing duty to deal or decreeing compulsory licenses. In fact in US the principle of granting involuntary compulsory licenses is inextricably interwoven with the concept of essential facility which developed in relation to access to physical infrastructure. Essential facility is a facility or infrastructure which is necessary for reaching customers and/ or enabling competitors to carry on their business. The essence of this concept is captured appositely in the Terminal Railroad Association case.
United States v Terminal Railroad AssociationA group of railroads which jointly owned the only railroad switching yard across the Mississippi River at the important city of St. Louis prevented competing railroad services from offering transportation to and through that destination. The Supreme Court required the railroads group to give access to non-members; and concomitantly held that such conduct constituted both an illegal restraint of trade and an attempt to monopolize.
Likewise in Lorain Journal case , the Supreme Court considered whether the defendant, the only local newspaper circulating news and advertisements in northern Ohio, violated the Sherman Act by refusing to accept advertising from businesses that placed advertisements with a small radio station. The Court approved an order requiring the newspaper to accept advertisements as it was considered an indispensable medium of advertising. Therefore, through the course of such decisions was born the essential facilities doctrine and the accompanying remedy of compulsory access. This doctrine is certainly not an independent cause of action but a strand of the monopolization claim. It has been articulated as a subset of the so-called refusal to deal cases which place limitations on a monopolist's ability to exclude actual or potential rivals from competing with it.
Hence, Where facilities cannot practicably be duplicated by would-be competitors, those in possession of them must allow them to be shared on fair terms. It is illegal restraint of trade to foreclose the scarce facility.
In the realm of IP monopoly, the federal circuit in Intergraph case , trimmed the ambit of essential facilities doctrine by holding that only when the facility owner and the user compete in a downstream market that requires access to the facility, will the doctrine apply. In this case, the plaintiff Intergraph argued that Intel had an affirmative obligation to continue supplying it with chips, technology and interoperability information because Intel products were the de facto industry standard and thus essential facility to do business in the industry. Intel dominated the market with well over 80 percent share of microprocessor chip sales, thus Intergraph asserted that the refusal to deal was monopolizing conduct in violation of Sherman Act. However, the court held that Intel and Intergraph were not competitors and since they did not compete in downstream market, a compulsory license could not be granted.
Another important case is that of Eastman Kodak Co. v. Image Tech. Inc. . The Supreme Court emphasized that power gained through some natural or legal advantage such as patent, copyright or business acumen can give rise to liability if a seller exploits his dominant position in one market to expand his empire into the next. In this case, the plaintiff won its monopolization claim that Kodak's practice of refusing to sell patented parts to independent service providers was an unreasonable restraint of trade that violated Sherman Act section 2. A perusal of the above decisions makes it amply clear that in US, apart from mere ownership of an IPR, some additional exclusionary conduct is essential for the grant of compulsory and involuntary license.
The EU PerspectiveThe competition policy under Article 82 of the EU Treaty has been used to restrict the abusive commercial conduct of individual owners of IPRs, particularly where the IPR protects a market standard or a de facto monopoly. This form of regulation has extended to excessive pricing, but has been more frequently focused on the IPR holder's conduct towards innovators who are 'downstream' of an IPR protected industrial standard including refusals to deal and refusals to license. Article 82 in the system of EC competition law regulates undertakings which have been found to occupy positions of dominant market power, such as monopolies or near monopolies. It not merely prohibits exploitative pricing or limitations of output, but also concerns itself with the use of market power to damage effective competition in markets by preventing access to markets or driving out existing competition. It has been interpreted to prohibit anti-competitive or 'exclusionary' abuses such as refusal to supply without justification. In essence, this provision of EU Treaty has been the conduit pipe for implementing compulsory licensing, which can be understood by perforating through a series of important cases.
The first such case is AB Volvo v Erik Veng
Volvo held the design right in the UK over front wings for cars. Veng imported panels into UK from Italy and Denmark where they had been manufactured without Volvo's consent. Volvo alleged infringement of its UK registered designs. Veng's defense was that Volvo's refusal to grant license was an abuse of dominant position when Veng was willing to pay a reasonable royalty for license. The question before ECJ was whether refusal to grant license by Volvo was an abuse of dominant position? The ECJ said:
An obligation imposed upon the proprietor of protected design to grant to third parties, even in return for a reasonable royalty, a license for the supply of products incorporating the design would lead to the proprietor thereof being deprived of the substance of his exclusive right, and that a refusal to grant such a license cannot itself constitute an abuse of a dominant position.
Outlining the circumstances, under which refusal to license may be deemed to constitute abuse of dominance, the court said that Article 82 may be attracted if an undertaking holding a dominant position involves in abusive conduct such as - arbitrary refusal to supply spare parts to the independent repairers, the fixing of prices for spare parts at an unfair level, or a decision no longer to produce spare parts for a particular model even though many cars of that model are still in circulation…
Therefore, the significance of this case lies in determining the boundaries of compulsory licensing. It is pertinent that merely a refusal to grant license may not be anti-competitive in nature. Such refusal should be arbitrary, so as to compel involuntary compulsory licensing, in order to mitigate the rigours of abusive conduct.
In the landmark case of Magill , broader and more flexible approach was adoptedMagill, a Dublin company, was the compiler of a comprehensive weekly television guide combining the listings of three television companies broadcasting in the UK and Ireland. Since these listings were protected by copyright, Magill inevitably required a license, the grant of which was refused by these companies. The ECJ affirmed the grant of compulsory license by the Commission, on grounds of Article 82, and held that copyright itself did not justify a refusal to license in the 'exceptional circumstances', where there was a consumer demand for the new product, where the TV companies had a de facto monopoly over the listings by virtue of their scheduling of TV programs, where a license of the listings was an indispensable input for the comprehensive TV guide and where they were not themselves supplying the product to the consumers.
A more recent case is that of IMS Health v. NDC HealthIMS was the largest supplier of sales data and other information on pharmaceutical services to pharmacies in Germany using a 'brick like' structure, which divided Germany into 1860 areas or 'bricks', corresponding to a particular geographical area. This structure became the 'market standard' for delivery of such pharmaceutical information and was protected by copyright. NDC developed a similar structure, deriving from IMS and the German court prohibited NDC from using any structure derived from IMS. On a referral from the German court, the ECJ emphatically reiterated that all the criteria of the exceptional circumstances, as stated in Magill, must be fulfilled in order for a compulsory license to be granted. In the absence of such exceptional circumstances, the IP owner has the exclusive right of reproduction, and a refusal to grant license even by a dominant undertaking, cannot, of itself, constitute an abuse of Article 82.
The court reasserted that the three cumulative criteria must be met for a refusal to be regarded as abusive:
# The undertaking which requested the license must intend to offer new products or services not offered by the owner of copyright and for which there is a potential consumer demand.
# The refusal cannot be objectively justified
# The refusal must be such as to exclude competition on a secondary market.
In this case it was for the national court to determine whether the brick structure constituted an indispensable factor in the downstream supply of regional pharmaceutical sales data.
The above cases reflect, to an extent that the American doctrine of essential facility has been the conduit to enforce compulsory licensing, albeit in a different form.
Both in US and EU the principle of compulsory licensing has been used to countervail the dampening effect of anti-competitive behaviour. However, this approach has not transcended beyond the various pre-requisites such as - competition in secondary market and indispensability and the jurisprudence in the EU and in the U.S. both suggest that under exceedingly limited circumstances, compulsory licensing can be an appropriate remedy in antitrust cases. Though applied cautiously and within a limited ambit, compulsory licensing has served the purpose rectifying the market failure, which is the quintessence of competition policy. The narrow and well defined application has at the same time ensured that an efficacious and delicate balance is maintained between innovation and competition.
1. Steven D. Anderman The interface between Intellectual Property Rights and Competition Policy (Cambridge University Press, 2007)
2. H. McQueen, Charlotte Waelde and Graeme Laurie Contemporary Intellectual Property - Law and Policy (Oxford University Press, 2007)
3. Alan Gutterman, Innovation and Competition Policy (Kluwer Law International, 1997)
4. Gustavo Ghidini, Intellectual Property and Competition Law - The Innovation Nexus (Elward Elger Publication, 2006)
The author can be reached at: ManpreetKaur@legalserviceindia.com / Print This Article
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