INTERFACE BETWEEN IP AND COMPETITION LAW
Intellectual Property Rights (IPRs) and Competition Law are both necessary for innovation and economic growth. IPRs create exclusive rights while Competition Law seeks to correct market failures caused by monopolies and restrictive practices. Tension arises when IPRs are used to restrict competition beyond the intended scope.
Competition law recognizes IPRs as valid exceptions to its application within reasonable limits [s.3(5)]. Unreasonable conditions not necessary for protecting IPRs can attract competition enforcement.
Competition concerns in IPR markets:
- Licensing arrangements imposing vertical restrictions like tie-in, exclusivity, etc.
- Refusal to license IPRs, especially those essential for implementing standards
- Patent pools, cross-licensing with horizontal competitors
- Mergers between companies with significant IPR portfolios
- Settlement agreements between originator and generic drug companies (“pay for delay“)
LICENSING AND TECHNOLOGY TRANSFER
IPR licensing is generally pro-competitive as it enables wider use of the invention. Licensing restrictions beyond the scope of the IPR or not necessary for its protection can raise competition issues.
Potentially anti-competitive licensing restrictions:
- Price restrictions on licensee
- Output restrictions on licensee
- Allocation of markets/customers between licensor and licensee
- Tie-in of non-essential products/technologies with the license
- No-challenge clause preventing licensee from challenging the validity of the IPR
- Exclusive grant back of improvements made by the licensee to the licensor
- Refusal to license the IPR to competitors or only on discriminatory terms
Rule of reason analysis weighs pro-competitive and anti-competitive effects, unless the restriction is egregious like price fixing or market allocation.
STANDARD ESSENTIAL PATENTS (SEPs)
Technology standards ensure interoperability and compatibility between products of different manufacturers. Standards may incorporate patented technologies which become Standard Essential Patents (SEPs).
Competition concerns arise when SEP holders:
- Refuse to license the SEP to competitors (“hold-up“)
- License the SEP on Fair, Reasonable, and Non-Discriminatory (FRAND) terms
- Seek injunctions against willing licensees on FRAND terms
- Discriminate between similarly placed licensees
As a result, standard setting organizations require members to disclose their SEPs and commit to licensing them on FRAND terms. Refusal to license SEPs can amount to abuse of dominance under the Competition Act.
FRAND TERMS
SEP holders voluntarily commit to license on FRAND terms in return for their technology being made the standard.
- Ensures availability of the standard to all implementers while providing a fair and reasonable return to the SEP holder for its innovation.
- FRAND is a range rather than a specific royalty rate.
- Appropriate royalty base is the smallest saleable patent practicing unit and not the end product price.
- Royalty rates must factor in the possibility of royalty stacking with multiple SEPs reading on the same product.
- Non-Discriminatory means similarly situated licensees must get similar rates and terms.
FRAND commitments can be enforced under the Competition Act as a remedy for abuse of dominance by the SEP holder.
A fortiori, the interface between IPRs and Competition Law requires a balanced approach. IPRs must be protected to promote innovation while Competition Law ensures they are not used to stifle competition. Licensing of IPRs is generally pro-competitive, but restrictions beyond the scope of the IPR can raise competition concerns. SEP holders have a special responsibility to license on FRAND terms to ensure access to the technology standard. Competition authorities are well-equipped to assess IPR-related practices and ensure a balance between rewarding innovation and promoting competition.
