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Guy Lougher |
The UK's Enterprise Act 2002 will allow the Competition Commission (CC), following merger or market investigations, to seek wide-ranging changes to the exercise and licensing of IP rights registered in the UK.
Similarly, once it enters into force in May 2004, the EU's Modernization Regulation will facilitate the imposition by the European Commission of behavioural or structural undertakings that could affect the ownership, use or licensing of IP rights within the EU. As such, the Regulation could change current EU case law on compulsory licensing which follows the Magill case. These new legal developments are in turn likely to facilitate innovative arguments, especially in relation to the compulsory licensing of IP rights.
Cases such as Intel v Via, IMS, Magill and Levi Strauss v Tesco highlight the potential tension between, on the one hand, the ability of an IP rights holder to exploit the monopoly that those rights are intended to confer and, on the other hand, the breaking down of market barriers that is the objective of the competition rules.
UK competition rules are primarily contained in the Competition Act 1998. Chapter I of the Competition Act prohibits anti-competitive agreements and concerted practices, and Chapter II prohibits the abuse of a dominant position, where these have an appreciable effect on trade in the UK. The Chapter I and Chapter II prohibitions are modelled on the equivalent EU competition law provisions, in the form of Articles 81 and 82 of the EC Treaty respectively.
Section 60 of the Competition Act is intended to ensure that, so far as possible, questions arising when applying the Act's prohibitions are dealt with in a manner which is consistent with the treatment of corresponding questions arising in EU law. Consequently, the Office of Fair Trading (OFT) and any court interpreting and applying the Chapter I and Chapter II prohibitions must ensure consistency between their decisions and the principles laid down by the EC Treaty and the European Court, and must also have regard to any relevant statements or decisions from the European Commission.
Greater power for watchdogs
The Enterprise Act 2002 retains the Chapter I and Chapter II prohibitions, together with the existing sanctions for infringing those prohibitions. However, the Enterprise Act, which is due to come into force in Spring or early Summer 2003, will considerably strengthen the enforcement mechanism and the sanctions for breach of the rules set out in the Competition Act.
The Competition Act permits sanctions to be applied against the corporate bodies that engaged in anti-competitive behaviour. Consequently, a party to an anti-competitive agreement in breach of the Act can be fined and sued for damages by any persons adversely affected. In addition, restrictions on competition in breach of the prohibitions set out in the Act are potentially void and unenforceable.
However, the Competition Act does not permit the imposition of behavioural or structural remedies in order to prevent future anti-competitive behaviour. This lacuna is addressed by the Enterprise Act, which allows the OFT, the CC and the Secretary of State for Trade and Industry to interfere in the licensing of copyright, registered designs and patents in the UK. Schedule 25 of the Enterprise Act directly amends the Registered Designs Act 1949, the Patents Act 1977 and the Copyright, Designs and Patents Act 1988 to allow changes in IP rights following a merger or a market investigation.
Merger investigations
The Enterprise Act changes and largely replaces the UK's merger control rules previously set out in the Fair Trading Act 1973. Under the Enterprise Act, a merger may be referred for an in-depth investigation by the CC if it involves either the creation or strengthening of a share of supply of goods or services of more than 25% in the UK, or if it involves the acquisition of a business with an annual UK turnover of more than £70 million.
| Market investigations The Enterprise Act also gives scope for interference with the ownership and exercise of IP rights following a market investigation where no merger is involved. Under the Enterprise Act, the CC can be requested by the OFT to investigate a market where the OFT has reasonable grounds for suspecting that any feature, or combination of features, of that market prevents, restricts or distorts competition in connection with the supply or acquisition of goods or services in the UK, or a part of it. Alternatively, the Secretary of State for Trade and Industry could refer a market to the CC for investigation, regardless of whether any public interest issues are involved. A market investigation by the CC may take up to two years. During an investigation, the CC will ascertain whether there is an adverse effect on competition and, if there is, whether action should be taken by the CC (or by others) to remedy or prevent those adverse effects or any resulting detrimental effects on customers. The Enterprise Act states that detrimental effects will be deemed to arise if existing or future customers will face higher prices, lower quality or less choice of goods or services, or less innovation in relation to such goods or services. In deciding these issues the CC should seek to achieve as comprehensive a solution as is reasonable and practicable and in doing so it may take account of the effects of any action on any customer benefits of the relevant market or its features. In such a situation, the CC will be able to exercise the new powers in relation to IP rights. |
The Enterprise Act will impose on the OFT a general duty to refer a merger satisfying these thresholds to the CC for an in-depth investigation if it has resulted, or may be expected to result, in a substantial lessening of competition in any goods or services market in the UK. The OFT may however decide not make a merger reference if the markets concerned are not of sufficient importance to justify it. Alternatively, the OFT may decide not to make a merger reference if it believes that any relevant customer benefits in relation to the merger outweigh the substantial lessening of competition and any resulting adverse effects that may be expected to arise in relation to that merger.
In order to avoid a merger investigation by the CC, the parties to a merger may offer certain undertakings which are designed to alleviate the substantial lessening of competition identified by the OFT in the markets concerned. These undertakings could relate to the ownership, use or licensing of IP rights that are owned or controlled by the parties to the merger.
In deciding whether to accept such undertakings the OFT should "have regard to the need to achieve as comprehensive a solution as is reasonable and practicable to the substantial lessening of competition and any adverse effects arising from it".
If a merger is referred to it for an in-depth investigation, the CC will also evaluate whether the transaction may result in a substantial lessening of competition. If the CC concludes that this will be the case, it must then decide whether action should be taken (either by it or others) to remedy or prevent the damage to competition. In reaching its view, the CC must have regard to similar aims and factors as the OFT. The CC has the power to accept undertakings from the parties to the merger, but if the parties do not agree to give undertakings the CC could try to require changes to IP rights.
In addition, in limited cases, the Secretary of State for Trade and Industry is given a similar power to accept undertakings and make orders in relation to certain mergers raising a public interest consideration, which is currently limited to defence issues.
Impact on IP rights
The merger review and market investigation situations are both circumstances in which an attempt may be made to interfere with the ownership or exercise of IP rights under changes introduced by Schedule 25 of the Enterprise Act.
Schedule 25 amends the Registered Designs Act 1949 so that, following a CC merger or market investigation, the CC may apply to the registrar to take action. This power arises if the CC considers that it would be appropriate to make an application to remedy, mitigate or prevent a competition problem that cannot be dealt with in any other way under the Enterprise Act. The application must involve conditions in licences granted in respect of a registered design by its proprietor, restricting the use of the design by the licensee or the proprietor's right to grant other licences.
Before making such an application, the CC must publish a notice describing the nature of the proposed application. The CC must then consider any representations made within 30 days of publication by those persons whose interests the CC considers to be affected by the application. This is likely to include any person whose licences would be amended or cancelled, and may include any other person that would benefit or suffer detriment as a result of that change. If, following this public consultation, the CC considers that the application should go ahead, it will apply to the registrar who may then cancel or amend any licence conditions of the type mentioned.
A similar procedure is introduced into the Patents Act 1977, but the scope of the application and final orders available are different (along with the fact that applications are made by the CC to the comptroller). In relation to patents, an application can extend to any matter involving conditions in licences granted under a patent restricting the use of the invention by the licensee or the right of the proprietor to grant other licences, or a refusal by the proprietor to grant licences on reasonable terms. Following such an application, the comptroller may by order cancel or modify any such condition and/or make an entry in the register to the effect that licences under the patent are to be available as of right.
The Copyright, Designs and Patents Act 1988 is also amended. In this case, provisions similar to those introduced into the Patents Act will apply in relation to copyright, design right and performer's property rights.
The Secretary of State would also, under each of the statutes, enjoy similar powers to those of the CC in those limited circumstances in which she becomes involved in a merger or market investigation.
Changes to EU law
There have also been significant changes to the potential impact of EU competition law on IP rights holders. The recently adopted EU Council Regulation 1/2003 (the so-called Modernization Regulation), which comes into force on May 1 2004, gives the European Commission new powers to enforce Articles 81 and 82 of the EC Treaty.
In particular, Article 7(1) of the Regulation states that where the European Commission finds there has been a breach of Articles 81 or 82 of the EC Treaty it may issue a decision requiring the undertakings concerned to end the infringement. As part of that process, the European Commission may "impose...any behavioural or structural remedies which are proportionate to the infringement committed and necessary to bring the infringement effectively to an end".
Although it is not specifically stated, this would seem to allow the European Commission to, for example, require the proprietor of a patent or copyright to grant licences of that IP right, or to change the terms of an existing licence where it was necessary to end a breach of either Article 81 or Article 82 and if there was no less interventionist alternative option.
One comfort for IP holders may be, however, that Article 7(1) of the Regulation states that "structural remedies can only be imposed either where there is no equally effective behavioural remedy or where any equally effective behavioural remedy would be more burdensome for the undertaking concerned than the structural remedy". This would in theory allow the IP holder to argue against the Commission interfering with its agreements in favour of a less burdensome behavioural remedy, which might be for example for the IP holder to change the terms on which it licenses those IP rights to third parties.
Modified playing field
Article 7(2) of the Modernization Regulation allows EU member states and any person (whether an individual or a corporate entity) with a legitimate interest to make a formal complaint to the European Commission which may lead to the imposition of the sanctions mentioned above. This creates an avenue by which any person aggrieved by another's exercise of its IP rights (which may be in the form of an outright refusal to licence or in the precise terms of the licence offered or granted) can seek redress from the Commission. This is no panacea, however, because the Commission retains discretion on whether to intervene in a particular case. In practice, this discretion is normally used to investigate only those complaints that raise the most serious competition issues covering more than one member state.
Nevertheless, Article 7 offers an opportunity to challenge old principles, such as the idea that compulsory licensing of IP rights is limited to exceptional cases like Magill. Given the increasing importance of IP rights and their use to achieve and retain a competitive advantage, Article 7 could be used aggressively by smaller competitors (and especially new entrants) to attack incumbent operators with a view to trying to oblige them to make their technology available. It would be interesting to speculate whether the Commission's current investigation into Microsoft's licensing activities would have had a different result if the Modernization Regulation were already in force.
The interface between IP rights and competition law is still very much a live issue in the UK, as shown by the recent Intel Corporation v Via Technologies case. Here the UK Court of Appeal ruled on an application, in December 2002, that a defence to patent infringement based on Articles 81 and 82 of the EC Treaty should not be automatically struck out.
Further, because these new rights arise under an EC Council Regulation they may offer resellers and parallel traders a way to challenge the rights of trade mark owners under the Trade Mark Directive 89/104/EEC. This may provide an alternative, in cases such as Levi Strauss v Tesco, to arguing that the trade mark holder's rights have been exhausted and/or proving that they consented to the placing of the goods on the relevant market. In the future parallel importers could complain under the new Modernisation Regulation that the enforcement of the brand owners' rights restricts competition and request a compulsory licence as a suitable behavioural remedy.
The European Commission would probably be unsympathetic to such attempts. Indeed, the Commission announced on January 30 2003 its intention to bolster trade mark holders' rights through the introduction of a new Directive to support the fight against piracy and counterfeiting of trade mark goods. However, this may not stop complainants trying.
The way forward
These latest changes in competition law represent significant moves from the enforcement powers previously held by EU and UK competition authorities. They should also be viewed against the background of investigatory powers held by competition regulators, allowing them to search homes and business premises, seize documents and conduct interviews to find evidence of competition breaches.
IP rights holders should be aware of the potential competition law implications of their IP licensing policies and, in particular, should take account of the new scope for the EU and UK competition authorities to challenge their licensing activities.
One way to avoid these kinds of problems is to have in place a comprehensive competition law compliance programme, which would encompass a review of IP licensing policy. Such a policy should allow the company quickly to investigate and address any behaviour incompatible with competition law. A sham or inadequate competition compliance policy, by contrast, will achieve neither objective and may backfire and encourage the competition authorities to impose harsher sanctions than would otherwise have been applied.
© Guy Lougher 2003. The author is a partner with Wragge & Co in Birmingham, UK
