I. Static vs. Dynamic Inefficiency
Antitrust laws and the legal regime governing Intellectual Property Rights(IPRs) have evolved as two separate legal regimes. However, both share common goals of promoting economic development, technological growth and consumer welfare. IPRs define variety of legal rights that govern the use of creations involving intellectual efforts of creativity in the field of applied art, knowledge and fine arts.[1]They broadly comprise of trademarks, patents, copyrights, service marks, designs,trade secrets, know how etc.[2] These bundles of rights differ in scope and duration, serving a different purpose and having a different effect. On the other hand, Anti-Trust law seeks to constrain behaviour that may restrict competition to the detriment of consumers. The short run goal of IPRs to encourage innovation and new products and processes in the market finds harmony with the long run goals of antitrust laws to promote consumer welfare through an enabling innovation environment where better quality goods reach consumers.[3]
However, the conflict arises when we consider the issue of static efficiency as promoted by most antitrust regimes around the world and dynamic efficiency which is fostered by the presence of legal (property) rights over innovation[4]. Broadly, there is a conflict between antitrust laws’ objective of promoting competition to maximize current output from society’s existing resources (static efficiency) and maximizing output over time (dynamic efficiency).The conflict stems from the reasoning that the promotion of dynamic efficiency may require that innovators be given exclusive rights, such as patents that reduce static efficiency. This is because IPRs grant exclusivity to the creator or owner of the work and thus confer huge market power to the owner of the property for a fixed period of time. By doing so, it creates boundaries within which competitors may exercise monopolies or market power over their innovation, in conflict with the principles of competitive markets and level playing fields as sought by static antitrust rules. The huge market power acquired by a breakthrough innovation distorts short-run static efficiency (particularly in the absence of substitutes in the relevant market) and enables the monopoly innovator to extract higher prices for his/her innovation. Moreover, the harm caused by market power may extend beyond this, when the protection granted to innovators may be used by them to create entry barriers for potential innovators, thus distorting innovation and its incentives. Thus, when the dominant position made available through IPRs is abused, it creates a conflict between IPRs and competition law.[5]
However, innovation is an important driver of growth in the economy. As economists have recognized, in the long run, technological progress contributes far more to consumer welfare than elimination of allocative inefficiencies[6] caused by non-competitive pricing.[7] This is because of the consumer surplus generated by the availability of a new product (product innovation) that is valued highly by the consumers. In the same vein, process innovations, which are the implementation of a new or significantly improved production or delivery method[8], enable producers to lower their cost of production, the benefit of which can reach consumers in the form of lower prices.[9]A strong IP regime is crucial to promote an innovative environment and the purpose of competitive policy is to promote consumer welfare. This is attained both by protecting price competition and by encouraging innovative competition. The two laws should be in tandem to ensure the rights of all stakeholders including innovators, consumers and industries benefiting from such innovation, are protected.[10] There is a need to strike a balance between the two laws to promote economic development as well as protect consumer interests by fostering innovation, while taking care of the competitive spirit in the industry and/or economy as a whole.
II. Antitrust Enforcement in case of IPRs: Innovation or Competition?
Modern understanding of the interaction between the two disciplines of antitrust and IPRs is that IP and antitrust laws should together aim and work to bring new and better technologies, products, and services to consumers at lower prices. IP laws create exclusive rights to promote innovation by allowing IP owners to prevent others from appropriating much of the value derived from their inventions or original expressions. These rights can also facilitate the commercialization of such inventions or expressions and encourage public disclosure, thereby enabling others to learn from the protected property.[11]
Antitrust laws foster competition by prohibiting anti-competitive mergers, collusion, and exclusionary practices aimed at extension of market/monopoly power. In a dynamic market, it ensures that innovative technologies, products and processes are traded and licensed in a competitive environment. Moreover, antitrust laws do not constitute a violation if the monopoly/market power is lawfully gained on grounds of innovative activities aimed at bringing new and better products and processes into the market.[12] The presence of other substitute technologies or products for the protected technologies (or products) in a dynamically evolving market place, ensures that mere presence of intellectual property should not be taken to presume existence or exploitation of market power under modern antitrust rules. Antitrust and IP laws should thus be perceived as complementary bodies of law that should work together to bring improved products and processes to consumers at best prices.[13]
IPRs could however attract antitrust scrutiny where such rights do create market power and the possibility of exploitation of such market power through exclusionary behaviour by the innovator, facilitated by the acquisition of such rights. Examples include cases where a patented technology constitutes a basis of standard of manufacture for the entire industry or constitutes the only available cure for a particular disease, or refusal to license a patented technology in the absence of good substitutes for the same. Striking a balance between maintaining competition aimed at promoting efficiency by restricting illegal collusive behaviour and exclusionary conduct involving IPRs, and sustaining the incentives to innovate, lies at the heart of antitrust regime concerning IPRs. Failure to address any of these could lead to deterioration of consumer welfare and dynamic efficiency in the economies where innovation is the main propeller of growth.
The Antitrust Guidelines For The Licensing of Intellectual Property[14](US DoJ and FTC) explicitly states that agreements involving IPRs can be analysed using the same antitrust rules applied to agreements involving any other property.While the issues pertaining to intellectual property can certainly be distinct than those concerning other forms of property, however, the same antitrust principles can be used to analyse them. Moreover, the Guidelines state that IPR does not necessarily create market power. This principle has been reaffirmed by the Courts, such as in the Supreme Court’s ruling in Illinois Tool Works Inc. v. Independent Ink, Inc.[15] that a patent does not necessarily confer market power. The guidelines also consider intellectual property to have pro-competitive effects so long as firms combine them with other complementary factors of production such as manufacturing and production facilities and workforce.The owner of intellectual property has to arrange for these facilities to realize its commercial value. Often, the owner finds it most efficient to contract with others for these factors, to sell rights to the intellectual property, or to enter into a joint venture arrangement for the development of the intellectual property, rather than supplying these complementary factors himself.
However, typical differences between other forms of property and intellectual property make it difficult to apply antitrust rules to cases involving IPRs. Intellectual property faces more threats of infringement than other forms of property due to the relative ease with which they can be copied or used without interfering with the ability of others to do the same. Successful acquisition of IPRs require huge fixed costs in R&D and development of innovative products and processes. On the other hand, marginal cost of using such intellectual property is very low (and at times even zero)[16]. It is difficult to define boundaries for the protection afforded by IPRs. The value of intellectual property typically depends more on its combination with other factors of production, such as manufacturing and distribution facilities, workforces, or complementary intellectual property,than does tangible property. Finally, the duration of some, but not all, IPRs is limited.
If one considers the long run goals of antitrust principles of promoting consumer welfare by not just lowering of prices but by also providing improved quality goods, then the objectives of both the regimes can be reconciled. This is because IPRs are necessary for the promotion of innovation due to the appropriability effect(innovating companies’ failure to profit from their own innovations)[17], which ultimately brings new and improved goods to the consumers. The fear of misappropriation due to immediate imitation by rivals precludes optimal innovation incentives which are then protected by IPRs on such innovations. Thus, some market power is a prerequisite for innovations. And thus market power acquired through IPRs itself should not be considered a violation of antitrust rules but only its abuse should be.
This post has been authored by Shaurya Aron of RGNUL, Punjab.
[1]V. Warrier, Conflict between Competition Law and Intellectual Property Rights, 2010 (1) LW 2, The Lex-Warrier, (2010).
[2]James Yang, ‘Four types of Intellectual Property you can use to protect your idea and how to use them’, OC Patent Lawyer, https://ocpatentlawyer.com/four-types-intellectual-property-protect-idea/ (Last visited on 21st July 2018)
[3]Gilbert, Richard & Shapiro, Carl. (1997), Antitrust Issues in the Licensing of Intellectual Property: The Nine No-No’s Meet the Nineties, Brookings Papers on Economic Activity. 28. 283-349. 10.2307/2534758.
[4]Mark Blaug, ‘Is Competition Such a Good Thing? Static Efficiency versus Dynamic Efficiency’, Review of Industrial Organization, Vol. 19, No. 1 (August 2001), pp. 37-48.
[5] Atul Patel et al., Intellectual Property Law and Competition Law, Journal of International Commercial Law and Technology, Vol 6, No 2. 2011.
[6]Jagdish N. Bhagwati, Anatomy and Consequences of Exchange Control Regimes, National Bureau Economic Research, ISBN- 0-884-10487-7, (p. 82 – 126).
[7] Michael A. Carrier, ‘Unravelling the Patent-Antitrust Paradox’, 150 U. Pa. L. Rev. 761, 813 (2002).
[8]R. Simoneiti et al.,Product and Process Innovations: How Are They Defined? How Are They Quantified?Scientometrics, Vol. 32, No. 1 (1995) 77-89.
[9]Leunig, Timothy and Voth, Hans-Joachim, Spinning Welfare: The Gains from Process Innovation in Cotton and Car Production (November 18, 2011). CEP Discussion Paper No. 1050. Available at SSRN: https://ssrn.com/abstract=1961473.
[10]Phillip E. Areeda & Herbert Hovenkamp, Antitrust Law: An Analysis Of Antitrust Principles And Their Application, ¶ 2100 (3d ed. 2007 supp. 2009).
[11] U.S. DEP’T OF JUSTICE & FED. TRADE COMM’N, ANTITRUST ENFORCEMENT AND
INTELLECTUAL PROPERTY RIGHTS: PROMOTING INNOVATION AND COMPETITION (2007), available at: http://www.usdoj.gov/atr/public/hearings/ip/222655.pdf.
[12] Richard A. Posner, Antitrust in the New Economy, 68 ANTITRUST L.J. 925, 930-31 (2001).
[13] E. Thomas Sullivan, The Confluence of Antitrust and Intellectual Property at the New Century, Minnesota Intellectual Property Review, Volume 1 Issue 1 (2000).
[14]Supra, note 11.
[15]Illinois Tool Works Inc. v. Independent Ink, Inc., 547 U.S. 28, 40-45 (2006).
[16] Richard A. Posner, Intellectual Property: The Law and Economics Approach, Journal of Economic Perspectives, Volume 19, No 2, Pg. 57–73 (2005).
[17] Hurmelinna, P., Bergman, J. and Jantunen, A. (2004) ‘Appropriability Strategy in Assessing Future Business Development. Case: Wireless Communication Technology’, Int. J. Learning and Intellectual Capital, Vol. 1, No. 2, pp.226.
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