Competition, innovation and IP – a modest proposal

On 27 January we co-hosted an event with CIPA. You can find the details here, if you’re interested.  There was a tremendous panel of speakers (I wasn't one of them!) and it was really well attended. The fact that so many people turned out on a chilly Monday in January made me think about the importance of  the issue that the panel was discussing:  whether the Commission’s competition cases are harming innovation. The level of interest suggested to me that perhaps people would be interested in a series of blog posts about the potential impact on innovation of competition law enforcement activities – if you are (and if you aren't) please let me know.

As my earlier blog entries hint (particularly the one discussing the speeches last December by  EU Commissioner Almunia and FTC Commissioner Olhausen – see here), I think that this is an issue that perhaps doesn't get the serious treatment that it deserves in EU Commission policy circles. I have been thinking about the impact of competition cases and policy on innovation for quite a while - on and off between other things - and I've been thinking about the correct balance between IP and competition law since the period around the adoption of the first patent licensing block exemption and the first know how licensing block exemptions (1984/1989 respectively - which makes me feel quite elderly).

Both during that time and subsequently, the way in which the interrelationship between IP, Competition Law and innovation is perceived has changed – a lot.  The EU has not been alone in this. There has been a similar evolution, beginning rather earlier and perhaps going rather further, in the US.  As Steven Anderman and Hedwig Schmidt point out in their excellent book on the Regulation of Innovation,  an Assistant Attorney General commented in 1967:  "I do not believe that the impact of antitrust on patent licensing restrictions has any effect on innovative activity whatsoever…"; no such statement is likely today.

By the early 1980s, the ECJ’s decision in Nungesser (Maize Seeds - June 1982) was part of a general sense of a changing understanding of the way in which IP law and competition law could work together. This evolution has to some extent continued, at least in the field of IP licensing and Article 101 - although recent developments on the draft revised TTBE do give me some pause for thought, even in that context.

However, since the late 1980's developments under Article 86/82/102 in the line of cases beginning with the Volvo v Veng and Renault v Maxicar litigation have made me think that a real tension remains between competition law, as it is evolving in the EU, and giving effective weight in the policy balance to preserving long term incentives to innovate, respecting the way in which IP approaches that challenge.

At the moment, my working theory is that, while competition law as applied in the EU is reasonably well-equipped, at least in principle, to take into account short term direct incentives to innovate and related efficiencies, it is not at all good at taking more systemic incentives and effects into account or in dealing with any long term issues at all.  On the other hand, the IP system has created incentives which are directed both at specific innovation/innovators and have also provided systemic support for innovation (although economists debate how effective the IP system is in fulfilling these goals).   It seems that the difference between the specific and the systemic, the short term and the long term, is a genuine potential source of tension which needs to be properly considered and articulated if tension is to be reduced and a balance struck.

The current public stance of the EU Commission is that all is harmony, as articulated by Commissioner Almunia: "In their different ways, both the patent system and the system that enforces competition law in the EU pursue common goals.  A well-functioning IPR system can in fact promote competition by encouraging firms to invest in innovation.  And both competition policy and the intellectual-property protection system do contribute to create the right framework for innovators."  Joaquin Almunia, Commissioner for Competition: "Intellectual Property and Competition Policy" 9 December 2013.

But I am not sure that things are that simple.  And I don’t think it’s that simple, not because competition law and IP law are necessarily at loggerheads at a policy level, or because competition enforcers do not appreciate the worth of innovation, but because I think that over the years competition law enforcement has focussed ever more closely on the immediate and the short term, leaving considerably less room for more expansive horizons. And I am not alone in being concerned about the current state of the law and the lack of clarity surrounding its development and where it is going. If this is an issue close to your heart it is worth looking at the Chillin' Competition Blog, where Nicolas Petit has posted the slides that he prepared for a talk on this topic in Madrid at the end of October 2013.  

The sort of developments that concern me are things like:

  • the increasing propensity to identify ‘object’ restrictions where conduct appears likely to have a significant effect on price competition;
  • the tendency to identify "normal competition" or "competition on the merits" as closely focussed on short term price, service and quality - and very limited discussion of where the boundaries of that concept should properly lie to account for all aspects of competition in a modern economy;
  • the tendency to preclude dominant companies from engaging even in "competition on the merits", or "normal competition" through the articulation of a "special responsibility" which is so amorphous as to mean anything that seems convenient at the time;
  • lots of "novel abuses" popping up in sectors where innovation is critical to competition;
  • a predisposition to take much greater account of preserving or encouraging immediate and demonstrable short term gains in lower prices or greater competition in quality over less quantifiable potential benefits from innovation in the round; and
  • a real scepticism about claims that periodic competition enforcement which affects the exercise of certain IP rights will actually affect innovation much at all.

The final point is clearly a problem in trying to persuade hard pressed officials that solving an immediate competition concern will give rise to greater competition/innovation difficulties down the line - perhaps the 1967 quote from the US, mentioned above, also reflects some current thinking?

As far as I know, there is limited empirical evidence of quite how competition law enforcement, which could be perceived as undermining some of the incentives built into the IP system, affects innovation. There is also some debate about how effective IP is at encouraging genuine innovation, at least in some sectors.  There are even (at least) two schools of economic  thought on which system of law is best suited to achieve market innovation (of which more in a later blog – particularly if we can persuade a guest economist to write a contribution!).

In view of this, sceptics point out that notwithstanding the Commission’s actions in the sphere of IP (particularly those relating to compulsory licensing and other "novel abuses" over the last 15 or 20 years) the number of patents being granted has continued to rise and there has been no notable slow down of innovation. Some have referred to the tendency of IP-rich companies/innovators to cry "WOLF!" loudly and repeatedly every time any potential competition law encroachment on IP rights is raised; the same commentators have noted that no wolf has yet been spotted.

These are points that need to be thrown into the debate. But also we shouldn’t forget that the broad incentives which are in principle provided by the IP system have been well understood by companies and individuals for decades, while not everyone is so familiar with activities in Brussels and Luxembourg. The evolution of the Article 102 case law, in particular, has been incremental and fairly slow; reaching an understanding of what is "exceptional" use of an IP right or outside the scope of "normal competition" has taken time, and remains unclear.  There will be inevitable delay before the potential pitfalls for IP owners that may emerge from the finer points of cases such as Microsoft or AstraZeneca have any impact (other than a growing sense of unease) outside the largest and most astute corporations.

In other words, the effects may be there, but difficult to spot at the moment, and also masked by other trends. A Commission official once remarked to me, when I pointed out that there was very significant actual competition in a particular sector of interest to DG Comp: "Just because you can point to some competition, doesn't mean that, in the absence of the [conduct complained of], there would not have been more…" and it seems to me that if that is a legitimate approach when justifying a decision to intervene on competition grounds, it cannot simply be dismissed when talking of other important policy issues.

It may well be accepted (and I think that implicitly it has been – although this is also something to discuss) that from time to time competition law acts as a "second tier" of regulation to tweak unforeseen and unwelcome consequences of some aspects of the IP system. In those circumstances, however, given that IP has its own specific mechanisms and policy objectives there should be a much clearer understanding of the issues to be addressed when considering intervention.  Specific enforcement action in particular circumstances is often capable of being justified on the basis of the case law as it currently stands, given the woolly nature of many of the governing concepts. Such specific decisions do not, as far as I can tell, currently have regard to broader concerns about a possible chilling effect or to their impact beyond the parties and consumers directly affected.

In my view there are good reasons to have a public debate, which may take some time, to help develop policy frameworks to help clarify when it may be right to even consider (or reject) intervention in the first place.  Transparency on issues such as the value given to innovation and to systemic concerns could help dispel fears about the role of competition law as "overseer" of IP law.

I suppose that I am suggesting that when competition law is considering intervention in another policy area, which has its own objectives, tools and time frame, there should be a specific commitment to acknowledge that fact.  That could include a clear statement that when deciding on the appropriateness, nature and scope of any intervention in such an area, weight will be given to potential effects on the effectiveness of parallel policies in helping to achieve the same broad goal of consumer welfare.  How that would be done is of course a difficult question, but at least acknowledging the possibility for some tension, rather than dismissing it out of hand, and undertaking to consider the implications would be a step forward.

Over the next few months I’ll come back to this, but comments [by email or on the blog] would be welcome.

Pat Treacy

Comments (1) -

Sophie Lawrance 3/13/2014 1:47:48 PM

An intractable part of the problem you identify is the fact that innovation is so hard to measure, in particular if there is a degree of scepticism over the value / validity of patents, which means that mere patent numbers don’t provide a good guide.  Competition authorities have to be accountable to their political masters (probably now more than ever, whatever Commissioner Almunia may say), and it is difficult to see how they are going to take into account amorphous incentives which can’t be put into a balance sheet.

Pingbacks and trackbacks (1)+

Add comment