Competition versus Patents – Anatomy of an underlying policy tension

By Bertold Bär-Bouyssière[1]

2013 has seen significant tensions between antitrust enforcement and patents. The various “pay for delay” cases are the most visible development, but there are many others. increasingly, competition authorities challenge the use of patents or virtually ignore them when applying competition law. What is the ideology behind these occurrences? The short article below attempts to depict the opposing parameters.   When DG COMP launched the review of the technology Transfer Guidelines in 2011, it commissioned a study that looked, inter alia, at patent thickets. Patent thickets were also debated at the European Commission’s 2012 European Competition Forum in Brussels. The patent thicket is not at all identical with the “patent cluster” highlighted in the European Commission’s Pharma Sector Inquiry.[2] The patent cluster is a cluster of patents built around a single drug, allegedly for the sole purpose of protecting it against competition. Patent thickets, however, are defined as “overlapping sets of patents requiring that those seeking to commercialize new technology obtain licenses from multiple partners to avoid significant risk of infringement”.[3] Here is why patent thickets are relevant for competition policy debates.   Obstruction to Innovation?   In November 2010, the United Kingdom Prime-Minister commissioned a review of the intellectual property framework in the UK. A specific concern was whether the current framework is sufficiently designed to promote innovation and growth in the UK economy. The key-question was: “Could it be true, that laws designed more than three centuries ago with the express purpose of creating economic incentives for innovation by protecting creator’s rights are today obstructing innovation and economic growth?” The independent report rendered by Professor Ian Hargreaves in May 2011 (“Digital Opportunity”) answers this question with a clear yes. The Hargreaves Report finds that the UK´s intellectual property framework no longer reflects what is needed. Out of the ten recommendations of the Report, recommendation nr. 6 deals with “patent thickets and other obstructions to innovations.” The Hargreaves Report recommends that to limit the negative effects of these barriers to innovation, the government should “investigate ways of limiting adverse consequences to patent thickets, including by working with international partners to establish a patent- fee  structure set by reference to innovation and growth goals rather than solely by reference to patent office running costs.” (Report, para. 6, p. 99) The Report blames the recent increase in world-wide patent applications for causing delays in the granting process. According to the Report, “in some business sectors patent proliferation is causing regulatory blockage in the form of thickets or ‘pre-existing’ patents and pending patents which impede generally innovators wishing to enter markets” (Report, para. 6.5, p. 54). The Report suggests that these patent thickets are problematic for young, innovative firms. The alleged result of the increasing numbers of thickets or patents with overlapping claims is that “businesses working at the leading edge may find it difficult or impossible to know with whom they are in conflict, or whom they should approach for license” (Report, para 6.13, p.60). The Report cites the example of current generation smartphones, which may be covered by hundreds of patents owned by tens of right holders. The Report further states that patent thickets encourage strategic or defensive patenting behavior, particularly where there is fragmentation of IP rights into the hands of multiple owners. According to the Hargreaves Report, “strategic patenting behavior occurs when firms build portfolios of patents for a defensive rather than for innovative purposes, creating a store of bargaining chips in cross licensing negotiations or as a defensive shield to avoid patent litigation.” (Report, para. 6.14, p. 57). Strategic patenting behavior has allegedly also encouraged an increase in the number of weak, low-value patents. The increase is supposedly fuelled by growth in applications for machine tools, pharmaceuticals, telecoms, but most of all for computer technology. While the market has already devised solutions to patent thickets in the form of standards, patent pools and open technology standards, these solutions are not satisfactory from the point of view of the Report. According to the Hargreaves Report, SMEs in particular have reported facing barriers to participation in standardization, arising from costs in terms of participation, which are often prohibitive for small firms. In some cases, royalties stacking is said to present insurmountable barriers to market entry, particularly to SME´s without patents of their own to cross licence. The situation is allegedly even more severe when a single product embodies numerous standards. The Hargreaves Report concludes that standard setting and cross licensing pools are valuable tools to clear patent thickets, but are not a complete answer to the growing problem of gridlock. (The Report, para. 6.30, p. 60) Therefore, Governments should take further steps to resist the growing damage of patent thickets by: Preventing the extension of patenting to business sectors where the incentive effects of patents are low compared to overheads imposed; Resetting financial incentives for assessing whether to renew patents;and ensuring that only high-quality patents are granted (The Report, para. 6.20, p. 58). The Hargreaves Report thus advocates solving the issue by adapting the system, i.e. it proposes solutions internal to patent law. There is not the slightest suggestion in the Report that competition law should be used to make up for regulatory deficiencies.   In its Response of August 2011, the UK Government broadly endorsed the Hargreaves Report.[4] The Patent Informatics Team of the UK Intellectual Property Office, however, published another report on the issue of patent thickets in November 2011 (“Patent thickets – An Overview”).3 This IPO Report takes due note of the Hargreaves Report and its findings, but aims at taking the debate about patent thickets ‘away from an anecdotal and micro study-approach toward a more generalized methodology ‘and assesses whether or not patent thickets present a barrier to entry for companies, particularly SMEs, in the UK. To make a long story short, the IPO Report found that there is no conclusive evidence at this stage to suggest that patent thickets create any barriers to entry, even though companies involved in patent thickets are mainly large multinational companies. However, this is not the end of the story.  

Using the stick

  As an input into the review of the Technology Transfer rules, the European Commission (‘EC’) has published a Study on the assessment of the interplay between competition policy and intellectual property rights protection.[5] The Study takes the recommendations of the Hargreaves Report one step further, although it acknowledges that there is not much concrete evidence of the harm allegedly caused by patent thickets. The Study considers that reforming patent law would likely take a considerable amount of time. Instead, the Study suggests that competition law could or should be used to arrive at quicker results. “The idea is, that the more informed antitrust attitude towards some forms of licensing arrangements might help private IP owners get around patent thickets efficiently.” (Study, p. 16) The Study discusses, inter alia, two types of arrangements that relate to the clearing of patent thickets: cross-licensing and patent pools. In respect of cross-licensing, the Study appears to be of the opinion that ex-post cross-licensing is likely to trigger unilateral effects where the patent rights exchanged are complementary. Since the strength of these unilateral effects increase with the level of variable royalty charged, the Study calls for competition authorities to require that the level of royalties should be commensurate to the expected quality improvement of cost reduction. (Study, p. 18). The Study further appears to consider that allowing cross-licensing of complements ex-post is likely to slow down the pace of innovation. While the Study concedes that this has not yet been established, it nevertheless suggest that if it were, “then one might look rather less favourably at these agreements since their apparent ex-post efficiencies would just mask the fact that they in fact harm innovation incentives… and this without being able to claim any of the synergies that make research joint ventures potentially appealing.” (Study, p. 20). The Study also raises the question whether the current treatment of cross-licensing is not overly lenient compared to the current treatment of the research joint ventures under the Commission Guidelines. While this may indeed be the case, such difference in treatment can in our view be accounted for by the specific technology transfer context in which licensing typically occurs.   The Study goes on to suggest that cross licensing in the context of thicket clearing might have exclusionary effects. This is allegedly the case where some firms “are better able to solve those issues through cross-licensing”, or if firms discriminate in the cross-licensing terms that they offer. Such concerns are set to arise with a special urgency in industry where cross-licensing tends to be via barter arrangements, i.e. where the payment for access to IP rights is made “in kind”. The Study is concerned that firms which do not have a sufficiently broad patent portfolio can find themselves unable to solve patent thicket issues as readily as firms with large IP reservoirs. Under such circumstances, cross-licensing agreements can allow large or dominant firms to leverage their size to gain a further advantage in the market. The Study therefore suggests that such practices may warrant antitrust scrutiny. The Study also suggests that antitrust scrutiny should focus on the question whether the thicket that allegedly requires clearing though cross licensing exists at all. The Study repeatedly raises the question whether patent thickets should really be used as a basis for more lenient antitrust treatment of cross licensing, patent pools and other related forms of agreement. If this interpretation of the foregoing is correct, the Study seems to consider that arrangements in the context of clearing patent thickets serve anticompetitive purposes or at least have anticompetitive effects. Either the patent owner leverages its power through royalties stacking and otherwise excessive clearing terms, thereby obstructing innovation through mostly younger firms, or the cross-licensing creates unilateral or even coordinated effects that are not outweighed by efficiencies, in particular not in the case of ex-post licensing. A patent owner might easily find himself in a situation where either of his choices – whether he refuses to grant a license or decides to grant a license – is subject to antitrust scrutiny. The Study raises significant concerns as to the methodological choices that appear to underlie it. It deals with a number of practices arising in the context of technology transfers. It openly suggests that the Commission or other competition authorities should scrutinize those practices more thoroughly, as they might conceal anticompetitive intentions or at least have anticompetitive effects. To follow this line of thinking would result in casting a general doubt on the legitimacy of the practices concerned, all of which are genuine instruments of technology transfer agreements and intellectual property law. It would take only a couple of steps from these recommendations to a scenario in which patent thickets in the hands of dominant or large corporate organizations are individually or collectively seen as obstructing innovation through young maverick companies, mostly SMEs. This could lead to a line of thinking where a general doubt is cast on the legitimacy of licensing practices that puts in question the good faith of one or both contractual parties. Somehow this would resurrect the shadow of the “tool-box” that according to DG Competition, originators in the pharmaceutical industry keep in their closets to counter threats of competition.   Conclusion   Innovation is of course an important cornerstone of Europe 2020, the EU’s Growth Strategy. Nevertheless, the focus on patent thickets brings about a question raised in the context of the Pharma Sector Inquiry. Should competition law really be used as a stick to fix the problems of regulatory deficiencies? Much of DG COMP’s antitrust enforcement in this area seems to reflect the view that competition law has to remedy such deficiencies. But is that the right way to go forward?

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Bertold Bär-Bouyssière

 

Partner

 

DLA Piper

  Summary Profile Dr. Bertold Bär-Bouyssière is one of the leading practitioners of competition law in Brussels and Germany. Bertold has close to 20 years of experience in the field. A partner with DLA Piper’s Brussels and German offices, Bertold is a Fulbright alumni and admitted to the New York, German and Brussels bars. Bertold currently heads the EU Competition team in Brussels and also has administrative responsibilities as Location Head for the Litigation & Regulatory group in Belgium, a team of 40 partners and lawyers. In 2013 Bertold’s team was nominated for “Belgian Competition Team of the Year” and received a “Special Mentioning” in the Belgian Legal Award Procedure. Bertold serves corporate clients around the world in complex competition law and litigation matters, with a focus on the life science, technology and financial services sectors. Bertold advises at the forefront of competition law developments. He currently represents clients in the EU’s and OFT’s first ever investigations into “reverse patent settlements” in the pharmaceutical sector. Bertold also regularly represents clients in merger control proceedings. He is well connected with the political EU stakeholders in Brussels. Bertold advises in all areas of EU, German and Belgian competition law, including merger control, horizontal and vertical restraints, investigations and State. He has extensive experience in the application of competition rules in a large variety of industry sectors including chemicals, crop protection, petrochemicals, pharmaceuticals, medical devices, gas, electricity, steel, motor vehicles, automotive components, construction equipment, cable television & multimedia, telecommunications, aerospace, satellite launching, tourism, air transport, defence equipment, online gaming, shipbuilding, food processing, fuel card services, financial services and luxury watches. Recent Experience Bertold is advising Swiss luxury watchmaker Audemars Piguet on a day-to-day basis on competition issues linked to Audemars Piguet’s selective distribution system for the sale and maintenance of Audemars Piguet watches. Bertold is currently representing Merck KGaA in the OFT’s first “reverse payment patent settlement” investigation (CE/9531-11 – Paroxetine), in which Merck KGaA is involved in its capacity of the former parent company of Generics UK. Bertold is currently involved in the appeal to the EU Court in Luxemburg against the European Commission’s first ever investigation into “reverse payment patent settlement” (Case T-470/13), in which Merck KGaA is involved in its capacity of the former parent company of Generics UK. Bertold is currently representing Merck KGaA in one of the longest German competition law proceedings relating to an exclusive distribution agreement for the supply of laboratory chemicals between between Merck KGaA and its former subsidiary VWR Inc; this landmark case on novel and unresolved vertical issues went up to the Bundesgerichtshof and is taught in several Universities in Germany. Bertold is currently representing Cathay Pacific Airways in the appeal to the EU Court in Luxemburg against the European Commission’s decision in the air cargo sector (Case T-38/11). Bertold regularly advises life science companies from the US, Switzerland, Germany and Belgium in competition law and other regulatory issues (parallel trade, reimbursement issues, distribution issues). Bertold regularly advises technology companies on issues arising out of the complex relationship between competition law and intellectual property law. Bertold is advising major global hedge funds in EU related, competition and State aid matters Bertold regularly handles merger filings and advises on State aid issues. Recognition Bertold is recommended since 2004 in Chambers’ The World’s Leading Lawyers and Legal 500 as a leading expert for EU Competition and State aid (subsidies) law, with a special praise of his talent for delivering time and cost-efficient high-quality work: “The thing I really like about him is that he forces me to think and try to create solutions. Even though he has the technical knowledge, he gives me the information to make sure I understand what he tells me. The competition rules are really easy but to apply these rules to the real world is difficult. He is very pragmatic and always responsive and reachable.” (Chambers EU 2011). “I give him eight out of 10; he brings a very good academic approach to the legal issues. He’s a good team contributor.” (Chambers EU 2011). “Sources appreciate his pragmatism and clear manner of explaining legal issues to clients.” (Chambers EU 2010). “He is described by peers as ‘extremely charming and knowledgeable – he really has a flawless understanding of competition law.’” (Chambers EU 2010). “He ‘really goes that extra mile for you, meeting tight deadlines’.” (Chambers Global 2010). “He always seeks to understand his clients and shapes his advice to their needs.” (Chambers Europe 2012). “He’s always reachable; he’s the spider in the web. The fact that he’s fluent in three languages is beneficial too.” (Chambers Europe 2012). Clients describe Bertold Bär-Bouyssière of DLA Piper UK LLP as “very responsive, experienced and knowledgeable.” (Chambers 2013). Clients praise “Bertold’s knowledge and analysis of competition law to be of the highest caliber” and give him their “highest recommendation as both a legal professional and a business advisor.” (2013) They say that he is “a strong speaker and presenter, which makes him both an excellent litigator and negotiator” and that “you always have the feeling that your case is in the best hands with him” (2013). Bertold is also listed in the International Competition Law Who Is Who (2014) and in Euromoney’s Expert guide Competition (2014). In 2013 Bertold’s team was nominated for “Belgian Competition Team of the Year” and received a “Special Mentioning” in the Belgian Legal Award Procedure. Additional information Bertold manages DLA Piper’s worldwide legal support to EURORDIS, the European Organisation for Rare Diseases, a patient Organisation. He sponsors the education of two children in Ethopia. Social media Bertold is active on LinkedIn and has reluctantly given up his Facebook activities. Related site Please visit Bertold’s competition law blog on http://bertoldbb-comp.blogspot.com/ Publications Bertold is a prolific writer and his concise and witty legal prose is known for getting to the heart of legal matters. Bertold’s major work is a German language commentary on the State aid provisions of the EU Treaty (3rd edition 2012), but he also excels in shorter formats and in editorial style. Recent and upcoming publications include: “Patently Dangerous” in: Competition Law Insight (8/2009), p. 12-13. “Patent thickets – Should competition law be used as a stick to fix the problems of regulatory deficiencies?” in: Competition Law Insight (2/2012), p. 17-18. Kommentierung Artikel 107-109 AEUV, in: Jürgen Schwarze (Hg.): EU-Kommentar , Baden-Baden, Nomos Verlagsgesellschaft, (3. Aufl.) 2012. “David versus Goliath – Vom Nutzen des Kartellrechts zur Erzwingung von Innovation”, in: Jürgen Schwarze (Hrsg.), Brennpunkte der jüngeren Rechtsentwicklung in der EU (Baden-Baden, Nomos Verlagsgesellschaft, 2013). “Pay …. For Delay? – The Incredible Saga of Revers Payment Patent Settlements” – AB MLex, 2 July 2013. With Dominique Devos, Dodo Chochitaichvili and Pierre M Sabbadini, “Belgium”, in The Private Competition Enforcement Review (6th ed 2013). “Gaming – An Entertainment So Divine”, in: Hilary Stewart-Jones, All-IN@EiG (2013), p. 6. With Boris Marschall, “Green, Greener, greenest, Environmental protection does not escape State aid control”, in Competition Law Insight, November 2013, p. 12. “Eigentumsordnung” (Commentary on Art. 345 TFEU), in: Dr. Hans von der Groeben und Prof. Dr. Jürgen Schwarze (Hg.), Vertrag über die Europäische Union und Vertrag zur Gründung der Europäischen Gemeinschaft, Band 4, Baden-Baden, Nomos Verlagsgesellschaft, 2013 (forthcoming). “Aushöhlung des Patentschutzes durch Kartellrecht – Untersuchung einer Problematik”, Liber Amicorum Jürgen Schwarze, Nomos 2014. Conferences On 3 October 2012, Bertold initiated and organised a high-level event on the 20th Anniversary of the Single Market with participants from the EU institutions, industry and politics. Bertold also frequently speaks at international conferences and intervenes as guest lecture in Universities. Recent and upcoming appearances include: EU Competition Law Enforcement in Innovation Markets – VUB Lecture, 15 December 2011 Vom Nutzen des Kartellrechts zur Erzwingung von Innovation, Universität Freiburg, 21 September 2012 David versus Goliath – Using Competition Law to Force Innovation, DLA Piper Global IPT Conference, Brussels, 24 January 2013 “Reverse” Patent Settlements – UCB Lunch Seminar, Brussels, 13 June 2013 “Reverse Payment Patent Settlements” – US and EU Developments, 13 July 2013 (First Global DLA Piper Webinar) All Quiet at the Generics Front? – The Difficult Marriage Between IP and Antitrust, Darmstadt, 12 December 2012. How to manage your IP Rights Without Infringing Upon Competition Law?  C5 Compliance Conference, London, 22-23 October 2013. What’s left? – Does Antitrust undermine the essence of patents? – Kartellrecht im Kunstverein, Frankfurt, 26 November 2013 How to manage Patents in European Antitrust Swamps – San Diego, 16 January 2014 Expropriation – How Antitrust Undermines Patents and Innovation, C5 Biotech Conference, Amsterdam, 29 January 2014 Unendlich spannend – die nicht enden wollende Saga vom Patentschwan und dem Kartellentchen, Universität Osnabrück, Februar 2014 Should China Follow EU Precedent ? – Antitrust and Innovation, University of Beijing, June 2014 Does Africa Need More Competition Law Enforcement? – AfroEurope Foundation, Nairobi, June 2014 PRESENTATIONS AND SEMINARS Bertold regularly publishes on competition law subjects and speaks at high level conferences. His well-praised Commentary on EC State aid law has been published in a 3rd edition. Professional Experience 2005 – to date: Partner, DLA Piper UK LLP 2002 – 2005: Partner, Coudert Brothers Prior to 2002: Associate, Coudert Brothers (since 1996), Deringer Tessin (1995), Gleiss & Lutz (1994) PROFESSIONAL MEMBERSHIPS

• AmCham EU
• Cercle de Lorraine
• Studienvereinigung Kartellrecht
• Europa-Institut Freiburg i. Br.
• Bund Katholischer Unternehmer
• Registered foreign attorney with the Brussels Bar
• Admitted to the German Bar (Frankfurt am Main)
• Admitted to the New York Bar

 

Related Event

 

Tuesday, January 28 to Wednesday, January 29, 2014

Tags: Litigation, Patent, pharma