Old Topic, New Concerns? – The Control of Secondary Markets by Asserting IP Rights

1. Old Topic, New Concerns? – The Control of Secondary Markets by Asserting IP Rights Annette Kur, MPI Munich

2. What are we talking about? • Imagine a technically highly sophisticated device (e.g. a computer tomograph used for diagnostic purposes in a hospital) whose maintenance and repair are very costly • The manufacturer of the device will have an interest to exclude others from competing on the secondary market for maintenance and repair services • Several strategies can be used (possibly cumulatively) in order to secure exclusivity, in particular • contractual ties • invoking of IP rights, e.g. in computer programs steering and monitoring the technical interface • This presentation deals with strategies of the second type only

3. Relevance of the issue • The impact of companies asserting control over secondary markets is a familiar topic of the economic and legal (antitrust) debate • The discussion regularly involves the IP/competition law interface; see the following remarks on previous ECJ jurisprudence • As the means developed to control market interfaces become more sophisticated, the debate may gain new momentum in the high tech era • Typical examples are diagnosis software and exchange parts such as printer cartouches (the “Lexmark“ problem) • Similar problems may accrue in the patent/biotech area (complementary patents for herbicide/genetically protected plants; T-GURTs)

4. If there‘s a problem – where‘s the solution? • The economic debate (particularly in the USA) seems to be split about the positive/negative effects of secondary market control • From a European, pro-competitive point of view, control of secondary markets is regularly considered to pose a problem under primary EU law • The following routes can be considered for a solution • application of the competition rules, Art. 82 EC • specific “internal“ limitations of IP rights • regulatory measures within the relevant technical field • Of these, application of competition rules is the most problematic one

5. The IP/competition interface in the light of ECJ jurisprudence, I • Repeated attempts have been undertaken in the past to restrain the market power conferred by IP rights through application of competition law, albeit with very limited success • The general rule is that to deny licensing as such cannot be labelled “abuse“, even when the proprietor holds a dominant position (Volvo/Veng) • An adverse result can only ensue in presence of additional factors (Magill) • These factors must apply cumulatively (IMS Health). In particular, they require that by denying access to protected subject matter, the offering of a new product, for which substantial consumer demand exists, is rendered impossible.

6. The IP/competition interface in the light of ECJ jurisprudence, II • The criteria established in IMS Health have been criticised as unclear and overly restrictive • The argument has been made that the IMS Health criteria should be simplified and streamlined so as to allow competition law to interfere • when access to the protected subject matter is indispensable for competition on the relevant market, and • when this will not distort the aim of dynamic competition • However, this might arguably give rise to a constitutional problem (division of power): A competition agency interfering with conduct that is simply invoking the exclusivity inherent in an IP right that was validly acquired under pertinent law would seem to disrespect a decision which was made by, and lies in the sole competence of, the legislature.

7. A preferable solution: designing and applying IP laws properly, I • In view of the problems connected with application of competition law, the solution should preferably be sought within IP law proper • It is symptomatic that problems with free competition typically accrue where the right is “weak“, or the gounds for protection are doubtful anyhow • One solution might therefore be to deny protection where problems might ensue (see e.g. the American Lexmark-case) • The solution might work where protection is claimed for purely informational data (e.g. process monitoring protocols generated by diagnosis software) • However, it cannot be applied where European law has established a unitary, low threshold (e.g. for software)

8. A preferable solution: designing and applying IP laws properly, II • Where it is not possible to modulate the threshold for protection, specific limitations may be needed to encompass competition interests • One prominent example for that legal technique is the ‘repairs clause‘ proposed by the Commission with regard to design protection of spare parts • However, the example also shows that limitations of that kind – i.e. access to protected subject matter motivated by competition policy reasons – tend to be the object of fierce political debates and resistance by those who want to keep IP protection “pure“ • There is even an international edge to this: the three-step test in Art. 26.2 TRIPS has been invoked against the proposed repairs clause

9. A preferable solution: designing and applying IP laws properly, III • In the software directive, the problems addressed here were taken into account at least to some extent • The mandatory limitation in favour of reverse engineering (Art. 6) allows for the development of interoperable software • In addition, protected software may be used (copied) for the purpose of error correction (Art. 5), either by the authorized user or by a third party authorized by him • However, the existing limitations may not be sufficient, and are not completely water-tight, e.g. in case of (partial) abrogation • In addition, TPMs might pose a problem (though not very likely in Europe) • In case of enhanced problems, clarification or reinforcement of limitations may be needed

10. Alternative solution: Technical specifications • A different type of solution has been implemented in directive 2002/26/EC on waste electrical and electronic equipment (WEEE): Manufacturers of such equipment shall not prevent, through specific design features or manufacturing processes, that electronic waste isre-used • Although the clause primarily aims to protect the environment, it is also efficiently barring attempts to lock up the products concerned – which include copy machines and laser printers - against supply of exchangeable parts by third parties

11. Conclusion • There is no “perfect solution“ for the issue considered here, but the area is certainly one where awareness and constant monitoring are required