Innovation: a challenge for law

1. Innovation: a challenge for law Pierre LaroucheProfessor of Competition Lawpierre.larouche@uvt.nl Colloquium “Innovative to Abuse?”Center for Intellectual Property PolicyMcGill University, Faculty of Law29 October 2008

2. Outline • Linking intellectual property (IP) law and competition law • What do we know about innovation ? • Microsoft as illustration • Innovation and IP law • Innovation and competition law • Conclusion TILEC – TILBURG LAW AND ECONOMICS CENTER

3. Linking IP law and competition law • Two areas of law often conflict • Innovation is relevant to both • Starting point • Take a public policy / social welfare perspective • Innovation as main consideration TILEC – TILBURG LAW AND ECONOMICS CENTER

4. What do we know about innovation? • Innovation • Introduction of new ideas (information) • Leading to new products, new processes, etc. • Improving overall welfare • Assumption: Desirable to foster innovation • But… innovation is unpredictable TILEC – TILBURG LAW AND ECONOMICS CENTER

5. What do we know about innovation? • Classical story: • Problem: information has public good characteristics • non-rival, often non-excludable • Potential market failure • Remedy: create excludability • Intellectual property protection • Incentives and rewards • Dynamic efficiency: possibility to recoup investment • Then: wait for innovation to happen • Too good to be true? Perhaps... TILEC – TILBURG LAW AND ECONOMICS CENTER

6. What do we know about innovation? • Social welfare perspective • A broader view of dynamic efficiency • Innovation takes place in markets • Operation of markets must produce the optimal amount of innovation for society • Even if innovation is unpredictable, certain market characterisitics influence probabilities TILEC – TILBURG LAW AND ECONOMICS CENTER

7. What do we know about innovation? • Two main models • Breakthrough innovation • Innovation by leaps and bounds • Innovators compete for the next generation • Winner-take-all  competition for the market • Incremental innovation • Innovation through small steps • Innovators build on each other’s innovations • Firms compete and cooperate  competition in the market • Only models; not exclusive of each other TILEC – TILBURG LAW AND ECONOMICS CENTER

8. What do we know about innovation? • No one model is generally better than the other, it depends on • Type of product • Complementarities • Network effects and compatibility • Customer demand and expectations • Market structure • Microsoft case as illustration TILEC – TILBURG LAW AND ECONOMICS CENTER

9. Microsoft - Interoperability information • Facts • IMS test (“essential facilities doctrine”): 1. Facility indispensable to compete on neighbouring market 2. Refusal to give access excludes effective competition on neighbouring market 3. Newcomer wants to introduce new product for which there is demand 4. Incumbent has no objective justification to refuse • Differing views on innovation underpin debate on 1, 3 and 4 TILEC – TILBURG LAW AND ECONOMICS CENTER

10. Microsoft – Interoperability information • Indispensability • What degree of interoperability is required? TILEC – TILBURG LAW AND ECONOMICS CENTER

11. Microsoft – Interoperability information • New product criterion • Is a mere technical improvement in product features good enough to qualify as a new product? • Microsoft: No, but then how new must a new product be? • Commission / CFI: Yes, but is the threshold then not too low? TILEC – TILBURG LAW AND ECONOMICS CENTER

12. Microsoft – Interoperability information • Objective justification • Is the refusal to disclose objectively justified, for instance because of efficiencies on the side of the incumbent (efficiency defence)? • Microsoft: incentives to innovate undermined if disclosure is ordered • Commission / CFI • Also look at the incentives of competitors • Balancing test (even if not explicit) TILEC – TILBURG LAW AND ECONOMICS CENTER

13. Microsoft - Tying • Facts • Here will look only at objective justification • Reveals true nature of case • Microsoft: Commission ignores benefits flowing from integration • Commission / CFI: Link with standardization and innovation policy • “Standardization… cannot be allowed to be imposed unilaterally by a [dominant firm] by means of tying” • Microsoft cannot be allowed to have the last word • Then what? TILEC – TILBURG LAW AND ECONOMICS CENTER

14. Innovation and intellectual property law • Lessons from Microsoft • Competition law always trumps intellectual property • CFI refuses to enter into debate on IP rights • Is competition law the bogeyman of IP law? • What if it were only pointing to deficiencies within IP law? • Intellectual property protection going beyond socially desirable level (for innovation policy) • Intellectual property law versus alternative means to address market failures TILEC – TILBURG LAW AND ECONOMICS CENTER

15. Innovation and competition law • Lessons from Microsoft • Outcome of competition cases depends on underlying innovation policy • Should be made more explicit • There are many innovation models • Depends on circumstances • Different models in EU and US ? Is this acceptable? TILEC – TILBURG LAW AND ECONOMICS CENTER

16. Conclusion • Putting innovation upfront can help to solve tension between intellectual property and competition law • Innovation also poses challenges to the law • IP law • Move beyond the “garage” paradigm and take broader context into account • Competition law • Consider longer term / dynamic efficiency as well • Also beware of simple models • Deeper challenge: managing uncertainty under the law • Back to ordoliberalism or on with Hayek? TILEC – TILBURG LAW AND ECONOMICS CENTER