United States: The Convergence of the U.S. and European Laws Concerning Compulsory Licensing and Licensing Restrictions Part I

by Darrell Prescott and Katarzyna Buchen
American Conference Institute
November 18-20, 1998 Conference: Technology Transfers

I. Introduction and Summary

Courts in both the U.S. and the European Union have recently required compulsory licensing of intellectual property ("IP") as a remedy for antitrust violations. In the U.S., only last year, the Ninth Circuit required Kodak to provide its competitors in the service market for printers and copiers with access to replacement parts which are covered by Kodak's numerous patents and copyrights.[1] In April of this year, the U.S. District Court for the Northern District of Alabama issued a mandatory injunction requiring that Intel make patent rights, copyrights and know-how available to a former customer.[2] Finally, in June of this year, the Federal Trade Commission ("FTC") filed a complaint against Intel which alleges that Intel's refusal to disclose its IP to its customers was in itself an antitrust violation.[3] These decisions and the FTC complaint against Intel have been based, at least in part, on the well known essential facilities doctrine, which in the past had been used in common carrier and utility cases not involving IP rights.

The antitrust laws of the European Union ("EU") have been somewhat less protective of IP rights than their U.S. counterparts. The European Commission ("Commission") and the Court of Justice of the European Communities ("ECJ") have used compulsory licensing to prevent potentially anti-competitive effects of firms' dealings with one another. The EU's approach has often been justified not only by its desire to foster one European market, but also by a goal to prevent a firm which is dominant in one market from excluding competition and extending market power to an adjacent market.

In the important Magill case,[4]the ECJ required TV stations to license their copyrighted television programs to a company wishing to compile one comprehensive TV guide. The ECJ found that by refusing to provide information about their programs, the TV stations prevented the introduction of a new product and also reserved to themselves the secondary market of weekly TV guides, by excluding all competition in that market. However, according to the EU lower court (the Court of First Instance or "CFI") decision of Ladbroke,[5] the Magill holding applies only where an owner of IP refuses to license its IP, resulting in the exclusion of a potential competitor from a market in which the IP owner already has a dominant position.

The EU decision of SACEM[6] is also worth noting. The case did not involve compulsory disclosure or licensing of IP, but rather, at issue were royalty rates charged by an owner of music rights. The ECJ held that royalty rates charged by an IP owner holding a dominant position in a substantial part of the common market will be adjusted (in that case, lowered) if they resulted in unfair trading conditions. Here, imposing restrictions on royalty rates, the ECJ went further than the U.S. courts, which generally refuse to interfere with IP holder's decisions concerning royalties rates.[7]

The application of the essential facilities doctrine to IP is a relatively new phenomenon. However, mandatory licensing itself is not an entirely new remedy; it is a common feature of consent decrees issued under Section 7 of the Clayton Act. In such consent decrees, the FTC often requires IP licensing as a condition for approval of certain corporate transactions with potentially anti-competitive consequences. Similarly, in Europe technology licenses have been used to resolve competition concerns of mergers under the concentration regulation.[8]

Although compulsory licensing is a reasonable and effective remedy for antitrust violations, courts should be very cautious in this area. The importation of doctrines applicable to a common carrier or public utility and their application to an owner of highly valued IP carries with it the risk that parties who invest in innovation will have no assurance that they will be able to recover their very substantial investments made to develop the IP.

Research and development is inherently a risky enterprise with no assurance that it will lead to commercially viable products and services. Companies which invest in innovation should not be penalized merely because they succeed. In the interest of maintaining the incentive to innovate, mandatory IP licensing should be used as a remedy only when a company's market position results from willful maintenance or acquisition of monopoly power, or from another antitrust violation, not when market position results from superior innovation, skill, industry or business acumen. Courts should not forget that monopolization can be proven only where market share results from willful acquisition or maintenance of monopoly power, not when it results from superior research and development, skill, foresight and productivity.[9]

In light of the compulsory licensing applied by the Ninth Circuit in the Kodak case and other courts to remedy antitrust violations, and the FTC's complaint against Intel, the U.S. approach to the tension between IP rights and antitrust laws -- for the time being -- is gradually approaching that of the EU. In the meantime, however, important differences remain as to the weight accorded IP rights under the U.S. and European antitrust laws, and there is no substitute for analyzing each market on its facts. U.S. firms doing business in the EU should be familiar with the EU block exemptions and with the way particular licensing restraints are treated by European Commission and the ECJ.

Although in both the U.S. and the EU legal principles concerning the conflict between IP laws and antitrust laws are in a state of flux, the following unifying principles can be drawn for both jurisdictions:

(1) The risk of compulsory licensing is greater in both the U.S. and the EU if the licensor and the proposed licensee are actual or potential competitors in a relevant market and a refusal to license will have the effect of removing the licensee as a competitor from the market or preventing it from entering the market.

(2) Courts will hesitate to regulate royalty rates. Therefore, the owner of the IP has the right to extract as royalty whatever rate the market will bear. While there is a risk that member state courts in the EU will intervene and deem royalty rates excessive, this risk is reduced if the same rates are offered throughout the EU and the prospective licensees, therefore, cannot claim discrimination or conduct which tends to impair the free flow of goods or services within the common market.

(3) Exclusive territories, field of use restrictions, prohibitions on sublicensing, non-exclusive grant-backs, confidentiality obligations, and obligations to maintain quality and technical standards are likely to be enforceable in both the U.S. and the EU, although in Europe, care must be taken to ensure that all contract clauses comply with the regulatory requirements of the technology block exemption.