Ecuador: Crossroad: Competition And IP

Last Updated: 26 July 2017
Article by Diego Ramírez

Whereas intellectual property laws protect the investment, effort and ingenuity in a specific creation of the intellect by giving an exclusive right to benefit from it, thus excluding others (even actual or potential competitors), competition policy and laws aim at increasing welfare by promoting vigorous competition and limiting exclusionary practices. 

This creates a tension, although now it is generally accepted that both legal regimes do in fact spur innovation that ensures a healthy competition and foster new technologies, products and services at lower prices.

However, the need to navigate through these two very different legal regimes does raise some concerns about the potential conflict, particularly in a jurisdiction like Ecuador where the current formulations of both are relatively new.  We offer in this article a glance at the crossroad between intellectual property law and competition law.

Laws for competition and IP

The Ley Orgánica para la Regulación y Control del Poder de Mercado (Law for Regulation and Control of Market Power, "LORCPM")  is the main legal statute in Ecuador regarding protection and promotion of competition (also known as antitrust in several jurisdictions). LORCPM prohibits abuse of market power (akin to dominant position in some jurisdictions), anticompetitive agreements and unfair competition, and establishes the Superintendencia de Control del Poder de Mercado (Superintendence for Control of Market Power, "SCPM") as the supervising agency that investigates and imposes penalties for violations under LORCPM.

Intellectual property ("IP") is regulated by the recently enacted Código Orgánico de la Economía Social de los Conocimientos, Creatividad e Innovación, also known as Código Ingenios (Organic Code of the Social Economy of Knowledges, Creativity and Innovation, also known as Ingenuity Code, the "IP Code"), which replaced the Intellectual Property Act of 2006 and confirmed the Instituto Ecuatoriano de Propiedad Intelectual (Ecuadorian Institute for Intellectual Property, "IEPI") as the supervising agency that regulates and controls IP in Ecuador.   However, Decision 486 of the Andean Community ("Decision 486") establishes the legal framework for IP in the countries that are members of the Andean Community (comprised of Bolivia, Colombia, Ecuador and Peru). 

LORCPM contains specific provisions regarding the abuse of intellectual property rights ("IPR") as an abuse of market power; it is unclear if SCPM will require a prior determination by IEPI of abuse of IPR to conclude that there is an abuse of market power pursuant to LORCPM, or the burden to establish itself that a use of IPR constitutes an abuse that violates LORCPM.  In general, it seems that doctrine and international precedents may help define the burden.

LORCPM also establishes that use of IPR may constitute unfair competition when it affects economic efficiency, consumers, general welfare or competition in the marketplace.

Decision 486 contains several provisions referring to unfair competition related to IP, mostly as acts to generate confusion, misappropriation of trade secrets and false statements regarding the quality or characteristics of products.

In addition, the IP Code contains some provisions regarding the grant of compulsory licences as a remedy for anticompetitive practices and also stressing that the exercise of IPRs must not unlawfully restrict competition.

Investigations by the Competition Authority with a strong IP component

Most of the antitrust cases involving IP that have been filed before SCPM are regarding unfair competition, and many of them have been dismissed on the grounds that there is not sufficient evidence of potential violation of LORCPM and involve exclusively  IP law.

A reduced amount of cases involving IP are investigated for alleged abuse of market power, and to the best of our knowledge there has not been a single investigation for alleged anticompetitive agreement involving IP. 

Although SCPM has not directly addressed the issue of IP and competition, it has been very active investigating the pharmaceutical sector which relies heavily on IP protection. The final outcome of these investigations will allow a better assessment of standards applied by SCPM in regard to IP rights and competition law, and in the event of judicial review of the decisions, how much will judges be willing to accept those standards or impose different ones.

The IP Code aims at promoting wider dissemination of IP (although perhaps at the expense of reducing protection to IP owners), and also seeks to enhance competition by promoting cross-licensing, compulsory licensing and other measures that would limit exclusionary enforcement of IP.

Anticompetitive IP conducts

Any limitation on trading imposed by a licensing agreement could be considered an anticompetitive limitation either as an abuse of market power or an anticompetitive agreement, if unjustified from a perspective of economic efficiency or welfare; for the first case a determination of actual market power would be required, whereas for the latter the agreement imposing the limitation may be sufficient.

It is important to take into consideration that the simple exercise of an IP right is far from being an infringement of the LORCPM; a test should be applied to determine if the exercise of this right produces an anticompetitive effect, such as facilitating price fixing (an anticompetitive practice per se), foreclosing access to an important input, reducing output or dividing the market among undertakings that would otherwise have competed. The relevant test is therefore if the restraints in a licensing agreement would be anticompetitive or affect the general welfare or that of consumers.

i Refusals to license

Under LORCPM, refusals to license could be considered under the broader category of refusals to deal or supply. Either as an abuse of market power or as an anticompetitive agreement, refusals to deal or supply are considered an infringement to LORCPM if they are deemed unjustifiable from a competition perspective. To date there has not been a case where the limits between justifiable and unjustifiable refusals to deal or supply have been established, although such a violation has been alleged (regarding precisely IP rights) but the allegation was considered baseless as the IP owner did offer a licence on fair, reasonable and non-discriminatory terms whereas the claimant insisted on its own terms. 

A refusal to license, if the IP content or supply is deemed "must have" in order to compete, could result in an exclusionary effect that would more likely be found to be in violation of LORCPM.

ii Unfair and discriminatory licensing

Just like refusals to license, any unfair (i.e., exploitative) and discriminatory licensing could be in violation of LORCPM if  it puts third parties on equivalent transactions in an uneven position in a market downstream.

iii Standard-Essential Patents

In general terms, all actions to obtain an increased revenue or advantage by one undertaking that is dominant in a relevant market ("unjustified extraction of consumer surplus"), whether they involve an IP right or not, could result in liability for abuse of dominance under LORCPM.

In particular, LORCPM addresses the misuse or abuse of intellectual property rights as a separate, specific violation. 

The main national standard-setting organisation is a public agency (INEN) that does take into account the recommendations of the industry, and therefore may decline to include in a standard a patent held by one undertaking that would be detrimental to others, although there is no requirement or precedent for demanding licensing of Standard-Essential Patents by INEN. These standards are voluntary unless referenced in technical regulation, which is mandatory (a mandatory nature would not exempt from compliance with LORCPM so this would not be available as an effective defence).

Owning an SEP does not automatically result in dominance in the relevant market pursuant to the law, statutes or (limited) case law in Ecuador. However, it could be alleged that the owner of the SEP is in the position to impose entry-barriers and to limit access to technology, and that there are no acceptable substitutes (precisely due to the fact that it is an SEP), which are some of the criteria to determine dominance.

The owner of an SEP may seek injunctive relief, and once infringement is proven, it should ordinarily be granted unless there is an overriding public interest; an obligation to license under FRAND terms is not a viable defence at this stage.

Any potential violation of antitrust provisions in the LORCPM should be brought in a separate claim that would be initially adjudicated administratively by the SCPM, whose decision is subject to judicial review.  Unfortunately, there is no established policy or concurring precedents to determine whether seeking an injunction by the owner of an SEP would incur a violation of antitrust law.

Licensing under fair, reasonable and non-discriminatory (FRAND) terms of an SEP is not mandatory nor ruled out by Ecuadorian law. Private standard-setting organisations may contractually demand licensing under FRAND terms, although an agreement to regulate quality, when not pursuant to a national or international standard, may also be a violation of antitrust regulations (Article 11.10 of the LORCPM).

However, unjustified refusal to deal (i.e., to license an IP right), demanding exploitative prices (i.e., outsized royalties) or establishing different conditions for similar considerations (i.e., discriminating) are violations of antitrust provisions pursuant to the LORCPM, and would apply to the owner of the SEP if deemed to be dominant in the relevant market, or if it is the result of an agreement with other undertakings.

iv Anticompetitive or exclusionary royalties

There are general provisions that prohibit 'exploitative prices', 'exploitative practices', 'exclusionary practices', and the abuse of IP rights that may be invoked against anticompetitive or exclusionary royalties regarding any IP right, but little guidance as to how and when a price (i.e. royalty) may be deemed exploitative, or a 'safe harbour' or threshold for prices to be established without concern.

v Other Abuses

v.a) Sham or vexatious IP litigation

Vexatious litigation regarding IP rights can be considered a violation of the LORCPM both as an abuse of IP rights (Article 9.17) or the abuse of legal proceedings that limit the access or permanence in the market of competitors (Article 9.18), if the claimant enjoys dominance ('market power') in the relevant market.

Furthermore, sham or vexatious IP litigation could also be considered an unfair practice that also violates antitrust law because it constitutes an abuse of the legal or administrative proceedings to prevail in the market (Article 27.9 of the LORCPM).

v.b) Anticompetitive settlements of IP disputes

There are no special provisions regarding settlement agreements terminating an IP infringement dispute; consequently, any settlement agreement would be reviewed under the general provisions of the LORCPM, especially if the IP owner has dominance in the relevant market.

Any settlement agreement of IP disputes that limits market entry (i.e., generic producers in the pharmaceutical sector) could violate LORCPM as it may be deemed to constitute incitement to refuse selling or delivering goods (Article 9.10), the conditioning of acts or agreements to acceptance of terms that according to their nature or commercial use are not related thereto (Article 9.13), an exclusionary practice (Article 9.15), abuse of an IP right (Article 9.17), unjustified implementation of legal actions that result in restricting access to the market of actual or potential competitors (Article 9.18), or finally preventing or impairing market access to actual or potential competitors for reasons other than economic efficiency (Article 9.22).

Furthermore, even if the owner of IP rights does not enjoy dominance, the settlement agreement could breach LORCPM if it imposes entry barriers (Article 11.18) or prevents or impairs market access to actual or potential competitors for reasons other than economic efficiency (Article 11.20).

Conclusions

There are few cases with final rulings that address the crossroad between the IP Code and LORCPM. Therefore, doctrine and international case law has continued to be used as a reference both by the authority and private parties, to help better understand the interplay, and we would recommend careful analysis of the risks involved with aggressive IP measures, to ensure that it does not run afoul of competition law (LORCPM).

The promotion and protection of generic drugs will continue to be an important focus of SCPM, which has warned patent or brand drugs owners to refrain from using their IP rights in order to stop or delay the entrance of generic drugs. 

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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