Refusal to Supply

Refusal To License Intellectual Property Rights In The Wake Of The Microsoft Case

Adrián Crespo Velasco

CEIPI Master Thesis (Director: Prof. Christophe Geiger) Strasbourg, September 2011

Table of contents Table of cases 1 Section 1 – Introduction 3 Section 2 – A general overview on refusal to supply 6 Section 3 – Refusal to license IPRs: from Volvo to Microsoft 8 3.1 Volvo 9 3.2 Magill 10 3.3 Ladbroke 12 3.4 IMS-Health and related decisions 13 3.5 Microsoft Section 4 – Excursus: refusal to supply tangible property versus 26 refusal to license IPRs. Is there any justification for the different treatment? Section 5 - Microsoft and the impact of compulsory license on 29 dynamic efficiency 5.1 Pro mandated access arguments 30 5.2 Contra mandated access arguments 31 5.3 The “Schumpeterian school of competition policy” against 33 ordoliberalism 5.4 Any help from posterior developments? 34 5.5 Recapitulation 37 Section 6 – The “incentives balance test”: what future for effects- 37 based art. 102 review? 6.1 The perils of legal uncertainty and false positives 38 6.2 Price matters matter 40 6.3 Democratic legitimacy? 41 Section 7 – Do we see the tree or do we see the forest? 42 Bibliography and references 45


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Table of cases European Court of Justice

C-78/70 Deutsche Grammophon Gesellschaft mbH v Metro-SB-Großmärkte GmbH & Co. KG. [1971] ECR 00487

C-6/73 & 7/73 (joined) Istituto Chemioterapico Italiano SpA and Commercial Solvents Corporation v Commission [1974] ECR 00223 C-27/76 United Brands v. Commission [1978] ECR 00207

C-144/81, Keurkoop BV v. Nancy Kean Gifts BV [1982] ECR 02853

C-311/84 Centre belge d'études de marché - Télémarketing (CBEM) v SA Compagnie luxembourgeoise de télédiffusion (CLT) and Information publicité Benelux (IPB) [1985] ECR 03261

C-283/87 AB Volvo v Erik Veng (UK) Ltd. [1988] ECR 06211 C-241/91 and C-242/91 (joined) RTE and ITP v Commission of the European Communities [1995] ECR I-00743

C-7/97 Oscar Bronner GmbH & Co. KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG. [1998] ECR I -07791

C-418/01 IMS Health GmbH & Co. OHG v NDC Health GmbH & Co. KG. [2005] ECR I-05039

C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v GlaxoSmithKline plc and GlaxoSmithKline AEVE. [2005] ECR I-4609

C-468/06 to 478/06 (joined) Sot. Lélos kai Sia EE and Others v GlaxoSmithKline AEVE Farmakeftikon Proïonton, formerly Glaxowellcome AEVE. [2008] ECR I-07139

General Court (former Court of First Instance) T-69/89 RTE v Commission [1991] ECR Two-489 T-201/04 Microsoft Corp v Commission of the European Communities [2007] ECR Two-03601 Decisions of the European Commission

2007/53/EC: Commission Decision of 24 May 2004 relating to a proceeding pursuant to Article 82 of the EC Treaty and Article 54 of the EEA Agreement against Microsoft Corporation (Case COMP/C-3/37.792 - Microsoft) OJ 2007 L 32-

94/19/EC: Commission Decision of 21 December 1993 relating to a proceeding pursuant to Article 86 of the EC Treaty (Sea Containers v. Stena Sealink - Interim measures) OJ 1994 L 15.

Decisions of the Federal Trade Commission Dell Computer Co, C-3658 of 20th May 1996 Supreme Court of the United States Aspen Skiing v. Aspen Highland Skiing, 472 U.S 585 (1985)

Verizon Communications Inc. v. Law Offices of Curtis V. Trinko 540 U.S 398 (2004)


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CSU v. Xerox

United States v. Microsoft Corp, 253 F.3d 34 (D.C Cir. 2001).

Bundesgerichtshof (German Federal Supreme Court) BHG Urteil 13th July 2004 (KZR 40/02) Italian competition authorities and Italian courts Autorità Garante della Concorrenzia et del Mercato, Merck Principi Attivi (Case A364, decision no. 14388 of 15 June 2005) AGCM Bulletin no. 23/2005 p. 7. Tribunale Amministrativo Regionale di Lazio, decision no. 341 of 3 March 2006.


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Adrián Crespo Velasco*

1. Introduction

Despite the scarcity of actual cases, very few issues in competition law have attracted more the attention of law students, scholars, specialized practitioners and other members of the epistemic community than the interface between Intellectual Property Rights (IPRs) and competition law, more precisely abuse of dominant position under Article 102 TFEU. This inter-face is a thorny issue that raises deep questions about the role of both IP and competition law in our economy.

IPRs and competition law undoubtedly pursue the same objective: the promotion of innovation1 for the benefit of consumer welfare. As such, they are labeled by some commentators as complementary policies2, while others cautiously prefer to speak of “different, yet synergic objectives”3. Yet they pursue that goal by seemingly opposed means. IPRs operate ex-ante, directly through statutory rules, conferring the right holder an exclusive (thus monopolistic) control over an intangible asset. Therefore, they spur dynamic efficiency for a limited period of time; when protection expires, the innovation becomes unlocked and allocative efficiency and competition can thrive again4. Competition law, on the opposite, acts as an ex-post remedy, forcing changes in behavior and / or market structure to heighten competition between undertakings, in turn increasing consumer welfare.

Therefore, their common goal notwithstanding, the different means used by these two legal instruments, as well as their intervention at different stages of the economic lifecycle of an asset, can place them on collision course. Particularly, this conflict arises when ownership of

* Clifford Chance LLP Barcelona, CEIPI alumnus. This paper was written as a master thesis under the direction of Dr. Christophe Geiger of CEIPI. 1 For the rest of the paper, the term “innovation” will surface many times. Yet, what is “innovation”? From an organizational perspective, Baregheh et al. (2009) define innovation as a “multi-stage process whereby organ-izations transform ideas into improved products, service or processes, in order to advance, compete and differentiate themselves successfully in their marketplace”. This definition is intimately close to the notion of dynamic efficiency in the marketplace, which is key for this paper. Following Levêque and Menière (2003), we shall define dynamic effi-ciency it as the “amelioration and renovation of production techniques and goods over the course of time” – as opposed to “static” or “allocative” efficiency, which deals with the short-term maximization of output from a certain set of resources, that is to say, striving Pareto-optimality in price and output. See A. Baregheh, J. Rowley and S. Sambrok, Towards A Multidisciplinary Definition of Innovation (Management Decision, Vol. 47 No. 8, 2009); F. Lévêque and Y. Ménière, Économie de la propriété intellectuelle (La Découverte Vol. 375, 2003) 2 H. Schweitzer, Controlling The Unilateral Exercise of Intellectual Property Rights: A Multitude Of Approaches But No Way Ahead? The Transatlantic Search For A New Approach (European University Institute Working Papers 2007/31, 2007), p. 2. 3 Ghidini, Intellectual Property and Competition Law (2006), p.115; quoted by Schweitzer (2007) at note 8. 4 In this imperfect way, the “IP conundrum” is (tentatively) solved: duration of IP rights ought to be simultaneously infinite and non-existing. See Levêque (2003). Note that Pareto optimality cannot be achieved, for the original right holder will always be worse off after the exclusive right becomes a common good.


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an IPR, thus monopolistic control of an intangible asset, leads to having a dominant position5, and companies exercise their rights as an instrument to engage in anticompetitive behavior against rivals, abusing said dominant position. In this case, the unrestrained use of IPRs might be at odds with competition law, more precisely with Article 102 and its domestic equivalents. In these situations, competition law believes that it may intervene to limit and re-channel this inappropriate usage of intellectual property. As the U.S Court of Appeals stated in United States v. Microsoft Corp, arguing that there exists an absolute, unfettered right to use IP as one wishes is equivalent to owning a baseball bat and pretending to use it freely without having to worry about tort6. In particular, this problem presents itself in a when IPRs become the tool to leverage market power from market to market. This happens when one undertaking, which is active on two dependent products markets (such as a vertically integrated firm, or a firm active on both the main product market and an aftermarket) holds captive the secondary market by virtue of the exclusive control that IPRs give it over an indispensable production input located on the upstream market. Thanks to this exclusive control granted by copyright, design or patent, the dominant firm can ban rivals from using the innovation on the downstream market, gaining a competitive advantage over them. A leverage phenomenon takes place: the absolute power attained on the primary market is exercised to force competitors out of the primary market, or to prevent their access altogether. The question for competition authorities is if they can force undertakings to supply competitors with IPRs (or, for that matter, to let them access their tangible property) in order to ensure the market is competitive. Prima facie, this might seem deeply at odds with two of the great dogmata that are ingrained in our beliefs about a market economy: first, that intellectual property, as any other property, should be protected from any encroachment; second, that companies should be free to deal or not to deal with whoever they wish on whichever terms they wish; third, that exclusivity it is the very essence of IP rights. IP rights are conceded precisely to ban others from freeloading on our intellectual creations. Therefore, the notion of a competition authority ordering a firm to supply goods or services to another one, in particular intellectual creations might seem aberrant to us. It may even bring along echoes of socialist central planning More particularly, the legitimate concern arises that forcing the dominant firm to supply a competitor might reduce its incentives to invest and innovate. It is commonly argued that if an undertaking must share the benefits of costly innovation with its fellow competitors, it will innovate less than if it were free to choose with whom to deal and on which terms. It is reasonable to believe that if a firm is considering investing in expensive R&D for a new product, it will be less inclined to do so if it faces the threat of having to share the fruits of such investment. Indeed, it is quite counterintuitive for us to think that such type of market intervention might be turned for good, using it to foster more competitive markets.

5 Contrary to what we may intuitively think, owning an IPR does to mean having a dominant position within the meaning of Article 102. This idea was stressed as early as 1971 on the occasion of Deutsche Grammophon (Deutsche Grammophon Gesellschaft mbH v Metro Grossmärkte GmbH & Co. KG [1971] ECR 00487). Owning an IPR solely means having monopolistic control over an asset, but not necessarily over a market. The notion of dominance does not refer strictly to the object of the IPR, but to a geographical and product market. In other words, the acquisition of market power depends on market conditions for the products embodying the IP rights. Only when the IP right in question is the absolute key production input will it allow dominance, provided that all other generic conditions for the application of Art. 102 are met. 6 United States v. Microsoft Corp, 253 F.3d 34 (D.C Cir. 2001).


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Yet this ordoliberal7 idea has been repeatedly embraced as part of the so-called “essential facilities doctrine” by the European Commission (as well as, to a lesser extent, by other competition authorities), which has repeatedly ordered forced undertakings withholding their essential production inputs (including IPRs) to make them available to their competitors in order to ensure that the downstream / related market remains competitive. This doctrine, which remains highly polemic, raises profound questions about how dynamic, innovative markets work and, more in general, about the need for the intervention of competition law in our economy. The goal of this paper is to explore this interface between Intellectual Property and abuses of dominant position. I seek to explain how the “essential facilities” doctrine works in light of its most notable European cases, putting a special accent on the landmark Microsoft judgment. In particular, I seek to explore the current state of economical analysis on innovation incentives, judging whether compulsory licensing of IPRs is detrimental or rather beneficial for the competitive landscape and, on a more general note, if competition authorities are the right fora to subject IPRs to a welfare-theoretical analysis. There is a belief that IPRs, much like baseball bats, are too blunt of an instrument; an instrument that is sometimes ill-defined from an economic perspective, unsuitable to maximize welfare in every situation, and thus in need of being “fine-tuned” on an ex-post basis by regulators. In this vein, I shall formulate the question whether competition law is the appropriate tool to overcome the limitations of the institutional IP system. This paper is structured as follows: after this first introductory section, Section Two provides a broad overview over the European doctrine on refusals to supply involving tangible facilities, in order to allow a better understanding the specific problematic of IP-related refusals. For this purpose, this paper assumes that the reader is acquainted with the basic notions of competition law, and does not explain the basic workings of Article 102 TFEU, such as geographic and product market definition, notion of dominance etc. Section Three is a summary of all essential facilities cases involving intellectual property, from the seminal Volvo right up to Microsoft, which is discussed with particular attention to detail. The paper argues that Microsoft entails a watering down of previous benchmarks for refusal to supply, and denounces the European Commission’s misinterpretation of the essential facilities doctrine incurred when defining the indispensability of the essential input. Section Four is an excursus that looks deeper into any possible legal, economical or policy justifications for a different jurisprudential treatment of IPRs as opposed to essential physical infrastructures, concluding that both types of assets shall enjoy equal treatment from a competition law perspective. It also serves as a bridge to the next section. Section Five turns again to the Microsoft case and examines its core substantial question: whether and how compulsory licensing of IPRs affects innovation incentives and thus dynamic efficiency. It further tries to explain the economical trade-offs that regulators and competition authorities must balance when mandating access to an essential facility. More precisely, it focuses on the conflict between the ordoliberal, structuralist approach and the Schumpeterian conception on monopolistic markets. The paper looks at the state of the art of law and economics, balancing 7 See infra, section 5.3, for an elaboration on the European Commission’s ordoliberal bias. Ordoliberalism is a current of pro-free market macroeconomic thinking, originated at Freiburg University after World War Two, which advocates the need for the State to intervene in the economy in order to eliminate market failures, thus allowing the market to attain its highest allocative efficiency. In other words, it is the task of the state to act, not directing production, but fostering competition. Both economists and legal scholars agree that this idea has permeated the European approach on competition law since its very inception. For an enriching analysis of the deep impact of ordoliberalism on competition law and the European economic integration in general, see D.J Gerber, Competition Law and International Trade (Pacific Rim Law & Policy Journal, Vol. 4 No.1, 1995).


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different views on how market structure affects innovation. Section Six in turn looks at the bigger picture through an institutional and policy prism, judging if an effects-based, prospective analysis of the competitive landscape is a suitable technique for Art. 102 review and what disadvantages, perils and possible malformations it may entail when applied in practice by competition authorities. Lastly, Section Seven summarizes the findings of the paper and the author’s view on the subject, In essence, this paper argues that the European Commission, through an ill-conceived interpretation of interoperability, erroneously applied the essential facilities doctrine – yet at the same time it provided a modernized analysis framework for refusal to supply which should be considered carefully. Therefore, the paper concludes that it even if some aspects of the Microsoft judgment deserve to be criticized, is desirable for European competition policy to cautiously advance on the same path explored by said ruling. 2. A general overview on refusal to supply This paper focuses strictly on abuses of dominant position consisting in a refusal to license an intellectual property right. However, before dwelling into the intricacies of the particular subset of cases involving IP, it is necessary to understand the very notion of “refusal to deal” or “essential facilities”8 and its application in “regular” cases (that is, involving tangible assets) in ECJ judicial practice. The present Section shall briefly explain the most important case-law. In 1974, the Commercial Solvents9 case kick-started the European doctrine on refusals to supply. Drug manufacturer Zoja purchased raw material aminobutanol, whichit used for the manufacturing of drug compound ethambutol from quasi-monopolist Commercial Solvents. In 1970, Commercial Solvents vertically integrated the production of ethambutol, disrupting supplies to Zoja and other third parties. Since Commercial Solvents produced virtually all aminobutanol on Earth and synthesising ethambutol from other compounds was extremely costly, there was no realistic alternative. On appeal, the ECJ for the first time “encapsulated” the notion of abusive refusal to supply:

“an undertaking which has a dominant position in the market in raw materials and which, with the object of reserving such raw material for manufacturing its own derivatives, refuses to supply a customer, which is itself a manufacturer of these derivatives, and

8 For the rest of this paper, I will assume that the difference between the “refusal to deal” and “essential facilities” concepts is purely terminological and semantic. In my opinion, they both refer to the same phenomenon, an abuse created by the captivity of an essential production input by a dominant undertaking, a captivity which is in turn leveraged on a secondary market in order foreclose competitors. In this vein, see R. Whish, Competition Law (Butterworths, 3rd edition, 2001), p. 615; D. Gerardin, Limiting The Scope Of Article 82 Of The EC Treaty: What Can The EU Learn From The US Supreme Court’s Judgment In Trinko In The Wake Of Micosoft, IMS And Deutsche Telekom (Common Market Law Review, December 2005); also C. Ritter, Refusal To Deal And Essential Facilities: Does Intellectual Property Require Special Deference Compared To Tangible Property? (World Competition: Law and Economics Review, Vol. 28 No. 3, September 2005), p.3. These papers also present arguments of scholars defending a distinction between the two notions. In any case, this dispute has little or no impact on this paper, which assumes that Commercial Solvents, Télémarketing and Bronner, as well as any other lesser-known cases (i.e. Liptons/ Hugin etc.) constitute a single stream of case law, and uses indistinctly the terms “essential facilities” and “refusal to supply”. Actually, from a semantic point of view, “essential facilities” is more suited for tangible infrastructures like pipelines, docks, networks (that is to say, facilities!), whereas “refusal to supply” appears to be the better expression for raw materials, IP rights, time slots etc. 9 Joined cases C-6/73 and C-7/73Instituto Chimioterapico Italiano SpA and Commercial Solvents Corporation vs. Commission of the European Communities [1974] ECR 00223 (hereinafter Commercial Solvents).


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therefore risks eliminating all competition on the part of this customer, is abusing its dominant position”10.

This approach was later confirmed in Télémarketing11, which involved similar facts. Centre Belge, a Belgian telemarketing company, bought advertisement slots from Belgian TV monopolist RTV. Later on, RTV integrated a telemarketing business line into its activities, and then ceased selling advertisement minutes to Centre Belge. Thus, the three key conditions for a finding of abuse in the context of physical essential facilities already crystallized as early as Commercial Solvents and Télémarketing: I) the indispensability of the ancillary input Two) the risk of foreclosure for competitors on a downstream or dependent market and TwoI) the lack of objective justification. Another relevant case is Stena Sealink12, an EC decision which was not appealed before the CFI. The Stena Sealink group had vertically integrated two connected lines of business: port operation and ferry lines between the UK and Ireland. Transport company Sea Containers (SC) complained before the EC, submitting that Stena Sealink abused of its dominant position as the operator of the port of Holyfield, because it did not allow SC to use the port infrastructure on a reasonable basis for its ferry activities. Holyfield channelled between 50 and 60% of the traffic passing between the UK and Ireland (the second-best maritime alternative being a journey twice as long from Liverpool) and thus had become an essential infrastructure for the ferry market. The Commission found that Stena Sealink had abused of its dominant position as a port operator. It stated that“…the owner of an essential facility which uses its power in one market in order to protect or strengthen its position in another related market, in particular, by refusing to grant access to a competitor, or by granting access on less favourable terms than those of its own services, and thus imposing a competitive disadvantage on its competitor, infringes Article 86”13. During the course of the proceedings, Stena Sealink rectified its conduct and allowed Sea Containers to use the port on reasonable terms. A quite similar situation presented itself in the Sabena14 case, where Belgian airline Sabena, which also happened to own the dominant “Saphir” system used by Belgian travel agents to consult information and book flights, denied access to “Saphir” to London European, a rival carrier offering attractive alternatives to some of Sabena’s most popular routes, unless London European met some abusive requirements. The Commission found this refusal to supply to be abusive, and ordered Sabena to grant London European access to “Saphir”. Finally, after a series of lesser known decisions, this stream of case law culminated in the Bronner15 judgment, a milestone case and the current governing precedent for physical 10 Ibid, para. 25. 11 Case 311/84, Centre belge d'études de marché - Télémarketing (CBEM) v SA Compagnie luxembourgeoise de télédiffusion (CLT) and Information publicité Benelux (IPB), [1985] ECR 3261. 12 94/19/EC: Commission Decision of 21 December 1993 relating to a proceeding pursuant to Article 86 of the EC Treaty (Sea Containers v. Stena Sealink - Interim measures) OJ 1994 L 15, p. 8 (hereinafter Stena Sealink). 13 Ibid, para. 66. 14 88/589/EEC: Commission Decision of 4 November 1988 relating to a proceeding under Article 86 of the EEC Treaty (IV/32.318, London European - Sabena), OJ L 317/47,

15 C-7/97 Oscar Bronner GmbH & Co. KG v Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG. [1998] ECR I -07791 (hereinafter Bronner).


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essential facilities in the EU. Editing company Mediaprint was dominant on the Austrian newspaper market, publishing (among others) Austria’s two leading dailies, Die Kronenzeitung and Der Kurier, whose aggregated market quota reached almost 50%16 . In order to distribute its products, Mediaprint had created its own vertically-integrated distribution network, which delivered the freshly printed newspapers every morning to customers in the whole of Austria. Oscar Bronner, owner of rival underdog Der Standard, asked Mediaprint for the use of said distribution network. Upon refusal, Bronner sued Mediaprint for infringement of the Austrian Kartellgesetz. According to Bronner, Mediaprint leveraged its power over the distribution network to force competing editors on the newspaper market. In Bronner’s opinion, there were no alternatives for small newspapers that wanted to be distributed across the country in due time and, without access to Mediaprint’s network, his publication could never compete on an equal-footing with his rivals from Mediaprint. The competent Viennese judge submitted a request for a preliminary ruling to his peers in Luxembourg. Undoubtedly spurred by the adamant opinion of A.G Jacobs17, whom it closely followed in its argumentation, the ECJ quashed Bronner’s pretensions. The ECJ set a very high benchmark for indispensability, stating that Mediaprint’s distribution network could only be deemed to be an essential facility if its replication were completely impossible on the Austrian market for newspapers of roughly the same circulation as Mediaprint’s. The ECJ rejected compulsory access, even if it conceded that the distribution alternatives at Bronner’s disposal (i.e. mailing, kiosk selling) were less advantageous than Mediaprint’s network18. In my interpretation, the Bronner ruling had a schizoid effect on European essential facilities doctrine. On one hand, by setting the bar for indispensability very high, it raised the benchmark for a finding of abusive refusal to deal in regards to physical facilities. On the other hand however, Bronner implicitly rejected the applicability of the Magill19 test for IP-related refusals (which, in theory, should be more stringent), thus consecrating a differentiated benchmark for cases involving physical facilities. Therefore, it reveals its true importance not on its own, but in contrast with other judgments, particularly Microsoft, and serves as a yardstick for measuring the stringency of the ECJ’s current take on IP-related refusals. 3. Refusal to license IPRs: from Volvo to Microsoft Once the essential facilities / refusal to supply doctrine had been established for tangible assets in cases such as Commercial Solvents, Télémarketing, Sabena and Stena Sealink, there were little conceptual difficulties for the ECJ to extend the doctrine to intangible assets20. 16 Ibid, para. 6. 17 Opinion of A.G Jacobs in Bronner. 18 Bronner, paras. 41-46. 19 See infra. 20 S.D. Anderman, EC Competition Law And Intellectual Property Rights: The Regulation Of Innovation (Clarendon Press / Oxford University Press, 1998), p. 199. The sole legal obstacle was Article 295 of the EC Treaty (currently Article 345 TFEU) that enshrines the principle that the existence of national IPRs, whose definition remains a sovereign matter of each Member State, cannot be affected or prejudiced by Community law. Property remains one of the bastions of „intergovernnentalism“ in the EU. However, the ECJ was easily able to work around this restriction using the classic principle of ECJ case law about the dichotomy between “existence” and “exercise” of IPRs, first enshrined in Deutsche Grammophon (supra, note 2). The ECJ had to accept hands down the rights recognized by the domestic legislator, but could tame their exercise if it conflicted with the overriding goals of competition law. The issue of the legal basis to impose an actual remedy to the abuse (i.e. a compulsory license, or rather a mandate to negotiate access under RAND terms) did not pose many problems either. It was pacifically accepted


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However, in doing so, the ECJ started a separate line of case law that implied a distinct treatment of IPRs. The key implications of this differentiation between tangible and intangible property, and the question whether it is legally or economically sound are two interesting issues in itself that I shall address in Section Four of the paper. In this Section, I shall briefly present the evolution of the ECJ case law, highlighting its impact and its contributions, but also the doubts it casted and the difficulties it created. When appropriate, domestic cases will be presented as well. 3.1 Volvo The Volvo case21 opened the whole saga of ECJ case-law on refusal to license IPRs22. Swedish car manufacturer Volvo initiated a proceeding before the High Court of Justice of England and Wales against Erik Veng, a company which, without due permission, was manufacturing and importing Volvo design-protected car body panels. Previously, Volvo had refused to license Erik Veng the proprietary panel design. The High Court referred a series of questions to the ECJ for a preliminary ruling; notably, if it was prima facie an abuse of dominant position for Volvo to refuse to license the panel design to third parties, even if they were willing to pay a reasonable royalty23. The answer of the ECJ must be labelled as orthodox. First, in line with its previous Keurkoop doctrine24, the ECJ stressed that in absence of Community harmonization, the existence (or lack thereof) of rights protecting designs and models was a matter exclusively for national rules. On that basis, the Court enshrined the principle of freedom of contract, and ruled that the right of an undertaking to ban others from manufacturing products incorporating said design was the very “subject-matter” of its exclusive right25. Therefore, the refusal to grant a license could not prima facie constitute an abuse of dominant position. However, in the next paragraph, the ECJ noted that Volvo’s behaviour might indeed by forbidden under Article 102 if it involved certain types of abusive conduct: arbitrary refusal to independent repairers, fixing of prices of parts at an unfair level or a decision to discontinue production of spare parts for a particular model even though many cars of that model are still in circulation26. A pioneering judgment, Volvo is quoted in virtually every ECJ decision and academic journal on the issue of refusal to license. However, in my opinion, its actual impact and importance should not be overstated. First, the general rule set out by the ECJ – that enforcing exclusivity is the very essence of any IPR - was quite predictable, if not blatantly obvious. Any other opinion would have literally annihilated IP protection for any dominant undertaking in the European Community. Secondly, although the Court “opened the door” for later findings of abuse, it failed to provided any solid rule applicable to an abstract variety of situations. Indeed, the three conditions enounced in para. 9 did not prove very helpful for later cases.

that Regulation (EEC) 17/62 (later displaced by Regulation (EC) 1/2003) allowed the Commission to adopt this type of measures. 21 C-238/87 AB Volvo v Erik Veng (UK) Ltd [1988] ECR 06211 (hereinafter Volvo). 22 One may argue that there had been a previous case, Salora v. IGR Stereo Television (See European Commission, Eleventh Report on Competition Policy (1982), para. 94). However, this situation - which never lead to any administrative decision, since the involved parties arranged a settlement before the Commission intervened - was rather concerned with exclusionary conduct in the frame of a collusive patent pool, and would probably have been solved under Article 101. 23 Volvo, para. 4. 24 See C-144/81, Keurkoop BV v. Nancy Kean Gifts BV [1982] ECR 02853. 25 Volvo, para. 8. 26 Volvo, para. 9.


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Arbitrary refusal is nothing but a manifestation of discrimination, and as such can be tackled under the general doctrinal framework on discriminatory abuses. Unfair pricing, in turn, is either an exploitative abuse or, at its most extreme, simply an indirect manifestation of refusal to license itself. Finally, the third situation described by the ECJ – discontinuation of spare parts for a model still in circulation – is too specific and applies solely to the special circumstances of vehicle, tools or machine markets, and has little or none application in any other type of cases. Therefore, Volvo remains a rough sketch with little practical implications. Its greatest contribution was, however, acknowledging the possibility of future findings of abuse of a dominant position regarding refusals to supply IPRs, if some conditions were met that went beyond the substance of the right. In other words, it kick-started the search for the “exceptional circumstances” or “further conduct” that would convince the ECJ of an abuse. 3.2 Magill The two Magill judgments were arguably the most important and polemic precedents on refusal to license IP rights in the EU. They sent shockwaves through both the competition and the IP community27, since they rebuked the dogma about the exclusivity of IP rights. In spite of first warning shots in Volvo, few had been able to anticipate the courage of the European judicial institutions to so decidedly advance competition law at the expense of conventional beliefs on IP rights. One can see Magill as a brave effort of the ECJ to crystallize the “exceptional circumstances” or “further conduct” that were first anticipated in Volvo. The three television broadcasters controlling the Irish television market, RTE (Radio Telefis Erireann), the BBC and Channel 4 (ITP) practised the following policy with regard to the dissemination of programme listings: they provided their programme listings free of charge to newspapers, but on the condition that they may only reproduce the daily programme schedule (or for two days if the following day was a public holiday). They could also print some “highlights of the week”. The companies then published and sold their own programme magazines. Magill TV Guide Ltd. (Magill) saw the market gap and attempted to publish a weekly and comprehensive TV guide, informing consumers of the weekly broadcasting schedule for every channel, together with added value such as reviews, commentaries, pictures etc. Previously, consumers who wished know in advance about the upcoming broadcasts had to buy each broadcaster’s proprietary magazine. The broadcasters successfully aborted this attempt, obtaining an injunction from an Irish court, claiming exclusive copyright over the schedule roster according to local IP laws. The Irish judge went on to say:

“I am satisfied that each weekly schedule is the result of a great deal of preliminary consideration and work and of the exercise of skill and judgment.”28

In the meantime, Magill lodged a complaint before the European Commission, seeking a finding that the three broadcasters were abusing of their dominant positions on the broadcasting market by refusing to grant licenses for the publication of their respective weekly listings. The Commission opened a proceeding and issued a decision (the Decision) compelling the broadcasters to supply Magill with the weekly listings29. The broadcasters first

27 See Whish (2001), p. 698; also I. Van Bael and J.F Bellis, Competition Law Of The European Communities (Aspen Publishing, 4th edition, 2004) p. 713. 28 Judgment of the High Court of 26 July 1989, quoted in T-69/89 RTE v Commission [1991] ECR Two-489, para. 10. 29 Decision 89/205/EEC of 21st December 1988.


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appealed before the CFI30, which upheld the Decision, and before the ECJ, later.31 The Advocate General sided with the appellants, sharing the orthodox view that the competitive advantage obtained by the broadcasters on the TV guide market was a legitimate effort for their “creative effort”32. The ECJ however departed from this approach. First, as in Volvo, it took care of emphasizing that in absence of Community harmonization of IP laws, the existence of copyright protection for the programme schedule was a matter exclusively for domestic legislation to determine. Thus, the ECJ had to respect the protection conferred by Irish law and, in principle, acknowledged that it was plain that, as a general rule, copyright entitled the holder to reserve its right to reproduce the protected work33. However, the ECJ added that the right could be exercised “in such ways and circumstances as in fact to pursue an aim manifestly contrary to the objectives of Article 86”34. That is to say, in a manner incompatible with its “essential function”, which is to protect the moral rights in the work and to ensure a reward for the creative effort35. In other words, as already suggested in Volvo, the primacy of Article 102 TFEU might, in exceptional circumstances, prevail over any incompatible use of national IPRs36. The ECJ then went on to establish a framework for this “exceptional circumstances” where the exercise of the right might conflict with Article 102. The ECJ enunciated a triptych test for considering a refusal to license an IPR as abusive37:

a) That the conduct prevents the appearance of a new product, which the companies concerned do not offer and for which there is a potential consumer demand38.

b) That the companies concerned, by their conduct, reserve to themselves the secondary (downstream) market by excluding all competition through denial of access to an upstream IPR which is the raw material essential for competing said market.

c) That there is no objective justification for said conduct. The importance of Magill and these three conditions for abusive conduct cannot be overstated. Initially, Magill was labelled as a unique oddity by some. Many critical scholars and practitioners pointed out that the judges (although the ECJ was not competent to pronounce itself on the merits of the IPRs involved, which depended exclusively on domestic law) were possibly influenced by the fact that the copyrighted works had no creative value and were no significant investment, but merely a necessary by-product of the broadcasting activity, which had gained IP protection as a curious oddity of Irish law. Some event went to

30 For the sake of simplicity, we shall refer only to the aforementioned case T-69/89 (hereinafter “the Magill CFI Judgment” or simply “the CFI Judgment”), the appeal by RTE. The BBC’s and ITP’s appeal lead to cases T-70/89 and T-76/89, respectively. 31 See Joined cases C-241/91 P and C-242/91 RTE and ITP v Commission of the European Communities [1995] ECR I-00743 (hereinafter simply “Magill” ) The BBC chose not to appeal before the ECJ. 32 Opinion of A.G Gulman in Magill, para.37. 33 See Magill, paras. 27 and 28. 34 Ibid. This statement clearly follows the classic idea in ECJ (see i.e. Deutsche Grammophon) case law of a dichotomy between the grant of an IP right, which pertains exclusively to the domestic legislator, and the fashion it is exercised by its holder, which cannot conflict with the hierarchically superior Community legal order. 35 Ibid. 36 Ibid. 37 Ibid, paras. 29-31. 38 I shall refer to this prong of the test as the “new product rule”.


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say that Magill corrected the “aberration” of ill-defined intellectual property rights39. It is up for discussion if the CFI or the ECJ would have upheld the Commission’s decision, had it involved a “hardcore” IP right, i.e. a patent. However, in spite of the case’s peculiar circumstances, Magill would later prove to be a long-lived and far-reaching controlling decision: the three-prong test was later applied in IMS Health and even in Microsoft40. In other words, the Magill case introduced a sufficiently solid and abstract test for abuses of a dominant position consisting in refusal to license IPRs. Furthermore, Magill’s second most profound contribution is that this three-tiered test featured a benchmark element, the so-called “new product rule”, which does not apply to other refusal to supply / essential facilities cases. With Magill, the ECJ doctrine on refusal to supply bifurcated in two separate branches: one for abuses involving tangible property (i.e. port facilities, raw materials, railway networks etc.) and a separate one, with seemingly more stringent criteria and a higher benchmark, for intellectual property rights. This differentiation of treatment, which was implicitly confirmed in later judgments, notably Bronner and Microsoft, will be further discussed in Section Four. 3.3 Ladbroke

The Ladbroke case41 is often overlooked by commentators on IP-related refusal to deal. Its importance on this particular area is admittedly minor.

The Belgian subsidiary of Ladbroke, a sports bets bookmaker and broker, requested Pari Mutuel International, the exclusive owner of the audiovisual rights on French horse races, a license to broadcast said races in their Belgian establishments. Ladbroke wanted to offer betting services on French races that allowed gamblers to bet while actually watching them on television. Due to regulatory constraints, Pari Mutuel, although having a Belgian branch, did not effectively operate on the Belgian market. When Pari Mutuel refused to supply the sound and pictures the races, Ladbroke lodged a complaint before the European Commission, which did not find any abuse. Ladbroke then appealed before the CFI, which in turn upheld the Commission’s findings. The CFI ruled out that PMI leveraged its exclusive ownership of the audiovisual rights over the betting market, and found that none of the three Magill criteria were met, nor any criteria belonging to the main physical-facilities stream of case law42. In particular, the CFI found that the refusal did not prevent the appearance of a new product, since the broadcasting of the races, although “an additional, and indeed suitable service for bettors”43, was not in itself “indispensable for the bookmakers’ main activity, namely the taking of bets”. In my opinion, as can be inferred from this quote, the CFI seemed to confuse the indispensability criterion

39 For this critical stance, see among others Gerardin (2005) p. 9; Whish (2001) p. 699; Forrester (“It would be unimaginable […] that a truly innovative piece of technology (a pharmaceutical patent or novel software code, for example) would be treated in such a manner”, “..remedies to aberrations in the application of national laws”) or Delrahim (“I believe that the Magill and IMS Health cases may provide little precedent for a future case that features undisputed software rights, for example, or strong patent rights), both quoted by Ritter (2005), p. 6-7; A. Antoniu, The Essential Facilities Doctrine Before The European Community Courts: Ostracized Or Expanded? (Cyprus and European Law Review, Vol. 11, 2005) p. 11; Opinion of a A.G Jacobs in Bronner, para. 63. 40 See infra. 41 T-504/92 Tiercé Ladbroke v. Commission of the European Communities [1997] ECR Two-00923 (hereinafter Ladbroke). 42 Ladbroke, para. 133. 43 Ibid, para. 132.


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with the “new product criterion” or, as some commentators point out, it apparently suggested that they were not cumulative conditions, but rather alternatives44. In any case, this confusion vision was never held again neither by the CFI nor the ECJ. Thus, Ladbroke remains in my opinion an odd flower of secondary importance. 3.4 IMS Health and related decisions The landmark IMS Health case45 builds upon the Magill precedent, and is similar in several ways. However, it expanded and clarified the important contributions of Magill, notably regarding two of the three conditions for a finding of abuse set out in that case. The judicial and administrative proceedings surrounding IMS Health are manifold and complex46. IMS Health GmbH (IMS) was a company engaged in the collection, processing and interpretation of data concerning regional sales of pharmaceutical products in Germany. For this purpose, IMS used the so-called “1860 brick structure” (the 1860 Structure), a matrix dividing the German territory in 1860 blocks, which enjoyed protection under German IP law as a “data bank”47. The 1860 Structure had been elaborated in cooperation with a working group, the “Regionaler Pharmazeutischer Markt”, comprising representatives of large pharmaceutical companies, and had indeed become an industry standard, to the point that pharmaceutical companies rejected market studies delivered in any format other than the 1860 Structure. Pharma Intranet Information AG, a rival company founded by former IMS employees and later acquired by NDC Health GmbH (NDC), tried to compete on the market using an own, proprietary structure which divided Germany in ca. 3000 bricks. NDC soon realized that competition with an alternative brick structure was impossible and started using one very similar to the 1860 Structure. IMS obtained from a German court an interlocutory order against NDC, prohibiting their use of the copyrighted 1860 Structure. In the meantime, NDC lodged a complaint before the European Commission, which issued a decision48 compelling IMS to make the 1860 Structure available to NDC for a reasonable price. However, on appeal, both the CFI and the ECJ suspended the operation of the decision49, staying its enforcement until the outcome of the domestic procedure was determined. Finally, the second instance Landgericht Frankfurt submitted a request for a preliminary ruling. The first and main question read:

“1. Is Article 82 EC to be interpreted as meaning that there is abusive conduct by an

undertaking with a dominant position on the market where it refuses to grant a license agreement for the use of a databank protected by copyright to an undertaking which seeks access to the same geographical and product market if the participants on the other side of the market, that is to say potential clients, reject any product which does not make use of

44 L. Hou, Refusal To Deal Within EU Competition Law (June 11 2010), p. 22. Available at: http://ssrn.com/abstract=1623784]. 45 C-418/01 IMS Health GmbH & Co OHG v NDC Health GmbH & Co KG [2004] ECR 05069, hereinafter IMS Health. 46 For a good depiction of the procedural iter of the case, see M. Dolmans, R. O’Donoghue and P.J Loewenthal, Article 82 EC and Intellectual Property: The State of the Law Pending the Judgment in Microsoft v. Commission (Competition Policy International, Vol. 3 No. 1, 2007) p. 120. 47 As in Magill, one can argue about the degree of creativity involved in the design of the 1860 brick structure, which indeed followed very closely the pre-existing administrative and political boundaries in Germany. 48 NDC Health/IMS Health: Interim Measures, 2003 O.J. L268/69. 49 See T-184/01 R, IMS Health Inc. v. Commission [2001] ECR Two-3193 and C-481/01P(R), NDC Health v. IMS Health [2002] ECR. I-3401, respectively.


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the databank protected by copyright because their set-up relies on products manufactured on the basis of that databank?”

That is to say, the national court was essentially seeking to ascertain if the refusal to grant could constitute an abuse of a dominant position even if the restriction of competition takes place on seemingly the same market in which the owner of the IPR exploits his right and holds a dominant position50. Accordingly, the IMS Health revolved around the first two of the infamous three extraordinary circumstances set out in Magill: the refusal to grant a license must prevent the emergence of a new product and also have the effect of reserving a secondary / derivative market for the dominant undertaking. However, it seemed prima facie that these cumulative conditions51 could not be met in the IMS Health case for several reasons.

a) First, in sharp contrast to the Magill case, the classic “leverage” phenomenon was not

evident. Whereas the broadcasting companies in Magill used their dominance on an upstream market (market for television broadcasting) to leverage on a separate downstream market (market for TV guide publication), in IMS Health there was no evident distinction between the markets where IMS and NDC were active. Both undertakings provided market studies for pharmaceutical companies – a service for which the 1860 Brick Structure was nothing but an inseparable, in-house created input lacking any autonomous marketing.

b) Furthermore, competitor NDC did not pretend to introduce a new product (i.e. a previously unavailable weekly and comprehensive TV guide), but rather to use a nearly identical brick structure to compete on the very same market. Interestingly enough, the legal counsel to NDC tried to frame the problem from the perspective of appropriation of open standards, stressing the fact that, prior to claiming copyright, IMS had developed the 1860 Brick Structure jointly with the “Regionaler Pharmazeutischer Markt” industry group. It was through this cooperation that it had become an industry-wide standard in the first place. According to NDC, IMS had incurred in so-called “standard hijacking”. However, the ECJ did not follow this argumentation52. Instead, the ECJ followed closely Advocate General Tizziano’s well-thought opinion53, widening the boundaries of Magill’s conditions and expanding their application possibilities to new factual situations. In regards to the first difference between Magill and IMS Health, that is to say, the apparent lack of differentiation between an ancillary and a derivative market, both the Advocate General54 and the ECJ55 picked up an idea first implicitly suggested in the Bronner case56. In Bronner, the Court had appreciated a distinction between an upstream market for distribution of newspapers (although Mediaprint did not offer distribution services) and a connected market: the sales of newspapers themselves. On occasion of IMS Health, this idea was

50 See IMS Health, para 21 51 IMS Health, para. 38. 52 See J. Killick, IMS And Microsoft Judged In The Cold Light Of IMS (The Competition Law Review, Vol. I Issue 2, 2004) p. 23-47 at p. 31. The author, who was a member of the White & Case LLP team advising NDC, points out to the parallels with the high-profile Dell unfair competition case in the U.S. (Dell Computer Co, C-3658 of 20th May 1996). In Dell, the computer manufacturer of the same name had belatedly asserted patent ownership in order to tortuously hijack a previously agreed-on standard. 53 Opinion of A-G Tizziano on Case C-418/01 [2003] ECR I-5042 54 Ibid, paras. 55-57 55 IMS Health, paras. 40-45 56 See Opinion of A.G Jacobs in Bronner.


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rediscovered and expanded57. According to the Court and A.G Tizziano, it is sufficient that a “potential” or “hypothetical” market for an upstream input is identified, even if said input is in fact not offered and marketed independently58. In other words, a strict notion of upstream and downstream markets was substituted for hypothetical markets, or just simply for upstream and downstream production stages. In this vein, it was not difficult to distinguish between a monopolized ancillary market for access to the 1860 Structure and a secondary downstream market for the sale of the studies. Therefore, in line with Magill, IMS’s refusal to license the upstream product (the 1860 Brick Structure) meant they were reserving for themselves the connected sale of studies market. Secondly, A.G Tizziano and the ECJ tried to accommodate the facts of IMS Health to Magill’s “new product rule”. After all, NDC was not trying to introduce a clearly new product, but to offer market studies analogous to the ones offered by IMS. To solve this problem, the A.G provided a careful balancing exercise, stating that the protection of IPRs had to prevail, unless the requesting undertaking “does not wish to limit itself essentially to duplicating the goods or services [...] but intends to produce goods or services of a different nature which, although in competition with those of the owner of the right, answer specific consumer requirements not satisfied by existing goods or services”59. The Advocate General also attempted to justify this rationale in light of Volvo, stating that the Court had implicitly taken into consideration that Erik Veng simply wished to duplicate Volvo’s panels, without offering any extra service demanded by customers60.The ECJ quoted A.G Tizziano’s opinion almost verbatim61, and then left for the referring court to determine whether such was the case in the main proceedings62. IMS Health can lead us to several conclusions. First, it confirmed that the three-prong test set out in Magill, in particular the “new product rule”, was not a mere occasional “flash in the pan”63. The Court upheld the “new product rule” and, by rejecting mere duplication of goods and services, seemingly struck a right balance between the protection of innovation by IPRs and the imperatives of static competition. However, IMS Health introduced some degree of ambiguity64 as to the benchmark of innovation that the requesting undertaking’s product had to pass in order to qualify as new product satisfying specific customer requirements, rather

57 For criticism of this aspect (among others) of IMS Health, see specially D.M Gitter, The Conflict In The European Community Between Competition Law And Intellectual Property Rights: A Call For Legislative Clarification Of The Essential Facilities Doctrine (American Business Law Journal 40.2, 2003) p. 217-300. 58 See Opinion of A.G Tizziano, para. 60. 59 Ibid, para. 62 60 Ibid, paras. 65 and 66. 61 IMS Health, para. 49. 62 Ibid, para. 50. 63 See also Antoniu (2005). In this regard, the “new product rule” was incorporated in 2005 on that year’s D.G Discussion Paper on Exclusionary Abuses. 64 Some little details hint at this ambiguity. For instance, whereas A.G Tizzano referred to “products and goods of a different nature” (see para. 66; emphasis mine), the ECJ, although quoting said para. almost word for word (see para. 49), left out the mention to the different nature of the goods. Furthermore, the Court cautiously omitted any opinion on whether NDC’s product could pass the test or not, leaving it up for the referring court to decide. On another note, as Levêque (2005) at p. 8 points out, “the new product test is difficult to apply since newness [sic] is a continuous rather discrete variety. [...] In modern microeconomics, a given product is just a specific bundle of characteristics. [...] A clone is a product featured with the same characteristics and level of performance on each one. A new product may therefore be either a product integrating a new characteristic [...] or a product with a better performance on one characteristic [...]”. For an eloquent denunciation of the “new product rule’s” shortcomings and dangers, see D. Gerardin, C. Ahlborn, V. Denicolò and A.J Padilla, DG Comp’s Discussion Paper On Article 82: Implications Of The Proposed Framework And Antitrust Rules For Dynamically Competitive Industries (March 2006) p. 47 et seq.


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than being a mere duplication. For instance, NDC’s product, although using a very similar structure, included new features (online connectivity, wider spectrum of data, improved usability, etc.65) that made it better than IMS’ one. This uncertainty on the boundaries between innovation and duplication is particularly true if viewed retrospectively, in light of the posterior Microsoft case, where Magill’s new product requirement was considerably watered down66. Furthermore, by demanding a substitutive product and ruling out duplication of the protected product or service, IMS Health failed to provide a solution for extreme lock-up and market failure situations, i.e. through industry standards and subsequent network effects67, where the one and only way to compete is a perfect imitation of the dominant undertaking’s good. The Standard-Spundfass decision68 of the German Federal Court of Justice is an eloquent example of this perfect lock-up phenomenon. The claimant was a producer of barrels, one of whose patented offerings, a special plastic “tight-head drum barrel”, had been agreed on by the German chemical industry as its standard barrel. The standardization was so precise that it became impossible to produce a standard-compliant barrel without infringing the patent. Furthermore, due to the network effect spawning the whole chemical industry after standardization, an alternative barrel was virtually unmarketable in Germany69. In the end, the Federal Court solved the case under of § 20 Abs. 1 GWB (Gesetz gegen Wettbewerbbeschränkungen), a provision of the German Competition Act specifically sanctioning discriminatory conduct, as the owner of the patent had licensed it only to selected barrel manufacturers. However, the Federal Court’s final conclusion implicitly admitted70 that, even in absence of a discriminatory conduct, a regular abuse of dominant position under could still be found under the general clause of § 19 GWB if access to a market was dependent on a monopolized patent because of “norms” or “standard-like framework conditions”:

“Nutz der Patentinhaber den Umstand, dass der Zugang zu einem nachgelagerten Markt aufgrund einer Norm oder normähnlicher Rahmenbedingungen von der Befolgung der patentgemässen Lehre abhängig ist, um den Zutritt zu diesem Markt nach Kriterien zu beschränken, die der auf die Freiheit des Wettbewerbs gerichteten Zielsetzung des Gesetzes widersprechen, missbraucht er seine markbeherrschende Stellung“ 71.

65 See Opinion of A.G Tizzano, para. 39. 66 Infra, Section 3.5; Gerardin, Ahlborn, Denicolò and Padilla (2006) p. 49. 67 See on this matter J. Drexl, Abuse Of Dominance In Licensing And Refusal To License: A ‘More Economic Approach’ To Competition By Imitation And Competition By Substitution in C-D. Ehlermann and I. Anastasiu (eds.), European Competition Law Annual 2005: Interaction Between Competition Law And Intellectual Property Law (Hart Publishing, 2005): “We may conclude: the ECJ applied a concept of innovation which fits some cases but not others. The new product rule will only restore competition in situations in which the IP system itself excludes competition by substitution” (p. 7); see also B. Conde Gallego, Die Anwendung des kartellrechtlichen Missbrauchsverbots auf “uneralässliche” Immaterialgüterrechte im Lichte der IMS Health und Spundfass-Urteil (Gewerblicher Rechtschutz und Urheberrecht, 2006). 68 BHG Urteil of 13th July 2004 (KZR 40/02), Standard Spundfass. For an English translation, check the International Review of Intellectual Property and Competition Law, Vol. 36 Issue 6, 2995, p.741-725. The ruling appeared just a few weeks after the IMS Health judgment, but the German judges did not mention it. 69 Ibid, “…es sei nicht möglich, ein Fass herszustellen, das den Vorgaben der VCI-Rahmenbedingungen entspreche, ohne vom Klagepatent Gebrauch zu machen“ and “Andere Spundfässer [...] seien in Deutschland praktisch unverkäuflich“ (p. 8). 70 In this vein, see J. Drexl (2005), p. 11. 71 Standard Spundfass, p. 16


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In my opinion, the Standard-Spundfass decision of the German Federal Court is highly interesting, as it highlights the incapability of the “new product requirement” set out in Magill and refined in IMS Health of dealing with situations where, due to the lock-up effect created by standardization and/or insurmountable network effects, a perfect “clonation” of the protected product remains the only mean of competing. One may argue that the patent owner deserved to monopolize the barrel market, as it had conquered the market through its innovative effort, which had lead to the barrel being crowned as the industry standard. Thus, in a situation where dynamic competition is no longer possible, competition law should not intervene allowing other barrel manufactures to parasitize the standard-holder’s success. However, one must consider the flip side of the coin: by means of a one-shot Schumpeterian breakthrough success in dynamic competition (having its product standardized), a market actor can wipe out any static, neoclassical competition (which would otherwise be possible, i.e. as to the merits of price etc.) for the whole lifespan of the IP right. Nevertheless, one can only speculate about the treatment that a situation as defined above would enjoy in the wake of Microsoft72. 3.5 Microsoft By its stake alone (the fine amounted to € 497 million, then the largest fine imposed by the European Commission), the Microsoft case73 was without doubt one of the most important competition law cases in the history of the European Union74. What is more, this judgment of intricate complexity would also have a deep impact on the treatment of IP-based essential facilities. Needless to say, it did stir a great amount of controversy among scholars and practitioners: while some welcomed it as the spearhead of modernized art. 102 review, others decried it as the herald of an activist European competition policy. Some have even gone as far as to suggest that the Microsoft case was a disguised instrument of trade policy75. Others suggested that the CFI lacked the courage to give a blow to the Commission, which had staked its reputation on the case, after a series of big defeats in 2002 issuing no less than three statements of objection and drafting a five-hundred page decision76. Lastly, critics feared that due to high enforcement standards, the EU would become the regulator of choice in the global competition law arena, also placing itself on a collision course with the post-Trinko US regulators77. As a matter of fact, the U.S Department of Justice immediately condemned the Commission’s decision78, and some members from the International Relations Committee at the House of Representatives wrote an open letter to Commissioner Monti79.

72 Infra. 73 T-201/04 Microsoft Corp v Commission of the European Communities [2007] ECR Two-03601, hereinafter “Microsoft” or “the Microsoft case”. 74 Quantitatively, the fines on Saint Gobain in 2008 and Intel in 2009 broke the record established by the Microsoft decision. 75 D.F Spulber, Competition Policy and the Incentive to Innovate: The Dynamic Effects of Microsoft v. Commission (Yale Journal on Regulation, Vol. 25 No. 2, 2008) p. 132: “Microsoft v. Commission is much more than competition policy—it is a complement to European trade policy”. 76 See i.e. C. Ahlborn and D.S Evans, The Microsoft Judgment and its Implications for Competition Policy Towards Dominant Firms in Europe (Antitrust Law Journal, Vol. 75 No. 3, 2010), p.27; P. Larouche, The European Microsoft Case at the Crossroads of Competition Policy and Innovation (TILEC Discussion Paper No. 2008-021, 2008), p.22. 77 Ibid, p.27; see infra at footnote 115 for a more detailed elaboration on this aspect. 78 See http://www.theregister.co.uk/2004/03/25/us_doj_condemns_ms_ruling/ (The Register, 25 March 2004). 79 R. Pardolesi and A. Renda, The European Commission’s Case Against Microsoft: Fool Monti Kills Bill? (LE Lab Working Paper No. AT-07-04, 2004) at footnote 4.


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When talking about the Microsoft case, a preliminary precision must be made. The appealed Microsoft decision80 was the fruit of two different investigations, each addressing a different Article 82 infringement. On one side, an abuse consisting in refusal to supply competitors with information regarding interoperability of server computers with Microsoft’s Windows OS; on the other, a tying-and-bundling problematic regarding Microsoft’s Windows Media Player. For the purpose of this paper, I shall focus strictly on the former. The facts Microsoft, a behemoth computing corporation, was active on two connected markets. First, the market for operating systems (OS) for personal computers (PCs), where it had a nearly monopolistic market share of ahead of 90% thanks to its highly successful Windows OS series. Second, Microsoft was also present with a 30 to 40% share on the related market for working groups server (WGS) operating systems. Simply put, a WGS controls a small to mid-sized network of individual PCs, providing functionalities such as communication between the network’s members, access to common folders, printers, centralized access to an external network like as the Internet, security functions etc. In 1998, Microsoft stopped licensing its Active Directory interconnection protocols (the Protocols) to Sun Microsystems (Sun), a competitor on the WGS market. The protocols, which Microsoft claimed to be protected by IP rights81, were a set of rules82 governing the interoperability between Microsoft’s WGS operating system and Windows-based clients (server-to-client), as well as between working group servers themselves (server-to-server). Put simply, without knowing how exactly Windows related to a server, or how Microsoft’s servers related among themselves, Sun and other similar undertakings could not create an OS for WGS that could compete on an equal footing with Microsoft, providing a similar degree of functionality. Thus, according to Sun, Microsoft leveraged its monopolistic position on the upstream PC market, abusing of an essential facility (interoperability) to exclude competitors on the related downstream WGS market, infringing Article 82. Accordingly, Sun filed a complaint which, more than five years later, resulted in the finding of abuse by the Commission and a hefty €497 million fine. The Commission decision was appealed by Microsoft before the CFI. The many parties involved83 left no stone unturned, and every possible aspect was extensively discussed in court. For the purposes of this paper, I shall focus strictly on the issues most peculiar to IP-related refusals to deal and/or the essential facilities doctrine. In particular, I will examine how the CFI tackled the elements of the test for refusal to deal as formulated in Bronner and Magill / IMS Health: I) the indispensability of the upstream input and the foreclosing effect on the secondary market; Two) the requirement for the prevention of the appearance of a new product and lastly TwoI) the lack of objective justification. Indispensability of the upstream input and likelihood of elimination of competition

80 COMP/C-3/37.792 Microsoft of 24.03.2004, hereinafter “the Microsoft decision” or “the Commission decision”. 81 An assumption accepted by both the Commission and the CFI. 82 See Microsoft, para. 39, for an accurate definition. 83 In addition to Microsoft and the Commission, a number of companies and lobby groups joined the proceedings, supporting their respective interests.


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As seen in Section Two, any refusal to deal, regardless of whether in the area of IP rights or just tangible property, must fulfil two conditions to be deemed as contrary to Article 102. First, the refused facility, input or service must be essential for the requesting undertaking to operate on the market. Second, the refusal must have the consequence of eliminating the requesting undertaking from the market. Usually, the two conditions are assessed together, as one is the logical corollary of the other: the less substitutable the facility, the more difficult for the requesting undertaking to stay on the market. Thus, I prefer to consider the two issues jointly. On occasion of Microsoft, the CFI interpreted both criteria in a generous way, lowering the very high benchmarks set out in the controlling decision, Bronner. First, the parties disputed on the indispensability of the refused facility, the interoperability protocols. Both sides were willing to agree that interoperability was not an absolute standard, but rather occurred along a continuum84. However, there was discrepancy about the degree of interoperability needed by Microsoft’s competitors. Microsoft advocated a narrow definition of interoperability. The CFI in turn acknowledged that Sun and its peers could already achieve some degree of interoperability through different means, but stated that it was insufficient to successfully compete85. Instead, the CFI, backing the Commission, decided that so-called “plug replaceability” or “perfect interoperability” was needed, that is to say, a degree of interoperability so high as to be identical to the one attained by Microsoft’s products86. In other words, competing WGSs should be able to relate to PCs running Windows with exactly the same degree of functionality as Microsoft’s products, making their allegedly hidden, privileged connections also available to them. Furthermore, there should also exist “server to server” interoperability, that is to say, the possibility for Microsoft-based run server computers to communicate with competitor’s server units, thus permitting the existence either of hybrid, multi-tiered networks (i.e. a company network with some Sun and some Microsoft server units, each performing different tasks)87. As we can see, this is a rather expansive notion of interoperability, and one that did certainly drew criticism from sceptic scholars88. In order to achieve this, key technical information on the functioning of Microsoft technology had to be supplied, including, for technical reasons, information also about the interoperability protocols between Microsoft WGS among themselves. Interoperability was defined as: 84 Microsoft, para. 119. 85 Ibid, para. 219. 86 We should keep in mind that the fact that a client OS and a server OS do not share an identical technology does not mean that interoperability is impossible. On the contrary, Windows-based client PCs and competing server architectures were compatible with each other prior to the Microsoft decision and, in fact, hybrid networks were actually common place in the business world. As the Commission conceded, compatibility could and was indeed achieved by a variety of means (web-based protocols, gateway servers, software added either on client or on server), but obviously achieving this connectivity is much more costly than perfect compatibility. These difficulties, however, had not prevented the existence of a pluralistic market. The computer networks for business environments are what experts define as a “semi-open systems”, which allow for some degree of competition in the production of some of the layers. Firms retain some degree of control on the system (in this particular case, Windows OS and the interconnection protocols were the controlled asset that lead to a bottleneck), while other layers of the network were open for competition. For a good explanation of the technicalities, see Pardolesi and Renda (2005) p. 35. 87 The Commission’s decision thus admitted the presence of strong network effects on the WGS OS market (see i.e. para. 1062). This view is challenged by some economists, which claim that the workgroup server market was substantially free from externalities (i.e. network and learning effects); see for instance Pardolesi and Renda (2005), p. 33, who claim that the dominant technology in the client OS market did not dictate the dominant technology in the WSG market, which they define as an “aftermarket”. 88 See infra.


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“…complete and accurate specifications for all the protocols [implemented] in Windows work group server operating systems and . . . used by Windows work group servers to deliver file and print services and group and user administrative services, including the Windows domain controller services, Active Directory services and “group policy” services to Windows work group networks”89.

Further, the CFI rejected Microsoft’s view that this approach would treat interoperability in the same way as “cloning”90. In a nutshell, the Commission maintained that the requirement of “plug replaceability” affected only the relation of competing server architecture with Microsoft’s products (whether client PCs or other servers), achieving perfect compatibility, while their “internal” functioning would be completely different, incorporating proprietary innovations and functionalities. That is to say, the Commission drew a line between simple detailed disclosure of “specifications” (the complex technical rules governing interoperability) and the internal “implementation” of such connectivity. This expansive choice of interoperability, which also encompasses server-to-server plug replaceability, shows a deep misunderstanding of the essential facilities doctrine and constitutes - in this author’s opinion - the one big flaw of the Microsoft judgment. This doctrine ought to be used in order to avoid that an undertaking leverages an essential input located in a separate upstream market on another related downstream market, thus gaining an unfair competitive advantage. In this case, since the dominant undertaking also needs the input to compete on the primary market (where the firms suffering refusal are not present), incentives to innovate remain to a great extent confined in each differentiated market. Or, much like in Magill, the upstream facility is a necessary by-product that would have been produced in any event. In other words, the essential input has its origin in the primary market, where he contributes to the acquisition of market power. This is the case of the protocols for connectivity between a server OS and the Windows client OS. Microsoft benefits from its dominance over an upstream technology (Windows) to foreclose competitors downstream. However, ordering compulsory access to production inputs whose refusal strictly happens within a single market, without any market-to-market leverage action91, is a fatal misunderstanding of the essential facilities doctrine. Yet, in my view, the Commission incurred precisely in this gross mistake when it extended the notion of interoperability, ruling that Microsoft should also supply the server-to-server Protocols. This is wrong because refusing to disclose these Protocols is a legitimate business practice: they are a technology that has both its origin and its associated competitive advantage strictly on the downstream market (the network server market). There is no translational movement of dominance from one ancillary market to a dependent one: the server-to-server protocols are a neatly separated input which only plays a role on the downstream market. Thus, they are very different from Microsoft’s server-to-client protocols, which, although a downstream asset, are the fruit of a privileged access to an upstream facility: the inner workings of Microsoft’s Windows. However, when developing new technologies for inter-server operability, Microsoft does not profit (or at least profits to a very limited extent) from the dominance it enjoys upstream.

89 Commission Decision, Article 1(1) of the operative part, p. 298. 90 Ibid, i.e. para. 217. 91 See J. Temple Lang, Anticompetitive Abuses under Article 82 Involving Intellectual Property Rights in C.D Ehlermann and I. Anastasiu (eds.), European Competition Law Annual 2003: What Is An Abuse of a Dominant Position? (Hart Publishing, 2003), at p. 5 et seq. for a detailed overview of the different combinations of upstream / downstream leverage.


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When it comes to the connections strictly between server computers, Microsoft competed on an equal footing with Sun, Oracle et alia. As John Temple Lang had vocally maintained years before Microsoft:

“The essential facility principle applies only when there are two distinct markets involved [...]. The rationale for sharing essential facilities does not apply when there is only one market. The effects of applying the doctrine in single-market situations would be anti-competitive. [...] It is inherently pro-competitive, on the other hand, to allow competitors to develop or invent their own competitive advantages in the markets in which they are operating. [...] A legitimate competitive advantage on single market, however decisive, cannot be an ‘essential facility’”92.

The essential facilities doctrine should only operate in a vertical relationship between an upstream and a downstream market or at least production stages. It should never apply if there is only one market. The Commission failed to acknowledge this fact on occasion of the Microsoft case and it arguably committed a great mistake. It wrongly identified the indispensable facility, and thus applied the essential facilities doctrine in a perversely Procrustean fashion, levelling the playing field and eroding a legitimate intra-market competitive edge. What is more, this approach on interoperability reveals the Commission’s preference for competition “in the market” (merits-based competition within a hybrid server network with elements from different suppliers) instead of a more granular type of competition “for the market”, where undertakings try to capture the entire domain architecture93 in a single breakthrough movement. Far from being an anecdotal decision, this choice is an unmistakable hint of a structure-driven, merits-biased competition policy94. After having defined the facility, the CFI went on to assess what impact the refusal would have on static competition. The CFI interpreted the notion of “likelihood of elimination of competition” in a wide fashion. The Court stated that Article 82 could be applied preventively (otherwise, it would be divested of its efficacy) when the refusal is liable to, or likely to, eliminate all effective competition on the market95, particularly in light of market circumstances such as strong network effects96. Furthermore, the CFI stressed that a marginal, “niche” presence of “bonsai competitors” could not substantiate the existence of competition. In empirical terms it is disputable if Microsoft’s behaviour was having any foreclosing effect. It seems that the competitive landscape was rather lively: most market players had performed quite well, and were far from considering exiting the market. In addition, open source server software was gaining a foothold. These conclusions must be contrasted with the standard set out in Bronner. It can be maintained that Microsoft lowered Bronner’s benchmark for indispensability. As we have seen in Section Two, in Bronner, the ECJ held that Mediaprint’s distribution network was not an essential facility, although other distribution alternatives were admittedly “less advantageous”97. Furthermore, the Court, following the Advocate General’s opinion, ruled

92 Temple Lang (2003), p. 17 et seq. 93 Larouche (2008), p. 8. 94 See infra, Section 5.3 p. 34. 95 Ibid, para. 561. 96 Ibid, para. 562; Dolmans, O’Donoghue and Loewenthal (2005) p. 130. 97 Bronner, paras. 43-46.


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that for indispensability to be found, it had to be established that it was not economically viable to create a second home-distribution scheme for newspapers with a circulation similar to Mediaprint’s products98. Finally, the Court argued that it was not “impossible” or “unreasonably difficult” (thus, we are allowed to infer, still reasonably difficult) for Mediaprint to create its own distribution network99. A.G. Bronner wrote about the need for a situation of “genuine stranglehold”, where duplication of the facility is outright impossible. While the circumstances in the two cases were admittedly different, it seems to me that Microsoft lowered the high benchmark for indispensability set out in Bronner. In Microsoft, the CFI emphasized the need to establish a sort of “equal footing” for Microsoft and its competitors through perfect substitutability. The CFI did not settle for a lower, less advantageous degree of interoperability, but went all the way, demanding a perfect replaceability, even in “server to server” connections. In Bronner however, the ECJ was not nearly as generous with the requesting undertaking, and admitted that Bronner would be competing with Mediaprint with either much less advantageous means or creating an own home-delivery scheme, which was no doubt a daunting task for a small newspaper, whether alone or in a joint venture with other editors. In a nutshell, a considerably less stringent approach to indispensability and likelihood of elimination of competition can be observed in the Microsoft case. What is more, extending the interoperability to server-to-server connections is profoundly erroneous. It is a perverse choice that targets a legitimate competitive practice. Lastly, the choice of interoperability reveals an approach that prefers competition “in the market” rather than competition “for the market”, a policy choice that also has profound implications. The new product rule The Magill case introduced a specific test for refusals to license IPRs, one of whose prongs was the so-called “new product rule”: the infringing conduct had to prevent the appearance of a new product on the market, for which there was substantial consumer demand. The posterior IMS Health judgment confirmed the “new product rule”, but, in my opinion, it also introduced a considerable ambiguity as to the degree of differentiation required for a product to qualify as new. On occasion of Microsoft, the same problem as in IMS Health surfaced, because Sun and its peers simply wished to compete on the very same market as Microsoft, creating OS for WGS that served an identical purpose as its competitor’s product. The CFI “teleologically” reinterpreted Magill and IMS Health, making the “new product rule” much less stringent – if not abolishing it altogether – in order to uphold the Commission’s decision. The CFI first took care to place the rationale of the “new product rule” in the context of prejudice to consumers100. In other words, the blocking of a new product’s entry into the market was portrayed as manifestation of consumer prejudice. As the next logical step, the CFI held that the appearance of a new product could not be the only parameter to determine whether a refusal to license an intellectual property right is capable of causing prejudice to consumers within the meaning of Article 102(b) TFEU101. The set of circumstances listed in

98 Ibid, para. 46. 99 Ibid, para. 44. 100 Microsoft, paras. 645 and 646. 101 Ibid, para. 647.


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Magill ceased to be a numerous clausus. Thus, according to the textual reading of the provision, prejudice could also arise where the limitation concerned not only production or markets, but also technical development – in this particular case, by preventing competitors from developing their own WGS systems with innovative features. That is to say, the Microsoft judgment substituted a strict view of “new product”, as advocated in Magill and IMS Health, for the more nebulous notion of “technical development to the prejudice of consumers”. In my opinion, this implied, if not an abandonment of the “new product rule”, at least a very substantial reduction of its stringency. As some authors have pointed out, the CFI substituted the notion of a clearly identifiable new product (i.e. the weekly TV guides of Magill) with the vacuous idea of “future new products”102. While this change undoubtedly reduces legal certainty (although in my opinion, IMS Health had already blurred the line between new and pre-existing products), it could be welcome as a more inclusive approach taking more proxies for consumer harm into consideration. After all, consumer welfare is not only about price and output: consumers do have a strong interest in innovation103. This does not mean, however, that the CFI ignored the idea of novelty, and was keen to share the Commission’s view that an ample scope still existed for differentiation and innovation rather than pure replication. Microsoft competitors would not clone the WGS OS, but introduce new innovation and features which consumers considered important (i.e. safety, processing speed, functionalities)104. According to the CFI, innovation would indeed be the only way to profitably compete with Microsoft105. Once again, this approach on the “new product rule” reveals an unmistakable policy choice: the bias towards competition “in the market” by the means of incremental innovations or “cumulative knowledge”, as opposed to a lumpier, “low-res” approach in the market, allowing the building up of market concentration until the dominant undertaking is swept away by the gales of breakthrough innovation. This Commission’s choice is by no means innocent, but rather finds itself at the very core of the structuralism vs. Schumpeterianism debate, which is discussed in Section 5.3 of the paper. Objective justification: the “incentives balance test” The third element of the ECJ’s benchmark test for refusals to deal, objective justification, had played an admittedly minor role up until the Microsoft case. Although all refusing undertakings had invoked some type of objective justification as their defence strategies, the issue had never been central to any of the refusal to supply cases tackled by the ECJ. Very often, the alleged objective justification consisted of stating the obvious: that the essential facility was protected by IP rights. In Microsoft however, the objective justification prong of the test acquired a great importance and was at the very core of the controversy stirred by up by the Commission’s decision. As a matter in fact, it has very profound policy implications, down to the very core of the interface between competition law and intellectual property that I shall discuss on a separate section of this paper.

102 Gerardin (2005), p. 17. 103 Concurring with this view, see R. Cooper Dreyfuss, Unique Works / Unique Challenges At The Intellectual Property / Competition Law Interface (NYU Center for Law and Economics, Law & Economics Research Paper, No. 05-13, 2005), p. 14. 104 Ibid, paras. 655 to 657. 105 Ibid, para. 658.


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In the frame of the administrative proceeding before the Commission, Microsoft argued that a mandate to supply the Protocols competitors would reduce its incentives to innovate. The Commission challenged this assumption, and in doing so, it introduced what has been called the “Incentives Balance Test” (hereinafter IBT) or “incentives trade-off” 106. The theoretical model of the IBT involved two linked steps. First, the impact of mandated access on Microsoft’s innovation incentives was to be assessed, in comparison to the situation where the anti-competitive behaviour would remain unfettered107. Second, this possibly negative impact would be then balanced against the aggregated innovation incentives created by the decision in the entire industry. Thus, even if mandated access would reduce Microsoft’s incentives to innovate, this welfare loss could be still outweighed by the process of dynamic efficiency spurred in the rest of the industry108. The Commission held that if supply of the Protocols was not mandated, Microsoft’s incentives to innovate would progressively diminish as Sun and other competitors would be exiting the market. However, if they were allowed to access the interoperability information, the competitive landscape would most likely live up and bloom, as Microsoft’s WGS products would face increased competitive pressure from enhanced products, without being able to benefit from the previous lock-in phenomenon109. Thus, just the first step of the IBT was necessary, since the impact on Microsoft had already proven to be positive. In any case, the European Commission stated that:

“A detailed examination of the scope of the disclosure at stake leads to the conclusion that, on balance, the possible negative impact of an order to supply on Microsoft’s incentives to innovate is outweighed by its positive impact on the level of innovation of the whole industry (including Microsoft)”110.

With the IBT, Monti’s Commission advocated a more modern, effects-based approach, introducing a more sophisticated legal analysis. In a way, we could call the IBT an European “rule of reason” for essential facilities situations. The CFI however, while upholding the Commission’s decision, did not have in my opinion the will or the policy-driven courage to decidedly endorse the IBT and make it a governing tool for future cases. Instead, it largely ignored the IBT and (for reasons of scope of judicial review111) carefully avoided to look into the Commission’s economic analysis, swiftly and briefly stating that Microsoft had failed to adequately prove that a supply obligation would diminish its innovation incentives112. What is more, the CFI “reshuffled” the structure of the European Commission’s decision, placing the IBT at the tail of its analysis, thus as a sort of last resort “efficiency defence”. Accordingly, it 106 See the Commission Decision, paras. 724-727, 783. For a very good summary on the IBT, see S. Vezzoso, The Incentives Balance Test in the EU Microsoft Case: A More ‘Economics-Based’ Approach? (November 2005). Available at SSRN: http://ssrn.com/abstract=1358924. 107 Commission Decision, para 724. 108 The IBT focuses solely on dynamic efficiency. As Kwok points out, “allocative efficiency considerations regarding price and output are not written into the formula”. See K.H.F Kwok, A New Approach to Resolving Refusal to License Intellectual Property Rights Disputes (World Competition 34 no.2, 2011) 261-286, p. 271. 109 Ibid, para. 725. 110 Ibid, para. 729. 111 Microsoft judgment, paras. 85-90. See para. 87: “review of complex economic appraisals made by the Commission is necessarily limited to checking whether the relevant rules on procedure and on stating reasons have been complied with, whether the facts have been accurately stated and whether there has been any manifest error of assessment or a misuse of power.” 112 Microsoft Decision, para. 696-711.


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followed the tiered appraisal structure proposed by the 2005 discussion paper on exclusionary abuses113 - a choice that raises issues of its own (see infra). It is difficult to imagine that any radical solution would have emerged from the consensus of the thirteen judges in the Grand Chamber, but the shy, “playing it safe” introduction of the IBT remains disappointing. Thus, the future of the IBT is uncertain, particularly considering that since the Microsoft judgment, the CFI has not have the chance to rule on an IPR-related refusal to deal case. In any case, the IBT remains a highly polemic tool. First, it is up to discussion if it was correctly applied in the Microsoft case. Secondly, and more importantly, it is very controversial if the trade-off test can be an adequate economic assessment tool for future refusal to deal cases. This controversy finds itself at the very core of academic discussion on the conflict between ex ante protection of IPRs and its ex post fine-tuning by competition law. Conclusion The impact of Microsoft cannot be understated114. First, it was the first time that the essential facilities doctrine was applied on IPRs at its purest – without any peculiar or extraordinary circumstances surrounding them. Previously, the doctrine had been applied to force licensing in situations where the IPRs existed as an oddity of domestic law (Magill or the Italian Merck case115) and were not the fruit of any meaningful investment (also IMS Health), but not in a situation where IPRs were really deploying its function at its very purest, thus were protection of innovations had to been sacrificed for the sake of competition law. In Microsoft, the European authorities had no extraordinary circumstances that they could easily hold on to in order to justify compulsory licensing. Second, while not fully departing from the doctrine enshrined in previous cases, Microsoft lowered the previous benchmarks for IP-related essential facilities. This increased relaxation is evidenced across the key factual elements previously asked for a finding of abuse, mainly indispensability and blockage of a new product. In regards to indispensability, the CFI was very generous, conceding that Microsoft’s operators required full access to all interoperability protocols, including server-to-server protocols. Essentialness became no longer a synonym of impossibility or insurmountable difficulty, as suggested in Bronner, but merely a question of competition on an equal footing. In addition, under the laxer banner of “prejudice to consumers”, the simple notion of “limitation of technical limitation” stepped in as a criterion for abuse in lieu of Magill’s and IMS-Health’s much stricter “new product rule”. Third, and even more importantly, the European Commission for the first time picked up the “objective justification” prong of the essential facilities tests and used it to introduce a novel effects-based, “more economic approach”-inspired take on Art. 102 review – a welcome modernization in an area that had been neglected by the most recent advancements116. With the Incentives Balance Test, the Directorate for Competition under Mario Monti introduced a

113 DG Competition, Discussion paper on the application of Art. 82 EC on exclusionary abuses (Directorate for Competition, 2005), paras. XX. 114 Not everyone agrees with this opinion. Among sceptics, see for instance Larouche (2008), who emphasizes the avoidance by the CFI of the thorny IBT issue. He argues that the CFI gave undue significance and autonomy to the IMS Health test, which he claims is nothing but a set of proxies. In my view, while this is true, we cannot ignore that the CFI did not only struck down the IBT as an analytical framework, but implicitly embraced it. As it often happens, it is more important what the CFI did not dare saying than what it actually said. Again, a future IP-related case might be the occasion for the CFI or ECJ to “go the extra mile” and openly support the IBT. 115 See infra, at footnote X. 116 See i.e. J. Temple Lang (2003) p.1.


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trade-off between ex-ante and ex-post dynamic competition, and calculated that compulsory dealing would not only spare Microsoft’s incentives to innovate, but even have a revitalizing effect for the whole industry. This Incentive Balance Test fuels discussions that go beyond the Microsoft judgment itself: on one side, it stirs once again the old polemic about the impact of forced access on innovation incentives, as well as the closely related dispute on the interrelation between market structure and dynamic competition. Further, the Microsoft case does also raise other profound, systemic questions: about the suitability or lack thereof, of administrative authorities and civil courts to use economic analysis of dynamic competition. Lastly, the Microsoft judgment created a large gap between the U.S American and the European approach on essential facilities, as illustrated by the sharp contrast with the 2004 Trinko judgment of the US Supreme Court117, which fully relinquished the essential facilities doctrine. Accordingly, some feared that the EU would become a sought-after arena for undertakings wishing to access an essential facility. As a matter fact, although the fear of Europe becoming the Harry Callahan118 of IP-based essential facility owners has not come true, four years after, the footprint of Microsoft judgment remains indelibly casted in European competition policy. 117 Verizon Communications Inc. v. Law Offices of Curtis V. Trinko, LLP (decided January 13, 2004) [hereinafter Trinko] is arguably the most important and controversial competition law case ever decided by the US Supreme Court. The opinion was drafted by Justice Scalia, one of the most conservative and pro-market judges in the curia, and is a staunch defence of a laissez faire approach, in essence relinquishing almost any vestige of the essential facilities doctrine in the U.S. The facts involved a clear-cut unbundled access situation: Verizon, a telephone operator, was the incumbent local exchange carrier (LEC) in the New York area. Under the 1996 Telecommunication Act, which liberalized the US phone network, it was obliged to grant unbundled access to its network to competing LECs. Verizon however was discriminating between its own clients and competing operator’s clients. Trinko LLP, a law firm and client of competing operator AT&T, filed a class action against Verizon under Section 2 of the Sherman Act (the U.S equivalent to Art. 102 TFEU), claiming that Verizon leveraged its monopolistic power over the network infrastructure and thus the wholesale market to foreclose competitors on the retail market. Surprisingly enough, the Supreme Court dismissed the action. First, it emphasized that the essential facilities doctrine served no purpose in a regulated context, i.e. when access to the facility (in this case the local network) was compelled by sector-specific regulation. This doctrine had some impact on the interface between competition law and regulated network industries (telecom, utilities, rail, etc.), but is not interesting for the purpose of this paper. On Verizon’s behaviour, the Court essentially maintained that a company that had established a dominant position in the market, i.e. by creating an infrastructure that rendered it “uniquely suited to serve its customers”, could not be forced to share the facility, and was fully free to deal with whom it pleased to. Justice Scalia warned that mandated access would lessen incentives to invest, and also observed that enforced sharing would require antitrust courts “to act as central planners [...] a role for which they are ill-suited”. On the same line, the judgment quoted Prof. Areeda: “The problem should be irremeda[ble] by antitrust law when compulsory access requires the court to assume the day-to-day controls characteristic of a regulatory agency”. Some have derided Trinko as an extravagant, ideology-driven ruling. In any case, it has not been overturned. Its impact is enormous: it confined essential facilities to the extremely narrow and limited realm of Aspen Skiing (that is to say, a predatory pricing context) and enshrined the freedom of almost any facility-holder to refuse access. Trinko confirmed a trend of scepticism towards the essential facilities doctrine that had reached a previous peak in CSU v. Xerox, a case involving IP. While Trinko did not concern IPRs, it is obvious that, had it involved any, the U.S Supreme Court would have been even more keen on ruling out any abuse. Trinko remains a fascinating judgment for a Magill and IMS Health-weathered European jurist. It also has transatlantic implications, because it makes Brussels the forum of choice for global companies wishing access to global essential facilities, as was later proven by Microsoft. For a more elaborate discussion of Trinko, see inter alia H. Shelanksi, Unilateral Refusals to Deal in Intellectual and Other Property (Antistrust Law Journal, Vol. 76 No. 2, 2009); M.A Carrier, Refusals To License Intellectual Property After Trinko (DePaul Law Review, Vol. 55, 2006) 1991; as well as E.D Cavanagh, Trinko: A Kinder, Gentler Approach to Dominant Firms Under the Antitrust Laws? (Maine Law Review, Vol. 59, 2006). 118 Inspector Harold “Dirty Harry” Callahan, the ruthless cop impersonated by the great Clint Eastwood.


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4. Excursus: refusal to supply tangible property versus refusal to license IPRs. Is there any justification for the different treatment? The precedent section has shown the evolution of the European case-law on refusal to license intellectual property rights from a first embryo in Volvo right up to Microsoft, a high-stake litigation where a € 497 million fine was imposed on grounds of admittedly evanescent criteria. As shown, the decisive turning point of this jurisprudential saga was Magill. With this case, the Court did not only provide a framework for assessing IP-related essential facility cases, but actually, in doing so, introduced - at least theoretically - a higher standard than for non-IP cases such as Stena Sealink (port facility), Télémarketing (advertising slots) or Commercial Solvents (chemicals)119. This is true because in the Bronner case the ECJ has, at least implicitly, considered Magill’s three-prong test to be inapplicable for cases related to tangible property120. The Court followed the lead of A.G Jacobs’ opinion, who had stated:

“...particular care is required where the goods or services or facilities to which access is demanded represent the fruit of substantial investment. That may be true in particular in relation to refusal to license intellectual property rights”121.

In other words, in the wake of Bronner, only refusals to deal with IPRs are subjected to the higher standard of the “new product rule”. The Microsoft case would later confirm what had already been suggested in Bronner, admitting that there was a detached, stricter precedent for IP rights122. Thus, an IP-related essential facility seems more “sacred” than a physical one. In addition, this distinction between Bronner and Magill / IMS-Health seems to have been accepted by the domestic authorities and courts of the Member States, as illustrated by the Italian Merck case123.

119 For a brilliant paper on the rationale of this distinction, see Ritter (2005). 120 Bronner, para. 41 (“…even if that case-law on the exercise of an intellectual property right were applicable to the exercise of any property right whatever...”). Moreover, as far as I am aware, no other posterior dealing with refusal to supply tangible property has ever been treated by the ECJ under the perspective of Magill. 121 Opinion of A.G Jacobs in Bronner, para. 62. 122 Microsoft, para. 284. 123 Decision of the “Autorità Garante della Concorrenzia et del Mercato” (AGCM) of 15 June 2005, Case A364 (AGCM Bulletin n. 23/2005, p.7). In Merck, the AGCM (Italian competition authority) imposed on Merck the obligation to gratuitously license the patent for carbapenem antibiotics to Italian generic drug manufacturer Dobfar. Merck’s patent rights had expired in all European countries but Italy, where some particularities of Italian patent law concerning supplementary protection certificates (SPCs) allowed for a particularly long protection. Dobfar intended to manufacture the key active ingredient in Italy, where its production plants were located, and export it abroad. On appeal, the decision was upheld by the Regional Administrative Court of Lazio. Both the ACGM and the Court applied the essential facilities doctrine in its Bronner declination, ignoring the IP-specific “new product rule” set out in Magill. Although Dobfar pretended to manufacture exactly the same active ingredient, the Italian rulings stated that the “new product rule” was not applicable to the situation at hand, since the license would have been granted for export and sale to third countries where protection by IPRs was no longer afforded. This view is rather disputable, since an Italian patent right was in place, and it indeed allowed Merck to ban manufacturing of the antibiotics even if solely meant for export. Accordingly, the Magill / IMS-Health doctrine should apply. The question remains if and how the Italian competition authority would have circumvented this doctrine. In my view, Merck - much like the German Standard-Spundfass case – shows the limitations of the “new product rule” in situations of perfect market lock-up, where full replication of the IPR is the only mean of competition. In Merck, the whole of the European market was held captive by a single domestic patent, whose protection would remain unfettered in spite of compulsory licensing. In this vein, the Merck case confirms the trend that IPRs will only be subjected to mandated access if there are peculiar circumstances that make them less worthy of protection in the eyes of competition authorities: much like in Magill, the application of Article 102 in Merck was partly motivated by an oddity of Italian law: an extraordinarily long SPC for pharmaceuticals which made Italian patents inharmoniously stand out among its European equivalents (as a


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On the other hand, it is admittedly controversial if the theoretically less stringent duty to deal set out by Magill still applies in practice, since the Microsoft judgment has to a great extent relaxed Magill’s three-prong test, as well as other criteria (i.e. notion of likelihood of elimination of competition) common to both the IP and non-IP branches of ECJ case law on essential facilities. Conversely to the latter phenomenon, the Bronner case (now the controlling authority on physical essential facilities124) illustrates in sharp contrast to Microsoft that the benchmark for abuse in connection with tangible property has in turn become higher. This phenomenon is not confined to the European Union. The case-law in the United States also shows a split between courts that outright exempt IP from scrutiny under Section Two of the Sherman Act, and other circuits who, although generally very sceptical on the merits of this sort of cases, at least admit the possibility of taking IP-based refusal to supply to court. Further, this split is also evident in the diverging degree of deference that U.S American courts afford to IP rights as justification for a refusal to supply125. But, does IP deserve special deference and circumspection? Is such difference of treatment justified by legal, economic or IP-policy reasons? The arguments that have been provided by proponents of the distinction, i.e. that IPRs are more important because they incorporate moral right, which cannot be alienated126, or that the very essence of IPRs is to exclude others, fail to convince. As Genevaz observes, “[t]he policy arguments in favour of unfettered intellectual property rights are either misguided or advanced at such generality that no clear conclusions can be drawn”127. In my view, everything suggests that the distinction is not justified: - First, it shall be noted that there is no legal argument whatsoever to justify a different treatment128. I am not aware of any constitution where IP rights enjoy more protection than conventional property rights. Furthermore, under Article 17 of the recent European Charter of Fundamental Rights, which expressly mentions IP, as well as under Article 1 Protocol 1 to the European Convention on Human Rights, both types of property enjoy the same protection.

matter of fact, Italy was then trying to adapt its SPC regime to Regulation (EC) 1768/92= For comments on this case, see Pablo Ibáñez Colomo, The Italian Merck Case (College of Europe Research Papers in Law 1/2007); Alain Georges and Matteo F. Bay, Essential Facilities: A Doctrine Clearly in Need of Limiting Principles (IPTLJ, Vol. 17 No. 12, 2005); Rita Coco and Paolisa Nebbia, Compulsory Licensing And Interim Measures in Merck: A Case For Italy Or For Antitrust Law (JIPLP Vol. 2 No. 7, 2007). 124 Ritter (2005), p. 9. 125 For a detailed elaboration of the divergences in treatment across the different circuits, see Shelanski (2009); also S. Genevaz, Against Immunity For Unilateral Refusals To Deal In Intellectual Property: Why Antitrust Law Should Not Distinguish Between IP And Other Property Rights (Berkeley Technology Law Journal, Vol. 19, 2004) p. 741 et seq. 126 See E. Derclaye, Abuses Of Dominant Position And Intellectual Property Rights: A Suggestion To Reconcile The Community Courts Case Law (World Competition No. 16, 2006) p. 16: “First, contrary to other forms of property, copyright arises from an individual’s intellectual creation. The author has moral rights over his/her creation. A compulsory licence on something so personal should be imposed with extra care”. This unexpected argument fails to seduce us, particularly in light of the IPRs that have been concerned so far by refusal to license cases in Europe and the US, which mostly protected factual and/or functional creations. In addition, this argument is gauged for copyrights, and does not apply to patents or know-how. However, I do agree with the author that considerations of creativity should not play a role when balancing competition law’s intervention in the realm of IP. In the same vein, see also Gitter (2003) at p. 222. 127 Genevaz (2005) p. 746. 128 Ritter (2005), p. 13, see also Shelanski (2009), p. 379.


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This has been also confirmed by the case law of the European Court of Human Rights129. And, in any case, if IP rights were some sort of legal “safe harbour”, dominant companies would maliciously seek to incorporate some type of IP element in all their tangible essential facilities130. - Second, I disagree with the widespread identification of innovation with IP rights and classic knowledge-based industries. We shall not forget that innovation is a transversal phenomenon which can manifest itself in manifold ways (i.e. innovative changes in organization, distribution, production, marketing, contractual innovations etc.), and not only in the form of spiritual creations that can be protected as patents, software or know-how. It is absolutely disputable that development of IP requires more capital or risk than any tangible asset, i.e. the creation of a distribution network or the construction of a dock facility. Therefore, one might argue that mandated access to tangible property would have at least a comparable harmful effect on innovation incentives. It is indeed difficult to believe that the alleged harmful consequences of mandatory dealing of IPRs are so systematically greater as to justify a differentiated treatment. - Thirdly, pricing issues notwithstanding, the enforcement of remedies to a supply refusal is actually simpler and more efficient in the case of non-tangible IPs than of physical property, because of their alleged “non-rivalrous”, and “public goods” nature131. That means an unlimited number of undertakings may simultaneously enjoy an IP right without conflicting with each other, whereas this is impossible for tangible goods or services, which cannot be easily shared. As a matter of fact, it is much easier for owners of a physical essential facility (i.e. a port dock, a raw material or a distribution network) to find valid commercial, managerial or economic reasons to justify their refusal, for instance capacity or efficiency constraints, supply disruptions, stock shortages, safety reasons, lack of professional skills to handle the asset etc132. In my opinion, Bronner was a good example of this. The decision was surely influenced by the fact that carrying the additional burden of distributing other publications could have disrupted the proper functioning of Mediaprint’s distribution network. - In addition, from an economic prism, the only relevant difference between assets is the degree of monopoly power that their ownership confers133 - as market power is the very tool used by undertakings that engage in abuses of dominant position. All the other specific characteristics of the various types of property are sufficiently addressed ex ante by their respective property regimes. Thus, competition law does not discriminate between types of property: all that matters is the power over a market that they confer. All “market powers are born equal”, without its source being the reason for more or less benevolence.

129 See i.e. Anheuer-Busch v. Portugal (Judgment of the European Court of Human Rights, 11.10.2005), where the Court protected a trademark right against encroachment. 130 Ritter (2005), footnote 36 at p. 13; C. Humpe and C. Ritter, Refusal To Deal (College of Europe Global Competition Law Centre, July 2006) p. 10. Available at: http://ssrn.com/abstract=771907. 131 Ibid. On the “non-rivalrous” and quasi “public goods” nature of IP rights, see also Lévêque (2003) at p. 93; W. Kerber and C. Schmidt, Microsoft, Refusal to License Intellectual Property Rights, and the Incentives Balance Test of the EU Commission (November 8, 2008), p.21. Available at SSRN: http://ssrn.com/abstract=1297939 132 Temple Lang (2003) at p. 29 lists a series of justifications for denying access. It appears to me that most of this justifications (i.e. interference with technical or safety standards etc.) apply much better to physical assets than to IP. 133 P. Régibeau and K. Rockett, The Relationship Between Intellectual Property Law and Competition Law: an Economic Approach (University of Essex Department of Economics Discussion Paper no. 581, 2004) p. 30.


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- Lastly, again from an economic perspective, because the widespread assumption that mandatory licensing of IPRs for dominant undertakings always discourages innovation might not be necessarily true for all situations and circumstances134. This debate will be explored in the following section of the paper. 5. Microsoft and the impact of compulsory licensing on innovation As explained in the precedent Section, the perhaps most relevant contribution of the refusal to deal prong of the Microsoft case was the “incentive balance test”, a trade-off test proposed by the Commission to assess whether the benefits of compulsory licensing for the whole industry would outweigh any loss of innovation incentives for Microsoft, or for competing firms who would have access to its technologies. Even if it played a minor, timid role in the CFI’s ruling (the Court tacitly accepted it and briefly stated that Microsoft had failed to prove an objective justification135), the incentive balance test remains arguably one the Microsoft case’s most striking contributions to European Competition doctrine, since it constitutes (at least potentially) an effects-based assessment tool to be universally used in any essential facilities case. However, precisely for its economic, predictive and effects-based nature, it remains hugely controversial. There is no academic consensus about the impact of compulsory licensing on market actors’ behaviour. In fact, this lack of certainty jeopardizes, as I shall discuss in Section Six, the acceptance of the IBT as a valid analytical framework and raises questions about the limits of effect-based analysis in general. Over the following lines however, I will look into this debate and consider if and how compulsory licensing affects a dominant undertaking’s incentives to innovate. Economists currently frame the mandatory access debate around a trade-off between ex-ante and ex-post efficiency136. This trade-off presents itself at its most acute when involving IPRs137. This is the very core of the Microsoft case: on one hand, forcing a dominant undertaking to share its essential facility with competitors will stimulate competition in downstream markets, thus promoting ex-post allocative efficiency. On the other hand, mandating access will reduce the facility holder’s return, decreasing the ex-ante incentives to invest and to compete dynamically – an assumption challenged by many. In its Microsoft decision, the Commission clearly opted to fuel downstream competition by mandating access, while at the same time denying that Microsoft’s ex-ante incentives were weakened. Whether this view is correct or not is the true substantial core of the Microsoft case. 5.1 Pro mandated access arguments Among defendants of the Commission’s approach, Ritter138 quite convincingly enumerates a series of reasons why compulsory licensing does not necessarily diminishes investment incentives. I shall summarize the most important:

134 Ritter (2005) p. 14. 135 Of the same opinion, see Schmidt and Kerber (2009) p. 15. 136 Gerardin (2005) p. 19; for an extensive monographic discussion of this trade-off, see E.R. Elhauge, Defining Better Monopolization Standards (Stanford Law Review, November 2003). 137 Gerardin (2005) p.20 138 Ritter (2005) p.16-20.


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a) It is not obvious why investment incentives in the area of IP are more important than in any other area139. In my opinion, the conflict between rewarding innovation and addressing static competition also applies for tangible property – which more often than not is, as A.G Jacobs would put it, a “fruit of substantial investment”. Conversely, the Magill and IMS Health cases clearly illustrate how IP law often protects banal facilities. In Magill, the essential facility was merely a necessary by-product of the TV channel’s main activity. In IMS Health, the 1860 Brick Structure hardly represented any substantial investment (as it was a reproduction of Germany’s administrative boundaries), had acquired its indispensability mostly through network effects and, in any case, its cost had been long recouped when the market entrant demanded access. It seems that, consciously or not, many judges and scholars assume the fallacious dogma that IP is somehow more important or valuable than other business’ assets. As Shelanski (2009) writes:

“Any refusal-to-deal standard that differenciate[s] IP from other property on grounds of innovation incentives would miss much, if not most, industrial innovation”140.

b) Also, compulsory licenses are not free for the licensee, who must pay royalties. While pricing is certainly a thorny issue, this applies to access (albeit to a more limited extent. See Section 6.2) to physical facilities as well. c) Third, while broader exclusive rights increase the financial incentives of the owner, this does not necessarily translate into more innovation. In fact, excessive IP protection will have harmful consequences141, such as stifling of second-generation innovation, inefficient duplication of research efforts and thus very pernicious distortions in allocation of resources. d) It is also key to consider that IP protection is actually only one of the mechanisms to appropriate the returns of R&D investment142. A variety of other appropriability mechanisms exist, especially in high-paced, innovation-driven industries: first-move advantage, confidentiality143, the inherent reproducibility of the invention (in sophisticated industries, a patent itself means little without the associated know-how), network effects, or the speed of moving down the learning curve. In addition, specially if IP law does not grant a tight appropriability regime, an important role is played by the so-called “complementary assets”144, mostly consisting in proficiency in other managerial fields (i.e. manufacturing and distribution). For example, Mazda’s innovative Wankel engine needed the introduction of specialized repair facilities, since Mazda’s garages were only acquainted with traditional piston-stroke engines145. This is why large firms, despite being less innovative than their smaller, more creative counterparts, prosper – they are more likely to possess the relevant complementary assets. On another note, firms often obtain patents for strategic reasons that

139 Ibid, footnote 44 for an exhaustive list of concurring opinions. 140 Shelanski (2009) p. 386. 141 Again see Ritter (2005), p. 18, for an eloquent elaboration on the issue. 142 See Schmidt & Kerber (2008) p. 25. 143 See S.G. Winter, The Logic Of Appropriability: From Schumpeter To Arrow To Teece (Research Policy, Vol. 35, 2006) p. 1100-1106: “Lead time is often complemented by a dose of secrecy, which can preclude the possibility that imitating rivals run virtually abreast of the innovator in the race to get to the market” (at p. 1101). 144 See D.J Teece, Reflections on „Profiting from Innovation” (Research Policy, Vol.35, 2006) p.1131-1146; as well as the original 1986 paper, D.J Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy (Research Policy, Vol. 15, 1986) p. 285-305. 145 Teece (1986) p. 289.


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extend beyond directly profiting from exclusive commercialization146. Empirical evidence shows that IP rights are not the all-important factor. For instance, research conducted by Mansfield147 and, more recently, by Scherer148, has proven that most innovation would have been undertaken without patent protection, with percentages ranking at the very lowest at 62% for the discrete149 inventions typical in (petro)chemical and pharmaceutical industries, and going up to a surprising 99-100% for many industries, including such innovation-driven areas as motor vehicles or instruments. Levin et al. conducted an exhaustive (and currently referential) survey across a sample of 130 industries and concluded that product patents where thought of as “highly” or “quite” efficient in preventing duplication in just 25 industries. For process patents, only 3 industries had this same level of esteem150. This empirical evidence indeed dispels some perennial myths about Abraham Lincoln’s infamous “fuel of interest”151. 5.2 Contra mandated access arguments Of course, this view is challenged by many scholars, particularly those who are critical towards the Microsoft judgment152. They claim, sometimes in ideology-driven papers, that Microsoft is an attack on IP that reduces firms’ incentives to innovate. By eroding the foundations of IP, incentives to innovation would suffer; Microsoft – so claim critics - arguably constitutes nothing but an unnecessary triumph of competition objectives over IP protection. This criticism is invariably anchored in economic analysis. First, sceptic scholars argue that compulsory licensing turns IP right into public / common goods, eliminating exclusiveness, up to a point where they claim that this policies represent “a taking of private property by government”153, which, for alleged ideological reasons, seems less egregious to courts and authorities than the encroachment of classic “hard” property. (However, critic scholars invariably omit the fact that the compulsory license always implies the payment of a reasonable fee154, which compensates the incurred R&D expenses. In this context, the expropriation analogy appears rather interested). The second and main criticism is that compulsory licenses will reduce incentives to innovate for all firms on the market. First, critics argue that any firm will be reluctant to innovate since any successful invention risks triggering an art. 102-based suit or administrative proceeding. In this regard, authors claim that while consumption of IP rights themselves is indeed non-rivalrous, the return of investment’s consumption is. Second, competitors of the firm will have less incentive to innovate since they will have access to the innovation without any effort. Thus, unlike the Commission and the CFI, critics believe that compulsory licensing is not a panacea, but the opposite: it will discourage innovative competition across the board. 146 See W. Cohen, R. Nelson and J. Walsh, Protecting Their Intellectual Assets: Appropriability Conditions And Why US Manufacturing Firms Patent (Or Not) (National Bureau of Economic Research Working Paper No. W7552, 2000) p. 9-10. 147 Cited by Elhauge (2002) p. 277. 148 F. Scherer, The political economy of patent policy reform in the United States (KSG Working Paper No RWP07-042) Available at SSRN: http://ssrn.com/abstract=963136, also cited by Elhauge (2002) p. 277. 149 Discrete invention meaning here that a single patent covers the entire product or method, i.e. an active compound or a molecule, rather than a complex system (i.e. microelectronics). 151 Abraham Lincoln: “[Patents] secured to the inventor, for a limited time, the exclusive use of his invention; and thereby added the to the fire of genius, in the discovery and production of new and useful things”. Cited in Dolmans, O’Donoghue and Loewenthal (2007) p. 108. 152 For the most convincing critic voice, see Spulber (2008). 153 Ibid, p. 122. 154 See again Spulber (2008). Logically, the delicate pricing issue raises difficulties of its own (see infra).


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Some authors paint a very grim picture of competitive paralysis, where even undertakings without a dominant position will be reluctant to innovate, fearing to be propelled to the top of their respective market segment155. In my opinion, this extreme criticism demonizes compulsory dealing, claiming that it does nothing but to handicap winning undertakings, thus ignoring – in my opinion – the true aim of antitrust intervention. The aim of the essential facilities doctrine is not to give green light for competitors to happily parasite innovations and successful rival technologies, but simply to eliminate a cross-market leverage effect, levelling the playing field for undertakings on the dependent or downstream market. Although this author agrees that the expansive definition of interoperability in Microsoft, in particular its extension to the server-to-server protocols (arguably the weakest and less convincing point of the Microsoft judgment), might have been flawed156, we could not simply ignore that the basic goal of the Commission was to “deleverage” the power obtained by Microsoft by means of the Windows client OS. In my view, while criticism of the Commission’s shaky definition of interoperability is fully justified, rejecting the basic assumption that competitions authorities can mandate access to essential facilities is less so. The particular shenanigans of the notion of interoperability in Microsoft cannot lead us to outright discard the policy option of compulsory licensing. When reading some author’s tales of a seemingly “socialistic” EU Commission, we shall always keep in mind that access will only be mandated in extremely specific (and quantitatively rare) cases where a cross-market leverage phenomenon takes place. The essential facilities doctrine, however disputable it might be, has never pretended to undermine the free-market and to act as a redistributing central planner, divesting successful undertakings from its hard-earned market shares, but precisely to prevent monopolies to leverage their power to downstream, vertically integrated or (as in Microsoft), dependent product markets. In this context, the accusation that the European doctrine on essential facilities targets success rather than anticompetitive behaviour must be taken cum grano salis. In the end, as Spulber rightfully observes, the discussion on the Microsoft’s decision impact on the parties’ incentives to innovate boils down to the perennial debate about the degree of innovation in competitive versus monopolistic markets. Critics like Spulber argue that the Commission’s structuralist157 approach was fundamentally flawed, since the decision allegedly focused on the market structure rather than on the competitive conduct per se:

“The Commission viewed competition policy aimed at reducing market power as a means of stimulating innovation, even at the cost of reducing IP rights”. 158

Opponents of the Commission’s decision however maintain that an allocative efficiency-geared competition policy that seeks to harness the market power decreases the incentives to innovate. Based on relatively complex econometric analysis159, they claim that, unlike what we naturally are inclined to believe, competition does not necessarily foster innovation. Rather, competition among inventors dissipates rents and thus may reduce the supply of innovation. Between the ideal extremes of perfect competition and absolute monopoly, having more inventors reduces the rents to invention. In particular, critics believe that the Microsoft decision, which, by levelling the technical playing field, placed the emphasis on price

155 Ibid, p. 132 156 Supra, p. 20-21. 157 Infra. p. 34. 158 Spulber (2008) p. 144. 159 Ibid, p. 148-160.


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competition and incremental innovation (a clear ordoliberal bias), will diminish the returns of R&D investment to the detriment of new inventions. Crisply put, consumers will be worse off in an industry that competes more and innovates less. Thus, the Commission’s seemingly “common sense” approach (undertakings facing competitive pressure need to engage in innovation to survive the new, tougher scenario) does ignore the more complex nature of the innovation-competition relationship. Lastly, many commentators160 have pointed out that the indicator or “proxies” taken into account by the European Commission were particularly ill-suited for their application in the very dynamic competitive environment of knowledge-based industries, which does not abide by the more conventional market mechanisms that we are used to in other industries. As Pardolesi and Renda observe, “in these contexts, the market mechanism seldom plays the role of [an] optimal resource allocator [...] a constant overlapping of one-generation monopolists is often preferable to mere competition in the market”161. 5.3 The “Schumpeterian school of competition policy” 162 against ordoliberalism. Opponents of the Commission’s stance find powerful ammunition in Schumpeterian economics163, notably in two of Schumpeter’s beliefs on monopolistic markets164: on one hand, that the prospect of future monopoly profits is necessary to encourage ex-ante innovation (precisely in order to create that monopoly power); on the other, that existing market power fosters more innovation and investment ex-post, because a greater market share means that the firm will reap more of the fruits of its investment in innovation. Or, put crisply: large firms innovate more than small firms, and firms in concentrated markets innovate more. Thus, under the Schumpeterian model, long-term dynamic efficiency comes at the price of a deadweight loss in static competition. Building up on the ideas roughly sketched by Schumpeter, scholars have tried to develop more arguments to justify why concentrated markets are allegedly more fertile for innovation: i.e. firms with greater market shares are better able to finance R&D from own profits; to cover large fixed costs; to have access to complementary assets needed for innovation165; to diversify the risks of capital lock-up by undertaking parallel R&D projects etc. This view is challenged by economists such as Arrow166, who essentially maintains that monopolists will innovate less, simply because they have more to lose: a monopolist gains less from innovation due to the fact any monopoly profits that result from that innovation in part replace monopoly profits it was already earning. This limitation on the incentive of the monopolist is termed the “Arrow effect”, “cannibalization” or “replacement effect”, because the monopolist just works at “replacing itself” rather than on new businesses167. Sensu contrario, a small firm has more to gain from a given innovation than a monopolist. However, critics of Arrow point out that his model depends crucially on the enforcement of IPRs to exclude rivals from the benefits of an innovation. Thus, according to these voices, Arrow

160 Fort he sake of example, see Pardolesi and Renda (2005) p. 68. 161 Ibid. 162 This (ironical?) term was coined by Howard A. Shelanski, see i.e. Shelanski (2005) p. 394. 163 See Elhauge (2003) p. 228, for a clear explanation of Schumpeterian ideas applied to competition law. 164 As expressed in his seminal work Capitalism, socialism, and democracy (Harper Torchbooks, 3rd edition, 1942). 165 Supra. 166 Kenneth J. Arrow, Economic Welfare and the Allocation of Resources to Invention, in Essays In The Theory of Risk Bearing (1971), discussed in Elhauge (2003), p. 298 and, on a critical note, in Spulber (2008). 167 J.B Baker, Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation (June 2007) p. 6. Available at SSRN: http://ssrn.com/abstract=962261.


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would confirm rather than rebut the view that enforcement of IPRs is necessary to maximize incentives to innovate, particularly because Schumpeter’s claim referred to innovations that were not object of IP protection168. More recently, Geroski and Pomroy169 have provided two other interesting argument supporting Arrow’s views. First, they propose an argument rooted in behavioural economics, arguing that the absence of competitive forces leads to a behavioural disadvantage of monopolies, since they are tempted to “slack” in their confidence of having the cushion of large market shares. Second, these authors advance a simple but logic argument: in a competitive market, more firms search for innovation, which is therefore more likely to happen. On a different note, defenders of competition proceedings against Microsoft consider the allegations founded in the Schumpeterian notion of competition to be ironically wrong, because Microsoft’s behaviour sought precisely to avoid the next wave of what the Austrian economist called “creative destruction”170. As Prof. Bresnahan, former chief economist of the U.S Antitrust Division put it:

“This misses the entire point. Microsoft sought to block the mechanisms by which Schumpeterian competition plays out. It saw the coming together of the PC and the Internet as a potential occasion – one of a series of occasions – for competition against its monopoly, and engaged in the pattern of anticompetitive acts to prevent that potential from being realized”171.

This quote is taken from a 2002 paper on the U.S “browser war” case against Microsoft concerning the bundling of Windows and Internet Explorer172, but, mutatis mutandis, it could as well be applied to this paper’s refusal to supply problematic. It appears somehow ironical to reject a refusal to supply on the grounds of Schumpeter’s theories on monopoles, while at the same time doing everything to halt the Schumpeterian process of creative destruction. Therefore, as some scholars claim, compulsory dealing can help attain the necessary market decentralization for the fuse of Schumpeterian destruction to be lit173. Using a term borrowed from nuclear physics, competition law then intervenes to shape market stasis in such a way as to lead to “criticality conditions”. The truth is that economic science lacks conclusive evidence about the degree of market concentration that makes R&D investments bloom174.

168 Elhauge (2003) p. 299 169 See P.A. Geroski and R. Pomroy, Innovation And The Evolution Of Market Structure (Journal Of Industrial Economics, Vol. 38 No.2) p. 253-265; cited and interpreted in B. Sastry, Market Structure And Incentives For Innovation (Intertic Research Paper, June 2005). Available at: www.intertic.org/Policy%20Papers/Sastry.pdf 170 Schumpeter (1950), Chapter VTwo. 171 Bresnahan (2000) p.22. 172 United States v. Microsoft Corp, 253 F.3d 34 (D.C Cir. 2001). 173 See also Vezzoso (2005) p.11: “Innovation in Schumpeterian terms has invariably come from undertakings challenging the incumbent dominant position. […] Insofar, it seems that less control of other layers by the incumbent dominant undertaking and more disintegration in the industry […] can also lead to a more extreme form of innovation, namely Schumpeterian creative destruction”. 174 See Régibeau and Rockett (2004) p.28: “We do not know what the effect of market structure on investment incentives are. Economic theory just does not have any robust prediction as to whether competition drives innovation or invention is best nurtured – and financed – by large firms with significant monopoly power”.


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Other authors have pointed out and denounced the ordoliberalist threads that run through the Commission decision175. They observe what they consider the three “anachronic” traits or ordoliberalist competition policy: the emphasis on neoclassical competition on the merits, structural presumptions176 (the “structure-conduct-paradigm” enounced above, whereas there is an alleged causal link between market structure and degree of competition) and on form-based approach177, although they admit that this bias was less clear in the refusal to supply part of the case than in the Windows Media Player one. In my opinion however, it is rather odd to denounce Microsoft as the exclamation mark of form-based, per se rules, when it was actually the first judgment in the long “IP facilities saga” (or for that matter, even in the whole history of Art. 102 review) which introduced for the first time, even if timidly, a modernized, effects-based assessment tool: the IBT178. There is some sort of schizophrenia in denouncing the prevalence of form-based rules and at the same time decrying the lack of control of the Commission’s discretion on economic analysis, summoning the ghost of the (once) hubristic merger task force179. However, I do agree with critics in believing that the IBT may still fall short of a well-developed theory of objective justification (see infra). Yet another current of sceptics about the invocation of Schumpeter’s vision on monopolistic markets bases their arguments on the theory of “X-inefficiencies”180, an approach rooted in corporate governance, which argues that monopolists will more likely be befallen with inefficiencies and agency costs. While this might be true, I personally remain sceptical about the true impact of these considerations on innovation incentives, and I indeed suspect that large, dominant firms have many other advantages at their disposal that compensate any agency problems, i.e. the aforementioned economies of scale and scope, as well as easiness to attract external capital for R&D projects, or simply to fund R&D from own profits. It would be delirious to argue that Microsoft’s agency problems are a bigger detriment to innovation than a young firm’s trouble to attract venture capital181.

175 Ahlborns and Evans (2009) p. 16-24; to be taken with a pinch of salt, as both authors were counsel to Microsoft. 176 These traits are evidenced by the choices of the EC in regards to interoperability and emergence of a new product. Instead of a lumpier vision of competition “for the market”, that is to say, competition in Schumpeterian terms, where undertakings compete to capture the whole of the market by sweeps (“the perennial gale”, as Schumpeter himself wrote) of breakthrough success, the Commission’s decision deliberately favoured intra-market competition. This model of competition is incremental in nature: undertakings compete on the merits (price and quality), gradually acquiring or losing market shares. The Commission opted for this approach by mandating plug replaceability (thus, successful firms did not have to capture entire network architectures, but could compete within the heart of hybrid networks) and watering down the new product rule (accordingly, small, incremental product ameliorations could justify mandated access, rather than asking for full substitutes of the pre-existing products). 177 Ahlborn, Evans (2009) p. 20. 178 Also sharing this view, see Larouche (2009) p.23-24. 179 Ibid, p. 30. 180 Elhauge (2003) p. 299. 181 See G. Syrneonidis, Innovation, Firm Size and Market Structure: Schumpeterian Hypotheses and Some New Themes (OECD Economic Studies No. 27 Vol. Two, 1996) p. 37-70: “It seems then likely that the availability of internal and external finance will impose a major constraint upon plans to undertake or expand RGD activities. This is the reason why firm size or market power may matter Two different hypotheses are typically advanced in this context. It is argued, first, that RGD intensity is higher in concentrated industries because firms with greater market power are better able to finance RGD from own profits; and, second, that RCD intensity is higher in large than in small firms because large firms have better access to external finance” (p.49); “To sum up, there appears to be some evidence that the existence of financial constraints may restrict innovation by small firms and firms with little market power. This evidence is consistent with the Schumpeterian hypotheses on the role of financial constraints” (p. 52). In this vein, it shall be precised that according to some studies in the field of corporate finance, R&D results in a systematic risk premium for a firm, both for debt and equity capital. See among others G.J. Wedig, How Risky Is R&D? A Financial Approach (Review Of Economics And Statistics,


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In any case, the differing views on Microsoft’s impact on innovation remain irreconcilable and entrenched: yet another round of the perennial “Chicago vs. Freiburg” match. Both parties have strong arguments at their disposal and, what is more, these are founded on economic assumptions that are invariably complex and difficult to prove. Empiric evidence, if any, also fuels the arguments of both opponents and detractors and often departs from theoretical presumptions182. Despite the sophistication of econometric analysis, there are no definite conclusions to be drawn on the correlations between market structure and innovation incentives183. For instance, research by strategic consultancy Booz Allen has shown that Microsoft’s R&D investments have continuously grown since 2007184 and, as of 2010, they were the world’s largest R&D investor. On the other side, critics hint that the Commission’s decision impacted the IT marketplace, as allegedly shown by the post-Microsoft relationship between Microsoft and Sun185. Ironically, under the global watch of the European Commission, multinationals from across the globe have now greater incentives to cooperate. 5.4 Any help from posterior developments? Following the CFI’s decision in Microsoft, developments in the field of IPR-related refusal to deal have been non-existent. Accordingly, we remain largely in the dark as to any hint about the future European stance on the innovation incentives debate. Only the two Syfait cases, although relating to physical facilities, have dealt again with the innovation conundrum. Yet, as illustrated by the profound disagreement between A.G Jacobs in Syfait I186 (pre-Microsoft, but relevant nonetheless) and A.G. Ruiz-Jarabo in post-Microsoft Syfait Two187, views on the matter remain frontally opposed, even within the heart of the ECJ itself. Thus, the Syfait cases are of great interest for the purposes of this paper. The two cases involved the very same facts. The Greek branch of GlaxoSmithKline (hereinafter GSK) stopped supplying some of its medicines to a group of Greek pharmaceutical wholesalers, furnishing the medicines directly to an exclusive distributor. The rationale behind GSK’s decision was to avoid parallel importation by the wholesalers to other countries in the European Union. According to GSK, its market quotas and thus its return on R&D investment had diminished because of parallel imports. GSK suggested that “distributors which profit from parallel trade make no contribution to pharmaceutical

Vol. 72, 1990) p. 296-303. Wedig was able to show using empiric data from several hundreds of companies that R&D assets had a systemic financial risk somewhere between 2 and 3.5 times higher than the risk of non-R&D assets (see p. 301). Further, he argued that firm size and market concentration were able to somewhat offset that premium. In other words, while R&D capital is more expensive for everyone, it is disproportionately so for smaller, unconcentrated firms. For such firms, Wedig predicted a cost premium in excess of +900 bps. In my opinion, this risk premium which makes raising capital for R&D so costly highlights the importance of own financial capital over external capital for these type of investments. Own capital will always be more readily available in large, concentrated firms. 182 For a comprehensive critical survey of the large academic output on the relationship between market structure and innovation, see again Symeonidis (1996). 183 Ibid, p. 39-40. 184 B. Jaruzelski and K. Dehoff, Profits Down, Spending Steady: The Global Innovation 1000 (http://www.booz.com/media/uploads/Innovation_1000-2009.pdf) 185 Spulber (2008) p. 130. 186 C-53/03 Synetairismos Farmakopoion Aitolias & Akarnanias (Syfait) and Others v GlaxoSmithKline plc and GlaxoSmithKline AEVE [2005] ECR I-4609 (hereinafter Syfait I). 187 C-468/06 to 478/06 (joined) Sot. Lélos kai Sia EE and Others v GlaxoSmithKline AEVE Farmakeftikon Proïonton, formerly Glaxowellcome AEVE. [2008] ECR I-07139 (hereinafter Syfait Two).


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innovation”188.By discontinuing supply, GSK claimed to protect its “legitimate commercial interests”. The wholesalers considered this conduct as an abusive refusal to deal and initiated proceedings, both before the Greek Competition Authority and local civil courts189. Although the Syfait saga did not concern IP rights and the dispute was finally solved using the United Brands criteria for extraordinary orders190, we can see a parallelism of GSK’s and Microsoft’s arguments. Both companies believed that by sharing a facility, its incentives to spend money on innovation would diminish: in the case of Microsoft, as competitors were able to use its proprietary server architecture; in the case of GSJK, when wholesalers sold its innovative drugs for a reduced price in other parts of the Union. The allegations based on an impact on innovation were the same in both cases, but the take by the two Advocates could hardly be more different. A.G Jacobs’ opinion in Syfait I transpired the same reluctance towards compulsory dealing he had shown on the occasion of Bronner191. He agreed that protecting its commercial interests against parallel importation was a legitimate objective justification for GSK’s refusal to supply. A.G Jacobs pointed out that innovation was an “important competition parameter in the pharmaceutical sector”192. Thus, investment in R&D for new drugs would be hampered its return was put at risk by resale in other parts of the Union. What is more, A.G Jacobs predicted that pharmaceutical companies would be even reluctant to commercialize successful drugs in low-price countries such as Greece, in fear of achieving a dominant position which could trigger mandated access to parallel importers. Two years later, A.G Ruiz-Jarabo (comparing himself with great sense of humour to Avellaneda, the monk who wrote a second volume of Don Quixote’s adventures193) challenged A.G Jacob’s opinion in Syfait I. A.G Ruiz-Jarabo rebutted GSK’s arguments based on defence of legitimate commercial interests. He rejected the existence of a causal link between parallel imports and damage to the return of R&D investments194, which in his outspoken view just sought to “seduce” the public opinion, and suggested that GSK should change its commercial policy, i.e. by integrating vertically, if it wanted to maximize its profits and avoid competition by parallel importers195. The two conflicting opinions of A.G Jacobs and A.G Ruiz-Jarabo show that even after the Microsoft ruling, the dispute over the impact of the essential facilities doctrine (whether physical or IP-related) on dominant’s undertakings incentives to innovate has not yet been settled, not even at the very heart of the judicial institutions of the EU. Scholars and practitioners profoundly disagree on the matter, and each party has a wealth of powerful arguments, authoritative opinions from renowned academics and convincing econometric studies at their disposal.

188 Opinion of A.G Jacobs in Bronner, para. 44. 189 Both submitted the same request for a preliminary ruling, but the first one was rejected because of the competition authority’s lack of standing under Article 234. Inadmissibility notwithstanding, A.G Jacobs delivered his opinion on the merits of the case. 190 See case C-27/76 United Brands v. Commission [1978] ECR 00207. 191 The potential chilling effects of mandated access on innovation were picked up for the first time in A.G Jacob’s opinion to Bronner: “…a balancing of the interest in free competition with that of providing an incentive for research and development and for creativity” (para. 62). 192 Opinion of A.G Jacobs in Syfait I. 193 Opinion of A.G Ruiz-Jarabo in Syfait Two, para. 3. 194 Ibid, para. 109. 195 Ibid.


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5.5 Recapitulation The entrenchment and complexity of this discussion, as shown by the wealth of literature on one or the other side, raises issues which go beyond the particular conflict at hand in the Microsoft case, ultimately revolving about the economic justification of IP rights themselves. On a humbler scale, the discussion about innovation incentives raises the question about the appropriateness of the “incentives balance test” as a sound assessment framework for essential facilities cases and about the limits of the “more economic approach” and the prerogatives of competition authorities in general. These issues should be critically explored in the next section of the paper. 6. The “incentives balance test”: what future for effects-based art. 102 review? Regardless of the outcome of the Microsoft case, we shall not be myopic and ask ourselves if the “incentives balance test” constitutes a sound assessment tool for future cases to come. The question is more complex than it might seem at first glance. Logically, any previous prejudice on the impact (or lack thereof) of the essential facilities doctrine on innovation will influence the answer. If one adopts a Trinko-like position and believes that mandating access to an intellectual property right (or, for that matter, any physical essential facility) will invariably have a negative impact on dynamic competition across the board, then it would be pointless to even consider the IBT, because it is indeed a tool to balance mandated access. Obviously, defending the IBT means admitting the possibility of compulsory access to the facility if the benefits for the entire marketplace outweigh the loss (if any) of innovation incentives for the dominant undertaking. Thus, in my personal opinion, extreme sceptics of the essential facilities doctrine have excluded themselves from this debate. However, if we admit – be it just as a working hypothesis – that mandated access can be a reasonable policy under certain circumstances, then the debate about the advantages, pitfalls and limits of the IBT is opened. Prima facie, we could claim that the IBT is a sort of European “rule-of-reason” and a welcome modernization of Art. 102 review, which has been traditionally plagued with a rigid, form-based approach – particularly in the 00s decade, if compared to the analysis of collusive behaviour and the overhauled merger system196. An effects-based, economic take on Art. 102 is needed in other to overcome the rigidity of an exhaustive circumstances’ checklist – as many argue, it is unrealistic to believe that a set of objective and formal rules, no matter how sophisticated, can cover the infinite plethora of circumstances that business life throws at competition authorities. Instead, a comprehensive welfare calculus is needed. In my opinion, the IBT is particularly useful because it intervenes at the very core of the IP and competition law interface197. If IPRs were created by the legislator with the one and only goal of spurring dynamic competition, then there should exist mechanisms to “deactivate”

196 As a matter of fact, in July 2005, not much after the Commission’s decision on Microsoft, the Economic Advisory Group for Competition Policy (EAGCP) issued a report entitled “An economic approach to Article 82” (available at: http://ec.europa.eu/dgs/competition/economist/eagcp_july_21_05.pdf) that advocated a much-need overhauling of Article 82 review. In regards to IP-related refusals to deal, the report was very cautious, barely touching on the issue and stating that competition authorities should be particularly reluctant to intervene (see p. 45-46). 197 Concurring with this opinion, see Vezzoso (2005) p.7.


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IPRs when they achieve the opposite effect. According to this view, the IBT should become the instrument of choice to remove the “sharp edges” of IPRs and ensure that they maximize welfare in any situation. In such a way, the IP system’s great weakness can be solved: IP rights are granted across the board on an ex-ante basis, for all industries and in all circumstances, assuming that they will induce dynamic efficiency regardless of the specific circumstances of their deployment to a later point in time. In other words, competition law intervenes ex-post, identifying the special circumstances in which IPRs do not fulfil the function for which they are granted, and “tailoring” or “re-optimizing” them to any specific situation in order to ensure that they do not harm competition. As Régibeau and Rockett (2004) have pointed out, property law and competition law intervene at different stages of the economic cycle of an asset. Accordingly, competition authorities have more and better information about the importance of an innovation and the market structure than the legislator198. However, for all its benefits, it would be foolish to ignore that this idea comes with a number of pitfalls – legal uncertainty, false positives and pricing issues to name a few. 6.1 The perils of legal uncertainty and false positives Even defenders of the IBT approach, like economist François Lévêque, point out to the legal uncertainty created by increased intervention of competition authorities in the sphere of IP rights:

“Inventors and creators will not know in advance whether their rights will be whittled down or upheld by competition authorities. They will not be able to estimate correctly the return on their investments. This heightened legal insecurity reduces incentives and, consequently, R&D efforts”199.

The IBT is a powerful tool and, as such, one that might be abused. Any effects-based test gives competition authorities a great deal of discretion. As Vezzoso observes:

“...a pro-innovation “economics-based” competition policy cannot avoid taking into account that much less certainty and hard facts can be expected [...] even from the most modern and accurate economic theories and methods than would be advisable for rational, predictable and effective competition intervention”200.

Other commentators even point out to the very limits of economic prediction. According to Schweitzer, “...a balancing of effects on innovation and competition presupposes the availability of information and a capacity to predict future developments which – not only as a practical matter, but as a matter of principle – may not exist”201. This means heightened insecurity for European undertakings, since it is difficult to predict how the European Commission (or, for that matter, any domestic authority in the network202)

198 Régibeau and Rockett (2004) p. 26. 199 F. Lévêque, Innovation, Leveraging and Essential Facilities: Interoperability Licensing in the EU Microsoft Case (Word Competition, Vol. 28 Issue 2, 2005) p. 13. 200 Vezzoso (2005) p.13. 201 Schweitzer (2007) p.23. 202 We should not forget that Regulation 1/2003 broke the monopoly of the European Commission and gave birth to a decentralized enforcement network, where DG Competition and the Member States’ competition authorities


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will treat a specific situation. This is particularly true in a field where, in absence of “hard facts”, economists have disparaging views. Thus, litigation can easily degenerate in a stand-off of witness experts, consultancy firms and academics, all of them rather difficult for generalist judges to value. This also means increased litigation costs. In my opinion, the arguments about legal certainty should not be neglected, but not given undue importance, either. A few ideas come to mind. First, it is questionable whether the lack of legal certainty is really that much of a powerful deterrent for business activities built on IP rights. As we have mentioned before, IPRs are not the sole appropriation mechanism, and indeed, a certain nimbus of legal uncertainty, particularly coming from solid institutions such as European and American competition authorities, would unlikely have a strong impact on managerial decisions regarding R&D investments. Mutatis mutandis, the EC’s alleged activism in merger control issues, which has been the pinnacle of the “more economic approach”, has not shown any discouraging effect on European merger activity203. Second, this is particularly true if we look at the place assumed by the IBT within the wider scope of the essential facilities / refusal to supply doctrine. The IBT is (and, in my opinion, should not be) a stand-alone test, but rather the main and decisive element of a larger holistic test. For a license of IPRs to be mandated, three previous criteria have to be proven: indispensability, likelihood of elimination of competition and prejudice to consumers through technical limitation. Only then, within the frame of objective justification, the situation would be assessed through the prism of innovation incentives. Therefore, it is probable that a very small minority of cases would be subjected to the IBT204. As a matter of fact, no case similar to Microsoft has been dealt with by the European Commission or the ECJ over the last years. Microsoft was indeed a spectacular one-off event, but it did not trigger an avalanche of IP-related antitrust actions in the EU205. Again, the impact on managerial decisions will unlikely be decisive. Although I concede that compulsory dealing has an ex-post innovation impact, I believe that very few R&D investments, if any, will be forgone pre-emptively out of fear from the Damocles’ sword of competition law. After all, the essential facilities doctrine in its physical asset’s declination has been around for some decades now, and – putting aside some problems experienced with network industries’ liberalization - there are few reasons to believe that it has weakened incentives to create and develop new infrastructures and facilities. distribute cases among themselves. For an overview on this network, see F. Cengiz , Regulation 1/2003 Revisited (TILEC Discussion Paper No. 2009-042). Available at SSRN: http://ssrn.com/abstract=1512527. 203 See A. Bris and C. Cabolis, Merger Laws, Globalization and Corporate Value (March 2002) [Available at SSRN: http://ssrn.com/abstract=302912] for an empirical, quantitative analysis on the impact of Regulation 139/2004. 204 Yet one might turn around this argument, claiming that the using the IBT as an rule-of reason / efficiency defence is rendered a daunting task, since its position as the last element of the analysis “puts thebefore the cart”. In other words, the refusing undertaking would have to prove their efficiency defence by means of predictive welfare analysis in order to overcome of three previous form-based criteria inherited from Magill and IMS Health, a formidable hurdle which in practical terms would leave the undertaking in a disadvantageous, if not hopeless position. In this vein, see also the observations submitted by Régibeau and Rockett (2009), who point out at the problem of “regulatory opportunism”: once IP is produced, the optimal allocation is, obviously, access for everyone - that is to say, the optimal level of monopoly is none. Thus, the ex-post intervention of competition law faces a great bias towards limitation of IP. In my opinion, this risk is not too important, precisely because the economic appraisal is located at the tails-end of a test built up of other proxies, which should be configured in such a way as to “filter” situations not involving true cross-market leverage. Still, the imbrications of the IBT within the framework of other proxies remains a concern. 205 Of the same opinion, again see Régibeau and Rockett (2009) p. 26: “There is no need for intellectual property law to react to small changes in competition law. In particular, individual case decisions are of no consequence except if they herald a forthcoming sea-change in the enforcement of competition law”.


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In regards of false positives (the “twin brother” of legal uncertainty and arguably competition law’s par excellence pitfall), it is reasonable to believe that the IBT would not have a significant negative impact. Quite on the opposite: a move away from formalism and a judicious use of economic analysis can indeed reduce false positives in the context of IP-refusal to license, precisely because it involves rejecting a “one-size-fits-all” solution and instead tailoring the decision to the economic casuistic of the situation concerned. However, it must be noted that according to some commentators, the problems and social costs caused by erroneous antitrust interventions are specially magnified when targeting innovations, such as supposedly embodied by Intellectual Property206. Further, again according to this line of research, the likelihood of false positives is putatively higher in strongly dynamic markets207. 6.2 Price matters matter Many other scholars and practitioners have pointed out to one of the main practical difficulties surrounding mandated access: pricing208. In a free market setting, the price for IP royalties is set automatically by the free exchange of the parties at the crossing point of supply and demand. However, when a compulsory license is mandated by a third party, i.e. a judge or competition authority, market mechanisms no longer work, and no price can spontaneously crystallize: inefficiency is rife209. As Gerardin warns, pricing decisions should not be dismissed as secondary issues:

“All those who have been involved in access issues know that what often matters the most is not so much whether access should be given, but at which price it should be given”210.

Using exactly the same wording as Justice Scalia in Trinko, Levêque agrees that pricing requires competition authorities to be “an omniscient central planner” 211. He further points out to the shortcomings of current cost-based methods to valuate IP licenses, because unlike tangible assets, IP does not deteriorate and by definition (for it is public good) it never gets congested. Thus, the marginal social cost is zero, which makes calculation of an optimal [stress is mine] price impossible212. In practice, lawyers would resort to other economically more or less unsound methods which will just provide a range of acceptable values. As for competition authorities, they have the choice among several methodologies – and each of them might very well imply a particular policy choice. While calculation of a fee for comparably simple IP products, such as IMS’ block structure or some copyrighted material, might be relatively easy, one has to imagine the pitfalls of calculation for assets dealing with more complex processes. For instance, Gerardin, indeed a very seasoned practitioner in access cases, points out that rate cases in regulated network industries typically involve “dozens of experts and several months (or years) of evaluation”213. Once again, one asks himself if smaller, less sophisticated competition authorities, i.e. from Eastern European Member States,

206 G.A Manne and J.D Wright, Innovation and the Limits of Antitrust (Journal of Competition Law and Economics, Vol. 6 Issue1, 2001) p. 178. 207 Ibid, p. 29 208 For a profound research on pricing and pricing access, the reference in Europe is undoubtedly Covington & Burling’s Brussels-based partner Damien Gerardin. See for instance D. Gerardin, Abusive Pricing In An IP Licensing Context: An EC Competition Law Analysis (TILEC Discussion Paper DP 2007-020, June 2007). 209 This is essentially Ludwig von Mises’ classic theorem on the impossibility of socialism. See von Mises, Die Gemeinwirtschaft: Untersuchungen Über Den Sozialismus (Fischer, 2nd edition, 1932), specially p. 110-117. 210 Gerardin (2005) p.22. 211 Trinko, at TwoI. 212 Lévêque (2005) p.20. 213 Gerardin (2005) p. 23.


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are well placed to tackle this type of issues, not to say generalist judges under the decentralized framework of Regulation 1/2003214. However, pricing matters have not received much attention from the Commission, the CFI or the ECJ. In fact, the Microsoft legal battle dragged on when Microsoft failed to grant access to its interoperability protocols on unreasonable terms. Neither the Commission nor the CFI had established a solid basis for the calculation of access prices. Overall, pricing remains in my opinion the most problematic practical issue in regards to compulsory licensing of IPRs. However, I am convinced that the small number of cases that would likely surface would prevent this issue from acquiring systemic importance215. 6.3 Democratic legitimacy? On a wholly different note, Elhauge submits a surprising argument rooted in the defence of politics: competition law does not authorize competition authorities and/or judges to second-guess what the legislative bodies established when they enacted the laws governing IP:

“Those theories and studies should instead be argued to Congress, and if they are persuasive, they would call for far more sweeping changes in patent laws than occasional (and haphazardly applied) antitrust duties to deal with rivals”216.

Economist’s approach to IPRs and their outspoken call for welfare maximization through ex-post redefinition by competition law makes us sometimes forget that IPRs are in fact nothing but private property. Thus, from a purely democratic perspective, the conditions for their existence and enjoyment cannot be simply left to competition authorities, but ought to be established by the legislator. Should private property be a barrier against the expansive hubris of competition law? This programmatic argument of Elhauge does not seem overly convincing to me. While it is true that, for constitutional reasons, any limitation of private property should be anchored in statutory provisions, it would be absurd to claim that an executive agency, i.e. a competition authority, cannot have a discretional range of power to adopt measures which, under rule of law and having its origin in statutory provisions, limit the exercise or material content of IP or, for that matter, any property rights. This vision is incompatible with the needs of government intervention in the marketplace; that is to say, with the very essence of competition law. Yet obviously I do agree with Prof. Elhauge that any intervention of competition authorities on the content and scope of IPRs should represent the minimum encroachment possible. In a similar vein, some scholars217 propose that the essential facilities doctrine, in particular the three-prong Magill test, be incorporated into specific legal statutes. For instance, the 2002

214 See M.R Baye and J.F Wright, Is Antitrust Too Complicated for Generalist Judges? The Impact of Economic Complexity & Judicial Training on Appeals (George Mason University School of Law, Working Paper, Aug. 21, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319888; also A. Gavil, The Challenges of Economic Proof in a Decentralized and Privatized European Competition Policy System: Lessons from the American Experience (Journal of Competition Law and Economics Vol. 4, 2007). 215 In this regard, see Temple Lang (2003) p. 11, who claims that a series of factors such as the less litigious European environment and the prevalence of arbitration or the the lesser incentives for antitrust claims in the EU (i.e. absence of treble damages etc.) makes “refusal to license” cases very rare in this part of the world. 216 Elhauge (2003) p. 303.


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“Wittem Project”, which proposed an European model copyright code218, has chosen to enshrine the Magill triptych in the proposed text. This author does not line with such an approach: there are more perils than benefits in enshrining case law constructed criteria in legal statutes. For the sake of a tempting increase in legal certainty, we would constraint the capacity of the judiciary to react and adapt the criteria to specific situations. This is particularly true in the area of competition law, which is averse to codification and relies almost exclusively on flexible judiciary interpretation. Incorporating the Magill criteria into statutes would make analysis more formalistic and prone to false positives or, on the other extreme, degenerate in loopholes to be addressed by posterior case law. It is wishful thinking to believe that one provision may be sufficient to both comprehensively and accurately cover the entire spectrum of possible refusal to license situations. In my view, the legislator should steer away from a pointless attempt at codifying the essential facilities doctrine. 7. Do we see the tree or do we see the forest? Regardless of its particular outcome, the European Commission’s decision and particularly the subsequent ruling of the CFI in Microsoft leave a bittersweet aftertaste. Apart from the Commission itself, whose polemic decision was upheld, very few stakeholders or actors in the epistemic community will be fully satisfied with it. For some, the Microsoft case was a gross mistake. For others, it was a missed opportunity. Although critical of many aspects of both the administrative decision and the judgment, I myself prefer to see the glass half full and contemplate Microsoft as the start of a shift in the analysis of refusal to supply. In my opinion, a critique of Microsoft cannot be myopic and focus on case-specific errors, but rather look at the bigger picture. We must indeed differentiate between errors that are confined to the circumstances of the Microsoft case itself, and its wider policy implications, which we must carefully consider. Do we see the tree or do we see the forest? On one hand, the European Commission wrongly assessed interoperability, set an excessively low benchmark for indispensability and, by mandating access to the wrong protocols, failed to understand the logic behind the essential facilities doctrine. The European Commission created a perverse disruption on the server OS market: is forced Microsoft to disclose technologies that were not the fruit of an upstream activity, but had been created in order to compete specifically for that market. The Commission should have limited itself to mandate access to the server-client protocols. By not doing so, it levelled the competitive landscape in a perverse way, taking away from Microsoft a legitimate edge over its rivals. Through this ill-advised definition of the indispensable input, the CFI departed from Bronner’s stringent criterion and advocated a Procrustean vision of competition. Unfortunately, this gross mistakes concerning the indispensability criterion has casted a negative light on the entire Microsoft decision and CFI judgment.

217 See i.e. Gitter (2003): “In order to resolve this dilemma, the EC must, each time it enacts a directive harmonizing intellectual property, address explicitly the ensuing conflict between intellectual property rights and competition considerations [...] This is achieved only through the inclusion, in each directive harmonizing intellectual property protection, of language that establishes clearly when refusal to license constitutes abuse of dominant position”. 218 See Wittem Project, European Copyright Code (April 2010), Article 5(4)(2). Available at: http://www.copyrightcode.eu/Wittem_European_copyright_code_21%20april%202010.pdf.


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However, on the other hand, these errors, which are confined to the particular circumstances of the case, should not prevent us from looking at what I believe is the most important contribution of Microsoft: the so-called Incentives Balance Test. For all its pitfalls, the Microsoft decision’s innovation trade-off was a courageous, welcome innovation to Article 102 review in general and to IP-related essential facilities doctrine in particular. The CFI might have missed an opportunity when it refused to openly endorse the IBT219. Hopefully, the CFI or the ECJ will grab this chance in the future and decidedly embrace an economic take on refusals to license IPRs or, for that matter, the essential facilities doctrine in general, overcoming the inflexibilities of the Magill / IMS Health doctrine. In this regard, the IBT highlights the limits of the traditional, form-based approach: a “one-size-fits-all” solution is not suitable to tackle the myriad of different situations and circumstances on the marketplace. On the opposite, the IBT embodies the adaptability of economics-based appraisal to distinct situations and market structures, as well as different sectors or industries220. Therefore, when necessary, competition law could be cautiously applied ex-post to optimise the balance of IPRs and fine-tune the balance between efficiency losses and innovation incentives. The IBT is the open-ended, case-by-case approach that is more suitable for such purpose. It is part of an almost universal consensus that Intellectual Property is a key component of long-run innovation and thus dynamic efficiency in the market place. Competition authorities, in particular DG IV, which assumes a key role over a knowledge-driven market generating 20% of the world’s GDP221 should not relativize the importance of IP and become a redistributing central planner. What is more, dynamic efficiency is almost always more important than short-term static market stasis – the gains in heightened short-term static competition will rarely compensate for a disruption in dynamic efficiency. Accordingly, we believe that the bias should lie on Schumpeterian competition for the market as opposed to competition in the market, which might lead to regulatory tendencies. Competition authorities should steer clear of policy entrepreneurship in this regard, as the current state of economics suggests that market structure and dynamic efficiency remain endogenous phenomena. Yet, on the other hand, IPRs cannot be impervious to the objectives of competition law, degenerating into a “letter of marque” to be deployed in an abusively anti-competitive fashion – particularly when abusive leverage of market power threatens to shape the market structure in such a way as to make Schumpeterian “criticality” a chimera. In such circumstances, the intervention of competition authorities, in particular the application of the essential facilities doctrine, may be a legitimate policy. As of today, there exists no conclusive evidence in economic literature that compulsory licensing of an IPR will invariably lead to a long-term erosion of dynamic efficiency. Quite on the opposite, the essential facilities doctrine has been applied to tangible facilities without any dramatic consequences. In this vein, the judicial institutions should seize the opportunity to reunite IP facilities and physical facilities under the banner of a unified treatment. There is no single convincing economic reason why Intellectual Property deserves a different treatment than tangible property in the context to refusal to supply. What is more, the Incentives Balance Test might be the universal tool to be applied to both types of property.

219 A minority opinion still believes that the CFI specifically rejected the IBT. See for instance Kwok (2001) p. 271. 220 As the 2003 US Federal Trade Commission Report on innovation put it, “the Schumpeterian hypothesis is [according to some panellists] true for some industries and markets but not true in others”. See US Federal Trade Commission, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (2003) p. 14. Available at http://www.ftc.gov/os/2003/10/innovationrpt.pdf. 221 According to the International Monetary Fund ( see http://tinyurl.com/6eclluy)


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On an institutional note, it is biased and unfair to label the Microsoft decision and the CFI judgment as yet another example of ordoliberalism and old-fashioned competition analysis. We must reject this short-sighted criticism. Despite all its shortcomings, the Microsoft decision was indeed the European Commission’s long due attempt at a modernization of Article 102 review, manoeuvring away from the hallmarks of the classical form-based approach. The fact that there is legitimate disagreement about the interpretations of the facts, or about implicit policy options, such as favouring incremental competition in the market over a Schumpeterian approach, should not necessarily lead us to eschew the analytical framework used by the Commission, which indeed represents a leap forward in quality. Further, it is rather unfair to call for a modernization of Article 102 application, decrying form-based rules, but simultaneously raising concerns about the legal uncertainty of an effects-based approach. Effects-based analysis in competition law invariably asks for a wider discretional power of competition authorities, and thus invariably implies a certain loss of predictability. It borders on the chimerical to conciliate the legal certainty of a traditional approach with the sophistication and quality of economical analysis. Horizontal collusion and mergers have pioneered the “more economic approach” and, despite some errors and controversial decisions, no serious commentator advocates to turn back to a traditional, strictly form-based approach. The Microsoft decision’s refusal to supply part undoubtedly has some serious flaws. Yet after all, it provides us with valuable insights on the future of Article 102 review. The approach it proposes has its limitations and perils, since economic science, as any other discipline of human knowledge, is not infallible. Nevertheless, an effect-based approach that balances the impact of compulsory licensing on innovation incentives should be the adopted by European competition authorities – which, in turn, does not mean that a single exercise of incentive weighing-off should be the only applicable criterion. On the opposite, I believe that the IBT should gain depth, incorporating new proxies and assume a position as a balancing “efficiency defence” or as an effects-based prong of a larger essential facilities test, as advocated by the 2005 discussion paper. This would allow a restrained, targeted and precise deployment of competition law in leverage situations which result in unacceptable losses of welfare – and not an “across the board” exercise of IP readjustment, which is indeed an unreal and unenforceable perspective. Anyhow, the General Court or the European Court of Justice should, on the next available occasion, openly and clearly support the weighing-off of innovation incentives as a suitable technique to solve refusal to supply cases, both for IP and for tangible assets. Fearing this modernization because of the shortcomings of one decision is not a sustainable policy for European competition law. Once again, do we see the tree, or do we see the forest?


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Bibliography and references Journal articles and books Ahlborn C and Evans DS, The Microsoft Judgment and its Implications for Competition Policy Towards Dominant Firms in Europe (Antitrust Law Journal Vol. 75 No. 3 2009). Anderman, S.D, EC Competition Law and Intelellectual Property Rights: The Regulation of Innovation (Clarendon Press / Oxford University Press 1998). Antoniou A, The Essential Facilities Doctrine Before the European Community Courts: Ostracized or Expanded? (June (Cyprus and European Law Review Vol. 11 2010). Baker JB, Beyond Schumpeter vs. Arrow: How Antitrust Fosters Innovation (June 2007). Available at SSRN: http://ssrn.com/abstract=962261.

Baregheh A, Rowley J and Sambrook S, Towards a multidisciplinary definition of innovation, (Management Decision vol. 47 no. 8 2009).

Baye M.R and Wright J.F, Is Antitrust Too Complicated for Generalist Judges? The Impact of Economic Complexity & Judicial Training on Appeals (George Mason University School of Law, Working Paper, Aug. 21, 2009), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1319888

Bresnahan TF, The Economics of the Microsoft Case (Stanford Law and Economics Olin Working Paper No. 232) Available at SSRN: http://ssrn.com/abstract=304701 or doi:10.2139/ssrn.304701. Brinker I. and Loest T, Essential Facility Doctrine and Intellectual Property Law: Where Does Europe Stand At The Aftermath of the IMS-Health case? (Gleiss Lutz Rechtsanwälte). (http://www.gleisslutz.com/media.php/Ver%C3%B6ffentlichungen/Downloads/GleissLutz_BrinkerundLoest.pdf). Bris C and Cabolis A, Merger Laws, Globalization, and Corporate Value (March 2002). Available at SSRN: http://ssrn.com/abstract=302912 or doi:10.2139/ssrn.302912. Cavanagh ED, Trinko: A Kinder, Gentler Approach to Dominant Firms Under the Antitrust Laws? (Maine Law Review Vol. 59 2006). Cengiz F, Regulation 1/2003 Revisited (TILEC Discussion Paper No. 2009-042). Available at SSRN: http://ssrn.com/abstract=1512527.

Cohen W, Nelson R and Walsh J, Protecting Their Intellectual Assets: Appropriability Conditions And Why US Manufacturing Firms Patent (Or Not) (National Bureau of Economic Research Working Paper No. W7552, 2000).

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Refusal to Supply