IPR and Competition Law Regime: Towards a Common Goal

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Ashwini Siwal, Assistant Professor, Faculty of Law, University of Delhi.

The present paper is divided into four parts; the first part consists of a brief introduction. In its second part the paper broadly outlines the policy, justification and economics behind each regime. After an overview the paper delves into the misconceived controversy between the two regimes and has delineated that the two are complementary and in-fact seek to promote innovation and consumer welfare. Finally, in its conclusion, author have established the importance and need of recognizing a dialectic exchange between the two regimes which aim at different but often synergic objectives, and therefore interact to eliminate situation which could obstruct innovation and competitive dynamics. Hence, it can be submitted that through this dialogue exchange, not necessarily in the nature of a polemic, each discipline, by fulfilling its function, can also indirectly serve the aims of the other. These common grounds are innovation, free competition and in a wider sense ensuring the consumer welfare by securing wider choices, greater access to information and culture and lower prices.

In the words of AYN RAND “Patents are the heart and core of property rights, and once they are destroyed, the destruction of all other property rights will follow automatically, as a brief postscript ((AYN RAND, Capitalism: The Unknown Ideal (New York, New American Library, 1966) at p.128)).” This statement though a bit excessive highlights the importance of the IP. The first patent system developed in the 15th century Venice and for the first time a legal and institutional form of ownership of knowledge was established. Some regard that the thought that an idea can be owned is the birth of the European enlightenment ((See for a historical background CARLA HESSE “The Rise of Intellectual Property: 700 B.C. to A.D. 2000: An Idea in Balance” Daedalus (Spring, 2002): 26-45. For a preliminary general overview of the historical evolution of see F. PRAGER, A History of Intellectual Property from 1545 to 1787, J. Pat. Off. Soc., 1944,711;B. SHERMAN & L. BENTLEY, The Making of Modern Intellectual Property Law, Cambidge,1944.)). The 18th century witnessed the advent of IP, claiming it to be a real property in its purest form. IP is a product of human intellect as civilization developed from hunting, to agriculture; to specialization and trade… the creative intellectual endeavor was recognized and named “Intellectual Property”. The commercial and information age has only served to enhance the importance of IP laws ((Refer to p.2, Intellectual Property Law, ed. DR. AMEE-MARIE MOONEY COTTER, Law Society of Ireland, Cavendish Publishing ltd. (2003).)). IP the wealth of the new millennium is becoming central to strategic plans thus highlighting its importance and the need for its protection ((LESTER C. THEROW, NEEDED A NEW SYSTEM OF INTELLECTUAL PROPERTY RIGHTS, Harvard Business,  Sept-Oct., 1997 p.95-103.)). The survival in a highly competitive global market depends upon the development and adoption of the technologies.

The granting of a privilege though limited in consonance with the advice of LORD ACTON that… absolute power corrupts absolutely is with its consequences, is a public good, and tends directly for the advancement. Any system of law which attains these results is evidently consonant with reason, justice and sound public policy.

OBJECTIVES OF IPR’S

The following can be said to be the primary objectives of the IP law:

1. To provide an incentive for innovation, to be more creative. They act as a teaser for the inventive mind ((See SHAHID ALIKHAN & RAGHUNATH MASHELKAR, Intellectual Property and Competitive Strategies in the 21st Century, 2004 Kluwer Law International, Aditya Books (2006) at p.31; KITCH EDMUND W., The Nature and Function of Patent System, Journal of law & Economics, 20 (1977), 265. Further see Integrating IPR’s and Development Policy,REPORT OF THE COMMISSION ON IPR’S, London, September 2002. also see M. McFARLAND, Intellectual Property, Information, and the Common Good, (1999) BCIntell.prop.& Tech. F 060503.See also MONROE E. PRICE, The Newness of New Technology, Cardozo Law Rev.,Vol.22,July 2001, No.5-6 at p.1885.See also Z Grilliches, Patent Statistics as Economic Indicators, 28 J. Econ. Literature28 (1990) at 1661-1707.)). Abraham Lincoln remarked that incentives add “…the fuel of interest to the fire of genius.” IInd lecture on discoveries and Invention [Feb.11, 1859] ((See, The Collected Works of Abraham Lincoln(1953);356-63.as quoted in HARVEY E. BALE, Pharmaceutical Access and Innovation: Challenges and Issues, 42 DEVELOPMENTAL REV. 84, 84(1999).)). Then there are arguments of Jeremy Bentham that an exclusive privilege is absolutely necessary in order that what is sown may be reaped…He who has no hope that he shall reap will not take the trouble to sow ((A similar argument was given by JOHN STUART MILLS in Principles of Political Economy, Book V, Ch. X, s.4)).

2. To inform the public as it also provides incentive for the spread and use of such products (eg. TM’s enable consumers to make choices, thus inherent to it is an element of consumer protection.)

3. The exclusive grant eliminates the deterrent impact of “free-riding” and thereby increasing the perceived value of the patent and hence encourages increased investment in technology development. It further saves the cost required to maintain secrecy in order to prevent theft. The horrible, unthinkable alternative is a cesspool of secrecy which could lead to disastrous retardation of scientific progress ((see DR. EDWIN H. LAND, The Role Of Patents In The Growth Of New Companies, at the Annual Dinner of the Boston Patent Law Association on April2, 1959.)).

4. IP makes possible the efficient allocation of resources.

5. IP by affording protection enhances the free flow of ideas which form the ground of further innovations. It thus creates a positive cycle that leads to innovation ecosystem driving more creations thereby depicting its socio-cultural-economic benefits. As JOHN STUART MILL argued that the free thought and speech are important for the acquisition of true beliefs and for individual growth and development ((Protecting the right to receive benefits GOTTHOLD LESSING, one of the greatest writer of German Enlightenment argued that “ …..freely hast thou received, freely thou must give! Thus thought the noble Luther…Luther, I answer is an exception in many things.” In his 1772 essay “ LIVE AND LET LIVE”. For a detailed study refer to CARLA HESSE “ The Rise of Intellectual Property: 700 B.C. to A.D. 2000: An Idea in Balance” Daedalus (Spring, 2002): 26-45 IP SPURS INNOVATION, ARROW KENNETH , Economics, Welfare and the Allocation of Resources for Invention in INVENTION, GROWTH AND WELFARE: A THEOROTICAL TREATMENT OF TECHNOLOGICAL CHANGE, Ed. By NELSON R. (MIT PRESS,  CAMBRIDGE, MA ), 1969.)).

6. They results in increased- revenue, operational efficiency, improvements, and opportunities for local industrial and enterprises development.

7. Every new technology transforms the world around ((See p.23 Introduction in TINA HART & LINDA FAZZANI, Intellectual property Law, 3rd ed. Palgrave, MacMillan (2004); HORACIO SPECTOR, IP SKEPTICISM, INTELLECTUAL PROPERTY,at p.539-42 in PETER D. , The International Library of Essays on Law and Legal Theory,, II nd. Series, DARTHMOUTH (1999), further see ROBETT LANDENSON, “ free expression in the corporate workplace” in Ethical Theory and Businesses 2nd Ed., Ed. By T. Beauchamp & N. Biwis (Englewood cliffs, N.J.: Prentice-Hall,1983) pp162-69.)); it contributes to the achievement of higher standard of living and improvement of the public health and public safety. The reflection of deep human need for genuinely felt purpose that emerges when mere survival no longer dominates our daily lives.

JUSTIFICATIONS

The homo sapience asks for reason. Being so, it is pertinent as well as desirable in itself that any institution must be backed by justifications in favor of the institution which is to be defended which in the present case are the IPR’s. The aim here is to draw the main lines of the plausible justifications behind IPR’s. There are two ways of justifying an institution- DEONTOLOGICAL & CONSEQUENTALIST ((For an up-to-date distinction between two approaches refer to JOSEPH RAZ, The Morality of Freedom, Clarendon Press, 1986, ch.11.)).

A.  DEONTOLOGICAL JUSTIFICATION

This is provided when it is shown that it enforces certain rights which persons acting within the scope of the institution are entitled to. The most formidable being the Labor Theory of 17th century by JOHN LOCKE in THE SECOND TREATISE OF GOVERNMENT ((Refer to JOHN LOCKE, “THE SECOND TREATISE”, sec.27 (at 305-06) in TWO TREATISE OF GOVERNMENT, ed by PETER LASLETT, Cambridge University Press, 1970. the approaches are also apparent in the ARTICLE 27(2) of the U.D.H.R., 1948 when it provides that, “Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author” and to the same effect is the all-embracing definition of IP in The Convention Establishing The WIPO, 1967. The other deontological justification is identifying the personality through its external manifestations which JOSEPH KOHLER derived from OTTO VON GIERKE, who deemed it from HEGEL, who found it from KANT. See the point given by GEORG WILHELM FRIEDRICH HEGEL, POLITICAL WRITINGS 102-06.)), which is the amalgamation of two themes- that everyone has a property right in the labor of his own body (it clearly embraces the mind) and that the appropriation of an object arises out of the application of human labor to that object ((The Lockean themes of natural rights in modern IP scholarship can be seen in JUSTIN HUGHES, The Philosophy of Intellectual Property” , 77 Geo. L.J. 287(1988); the resonance of the Lockean thought were seen in the writings of  EDWARD YOUNG in CONJECTURES ON ORIGINAL COMPOSITION(1759) and in the  argument of illustrated encyclopedist DENIS DIDERROT in 1763 when he remarked that “ what form of wealth could belong to man, if not the work of his mind…if not his own thoughts …the most precious part of himself that will never perish, that will immortalize him?” he argued that products of mind are more uniquely the property of the man than land acquired through its cultivation . for further details refer to CARLA HESSE “ The Rise of Intellectual Property: 700 B.C. to A.D. 2000: An Idea in Balance” Daedalus (Spring, 2002): 26-45; also see ROSCOE POUND, Outlines of Jurisprudence in Social Dimensions of Law by JULIUS STONE , Ist Indian reprint (Universal, New Delhi), 1999, p.168.)). The central idea is that mixing (that is not material but legal-economic) one’s own labor with an un-owed thing confers a property right with a rider of, ‘enough and as good left over’ to ensure that the appropriation does not give a valid basis for complaints by other ((For an E.g. of the proviso being satisfied in case of patents refer to ROBERT NOZICK, Anarchy, State, and Utopia, Basil Blackwell, 1974 at 181-82.)). The merit of the Locke’s theory is that it not only explains the limited validity of IPR’s but also explains why a longer period of protection is granted to copyrights than patents.

B. CONSEQUENTALIST JUSTIFICATION

This is provided when it is shown that the working of an institution brings about valuable consequences (well-being, efficiency etc.).  The 19th century utilitarianism based on the canonical formulae –“the greatest happiness of the greatest number” is a justification of that sort. Patent law is utilitarian in that respect as it seeks to promote innovation and welfare- they are means to an end ((See, EDWIN C. HETTINGER (1989), ‘Justifying Intellectual Property’ Philosophy and Public Affairs, 18, pp. 31-52.)). The utilitarian justification-of providing incentive for innovation (for e.g. section8 para.8 of the Constitution of the USA says, “… to promote the progress of science and the useful arts.”) in the form of protection as without it adequate incentives for the creation of a socially optimal output of intellectual products would not exist ((EDWIN C. HETTINGER, JUSTIFYING INTELLECTUAL PROPERTY, Philosophy And Public Affairs-18 pp.31-52; PETER KARLEM,WORLD MAKING: PROPERTY RIGHTS IN AESTHETIC CREATIONS (1986) 45 Jo. Of Aesthetics and Art Criticism 183, at p. 185.)).

The economic theory of property rights in IP was given by MICHAEL LEHMANN as that IPR’s serve to generate optimal levels of production. He classified the economic activities on three levels- consumption, production and innovation and propounded the availability of property rights at one level ensure that the market and competition develops at the next higher level. The rights are restrictions on competition for the benefit of the competition ((See MICHAEL LEHMANN, ‘The Theory of Property Rights and the Protection of Intellectual and Industrial Property’, IIC 16 (1985).)).

In the conclusion it may be maintained that the institution is justified because:

1. It has an institutional structure justifiable on the basis of latter consideration related to the creative and innovative needs of the society

2. In recognizing the holder of the rights, it incorporates the variant which is formerly admissible ((For detailed study refer to HORACIO M. SPECTOR, An Outline of a Theory Justifying Intellectual and Industrial Property Rights, European Intellectual Property Review 11 (1989). For justifications behind patents, copyright and trademarks refer to CATHERINE COLSTON & KIRSTY MIDDLETON, Modern Intellectual Property Law, second ed., Cavendish Publishing (2005) at p.43-54; IPR are economically and politically significant in the course of the R&D, or in the course of marketing, business and the economic side of things as argued by DUTFIELD GRAHAM(ed.), Intellectual Property Rights: Driver of Competition and Growth or Unnecessary Constraint ? A Report of a conference held on 16 and 17 June 2003, Royal Institute of International Affairs, 2003.)).

ECONOMISTS RATIONALE

1. They provide an incentive to invent by affording protection from free-riders.

2. They lead to broader dissemination of innovations, otherwise the inventors would be force them to keep them in secrets.

4. They assure the public availability of inventions with a strong potential for further innovations and minimization of duplication ((21see ROBERT STONER, Presentation at FTC/DOJ Hearings on Competition and Intellectual Property Law and Policy in the Knowledge-based Economy, Intellectual Property and Innovation (FTC/DOJ, Feb. 26, 2002)http://www.ftc.gov/opp/intellect .(last visited on 18th September, 2008. ); also see GUSTAVO GHIDINI……)).

NO HARDSHIP PRINCIPLE:

The argument here is that those whom IPR constrain are no worse off as a result, and that there are thus no net losers in a system of IPR. This has found support in the writings of JEREMY BENTHAM and JOHN STUART MILLS ((See JEREMY BENTHAM, A Manual of Political Economy 71 (John Bowring ed., 1839); CLARK, Essentials of Economic Theory 360-61; JOHN STUART MILL, Principles in Political Economy with some of Their Applicatios to Social Philosophy, ch.2*6,for details refer to CARLA HESSE “ The Rise of Intellectual Property: 700 B.C. to A.D. 2000: An Idea in Balance” Daedalus (Spring, 2002): 26-45)).

EXTENT OF IP PROTECTION

What should be the extent of IP protection that is desirable is a question before the policymakers around the globe. It is a double edged sword as KOZINSKI J. remarked “overprotecting intellectual property is as harmful as under-protecting it…nothing today since we tamed fire, is genuinely new ((See WHITE V SAMSUNG ELECTRONICS AMERICA, INC. 989 F. 2d 1512,1513 (9th Cir., 1993); further see LAWRENCE A. SULLIVAN, Is Competition Policy Possible in High Tech Markets? : An Inquiry into Antitrust, Intellectual Property and Broadband Regulations as applied to the “NEW ECONOMY”, Case Western Law Review Vol.52, Fall 2001, No. 1 at p.62.)).”

Harms of over extensive protection-an overprotective system may be hemorrhaging if gratuitous award in excess  of those needed to encourage innovation may distort; resource allocation, reduce consumer welfare, and impede innovation by closing off research paths too early , too broadly, or on the basis of too trivial a contribution ((See ROBERT PITOFSKY, Antitrust and Intellectual Property: Unresolved Issues at the Heart of the New Economy, Speech At The Univ. of California, Berkley <http://www.ftc.gov/speeches/pitofsky/ipf301.htm.>(last visited 18th September, 2008.).)).

Following are some possible dangers inherent in over extensive protection of IP:

1. It may discourage second generation innovators foreclosing subsequent innovations ((See JAMES LANGENFELD; Intellectual Property And Antitrust Step Towards Striking A Balance. Case Western Law Review Vol.52 Fall 2001, No.1 at p.97-98..see also JAMES B. KOBAK, JR., Intellectual property, Competition Law and Hidden Choices Between Original and Sequential Innovation, 3 Va. J.l.&Tech.6(1998); WILLIAM LANDES & RICHARD POSNER, An Economic Analysis of Copyright Law 18 J. Legal Studies 325,326 (1989).)).

2. The above situation will reduce the overall welfare and such regime will amount to have traded one market failure for another.

3. It will result in creation of a deadweight loss as a monopolist will receive the greatest return by pricing at a level that excludes part of the market that is willing and able to pay above marginal cost for the product ((See JAMES BOYLE, Symposium: Taking Stock: The Law and Economics of Intellectual Property Rights: Cruel, Mean,or Lavish? Economic Analysis, Price Discrimination and Digital Intellectual Property, 53 Vand. L. Rev. 2007,2013(2000).)).

4. If an innovator will be allowed to keep all the surplus, there would be no benefit to the society from the innovation and the innovation would not drive the economy as a whole but will only enrich the innovator. Further, there would be no price or innovation competition and no consumer surplus from innovation. Although there will be innovations but there will be less number of developmental innovations considering the risk of the cost involved in R&D ((care must be taken as not to allow… [IP law] to be made instruments of oppression and extortion” in UNIVERSITY OF LONDON PRESS LTD. V UNIVERSITY TUTORIAL PRESS LTD. (1916) 2 Ch.601,610 (Eng.).)).

Harms of under protection:

It will be a situation in which the number of innovations would be lowest (but there will be some innovators being able to capture the gain from having a first mover advantage.)It will further reduce the total welfare as innovators would have a less incentive to invent and thus stifling future innovations. Stripping IPR’s of their excluding power would amount to killing their function as an incentive to innovation.

Thus there is a need of a balanced and strong IP regime in order to optimize the total welfare without sacrificing the innovation ((For a detailed study of impact of IP protection on consumer welfare and innovation see JAMES LANGENFELD; Intellectual Property and Antitrust Step Towards Striking a Balance. Case Western Law Review Vol.52 Fall 2001, No.1, Also see KEITH E. MASKUS & JEROME H. REICHMAN, The Globalization of Public Goods and the Privatization of Global Public Goods, Cambridge Univ. Press, 2005.)). As in the wise words of LORD MANSFIELD in that, “we must take care to guard against two equally extremely prejudicial; the one; that men of ability, who have employed their time for the service of the community, may not be deprived of their just merits, and the reward of their ingenuity and labor; the other, that the world may not be deprived of improvements, nor the, progress of arts be retarded ((LORD MANSFIELD in SAYRE V MOORE (1785) 1 East 361 n.,102 E.R. 139n.)).”

Thus a modern IPR system should seek a dynamic equilibrium that on one hand avoids both the perils of free-riding and the proliferation of ill-conceived legal monopolies that enable rent-seeking oligopolies to control and stifle follow-on innovation.

COMPETITION LAW

The competition law is the brainchild of policymakers attentive to democratic principles rather than an offspring of technicians of commercial law or economics ((AMATO GIULIANO, Antitrust and the Bonds of Power 2 (Hart Publishing, Oxford), 1997; PITOFSKY ROBERT, The Political Context of Antitrust, University of Pennsylvania Law Review, 127(1979),1051)). The law is premised on the conceptions of economic efficiency, consumer choices and the market. The philosophy is that a free market is the most efficient by keeping the prices down, meeting consumer demands and inducing the production of new goods.

Upon a bare reading of the preamble of the Competition Act, 2002 it is clear that the idea of consumer welfare can be described as the leitmotif of the act. The prime motto of the law is not to protect the market but rather to protect the consumer from the market failure ((SPECTRUM SPORTS, INC. V MCQUILLEN ,506 US 447(1993).)).

The other prime concern of law is to curb monopolies [at least when accomplished or maintained by means unrelated to merit] ((See generally ROBERT PITOFSKY, CHALLENGES OF THE NEW ECONOMY: ISSUES AT THE INTERSECTION OF ANTITRUST AND INTELLECTUAL PROPERTY, Antitrust law journal, 69(2000) 913; HOBERT HOVENKAMP ,Federal Antitrust Policy: The Law of Competition and its Practice 3 (West,1994). At p.17)). It runs on the premises that competition is always a stimulant and monopoly is narcotic ((See UNITED STATES V ALUMINIUM CO OF AM. 148 F. 2d. 416, 427 (2d. Cir. 1945); LE PAGES INC. V 3M. 324 F 3d. 141,147 (3rd Cir.(pa) 25 mar. 2003).)). The monopolies impose a DEADWEIGHT loss upon the society by reducing their output below which consumers would be willing to purchase at a competitive price. They further reduce consumer choices ((DAVID A. BALTO & ANDRE M. WOLMAN, Intellectual Property & Antitrust: General Principles IDEA- The Journal of Law and Technology,Vol.43, No.3, 2003, at p.398.)).

They reduce the total surplus thus are socially harmful ((LANDE ROBERT H. , Wealth transfer as the original and primary concern of antitrust: the efficiency interpretation challenged, Hastings Law Journal, 34(1982)65.)).

Incentive to invent is less under monopolistic than under competitive conditions. It had a direct role in stimulating competition as firms seek and achieve their competitive advantage through innovation. Strong enforcement of it is positively associated with successful, internationally competitive and innovative industry as business thrives on competition ((See MICHAEL E. PORTER, The Competitive Advantage of Nations 662-64 (The Free Press, 1990) ; also see  JAMES LANGENFELD; Intellectual Property And Antitrust Step Towards Striking A Balance. Case Western Law Review Vol.52 Fall 2001, No.1 at p.92.)). Competition between R&D companies gives them a strong incentive to seek the best possible balance between the opportunity costs involved in R&D and consumer preferences as they run on the risk of being driven out of the market.

The competition laws are intended to ensure that market remains competitive by way of proscribing certain conducts ((For e.g. see CONTINENTAL TV INC. V GTE SYLVAN INC., 433 US 36(1977); GREEN COUNTRY FOOD MARKET, INC. V BOTTLING GROUP LLC, 371,F3d 1275,1281(10TH CIR.OKLA.); PARK V THOMSON CORP., 2007WL119461(SDNY 11 Jan., 2007).)). This results in the most efficient allocation of a nation’s scarce resources and thus ensuring to the consumers the widest variety of choices at the lowest possible prices ((See generally HOBERT HOVENKAMP , Federal Antitrust Policy: The Law of Competition and its Practice 3 (West,1994).)).

Competition makes a substantial contribution to economic performance in following ways:

1. Efficiency in both productive and allocative sense of economic resources ((See PHILIP E. AREEDA & HERBERT HOVENKAMP, ANTITRUST LAW: AN ANALYSIS OF ANTITRUST PRINCIPLES AND THEIR APPLICATION Vol. II A Rev. Ed. (1997).)).

2. Progressiveness in the development of more efficient technologies and new and improved product and services; as with markets in equilibrium and the prices just covering costs, innovation would be the only way by which higher prices can be achieved.

3. To promote competition and curb monopoly ((STANDARD OIL CO. V FTC ,340 US 231,249(1951).)). In fact it stands in sharp opposition to it.

4. To maximize consumer welfare by encouraging firms to behave competitively.

Thus, by fostering fair competition it ensures lower prices, better products and wider consumer choices by ensuring fair play and bringing out the best of them (thereby promoting economic efficiency)

ORIGIN AND DEVELOPMENT

The modern competition law can be traced to the Americas SHERMAN ACT OF 1890. However its roots can be traced back to as early as, 483 AD when EMPEROR ZENO (474-491 AD) enacted such an act ((For a detailed background of the development in Europe, America & England refer to MARK FURSE, Competition Law of the UK & EC (Blackstone Press Ltd., 1999) pp. 2-6.))

THE ADVERSE CONSEQUENCES OF MONOPOLY:

1. High prices, ADAM SMITH in his THE WEALTH OF NATIONS (1776) suggested that: ‘the price of monopoly is upon every occasion the highest which can be got.’

2. Less output.

3. It results in a non-optimal allocation of resources by sending the wrong signals as to the value/cost of products.

4. Sent the false signal to the consumer about the value of a commodity.

5. The money that would have been spent on the monopoly product is instead spent on other products thereby raising their prices and the market becomes distorted ((For other harms refer to MARK FURSE, Competition Law of the UK & EC (Blackstone Press Ltd., 1999) pp.6-9.)).

Keeping in view the greater recognition of the fact that innovation is of far greater importance to the economy than avoiding excess limitations ((See MICHAEL A. CARRIER, Unraveling the Patent-Antitrust Paradox, 150 U.Pa. L.Rev. 761 (Jan., 2002);  WILLIAM F. BAXTER , Antitrust Law and Technological Innovation, Issues Sci. & Tech., Winter 1985, at 80,82.))the primary concern is as to how to reach a balance, so that the innovation can be encouraged while anticompetitive behavior in products market can be kept to a minimum.

WHAT IS MORE PRO-INNOVATIVE-MONOPOLY OR FREE MARKET:

Innovation is crucial for effective competition, economic development and broadly for the transformation of society. SCHUMPETER considered innovation as an Engine of Development ((See RICHARD N. LANGLOIS, “Schumpeter and the Obsolescence of the Entrepreneur”, Paper presented at the History Of Economics Society, Deptt. Of Economics, The Univ. of Connecticut, U63 Storrs,CT 06269-1063,1987. also see KEWANEE OIL CO. V BICRON CORP. 416 US 470 (1970); BISHWANATH PRASAD RADHEY SHYAM V HINDUSTAN METAL INDUSTRIES MANU/SC/0255/1978.)). As per the view of the SCHUMPETER the monopoly leads to innovation as they have more resources to invest in R&D and they are more willing to do so because they could later recoup the benefits stemming from their innovation. Further the monopolies were under constant pressure of innovation or they run risk of being replaced by a new monopoly ((JOSEPH A. SCHUMPETER, Capitalism, Socialism and Democracy 100-06 (3d. Ed., Harper & Row 1950).this theory was further expanded by EDMUND W. KITCH , The Nature and Function of the Patent System, 20 J.L.& Econ. 265, 276 (1977)as that the patent rights which confer a economic  monopoly are beneficial for two reasons. First, they provide developmental incentives by allowing full gain and benefits of such development  and , secondly, early and broad patent rights would allow coordination of developmental efforts, which would decrease the duplicative investments in development.).)). however this theory is challenged on the ground that a monopolist would have no incentive to innovate if the profits from that product would only eat into the profits on the monopolist’s current products ((SEE KENNETH J. ARROW, Economic Welfare and the Allocation of Resources for Innovation, in The Rate and Direction of Inventive Activity: Economic and Social Factors 609-25 (Natl. Bureau of Econ. Research ed., 1962).))and secondly the risk of duplicative investment is overblown as competing researchers can arrive at different results at a quicker pace and multiple discoveries help establish the validity of new research claims ((REBECCA EISENBERG, 56 U. Chi. L. Rev. 1017, 1063-64 (1999) (cited ROBERT K. MERTON, The Sociology of Science 378-80 (Chicago 1973)).)). MICHAEL E. PORTER, demonstrates the importance of competitive policies in promoting innovations by establishing that competition law has a direct role in stimulating innovation because firms seek  to base their competitive advantage by way of innovations ((See, MICHAEL E. PORTER, The Competitive Advantage of Nations, 662-64 (The Free Press, 1990).)).

INTELLECTUAL PROPERTY & COMPETITION LAW: INTERFACE

Striking balance between these two regimes remains a key concern for the policymakers around the globe. Previously, the two were considered to be in close opposition. There is an inevitable tension between the two regimes where one creates an exclusive so-called monopolistic rights and the other seeks to curb the monopoly ((see ALDEN F. ABOTT & SUZANNE T. MICHEL in The Right Balance of Competition Policy and Intellectual Property Law: A Perspective on Settlement of Pharmaceutical Patent Litigation, IDEA, The Intellectual Property Law Review, Vol. 46, No.1, 2005; WARD S. BOWMAN JR., Patent & Antitrust law: A Legal & Economic Appraisal(1973) that “both antitrust and patent law have a common central goal: to maximize wealth by producing what consumers want at the lowest cost”; WILLIAM F. BAXTER, Legal Restrictions on Exploitation of the Patent Monopoly: An Economic Analysis, 76 Yale L..J. 267,275 (1966);  SCM CORP. V XEROX CORP. 645 F.2d 1195,1203 (2d Cir. 1981)(“ while the antitrust laws proscribe unreasonable restraints of competition, the patent laws reward the inventor with a temporary monopoly that insulates him from competitive exploitation of his patented art .”); also see WALKER PROCESS EQUIP., INC. V FOOD MACH. & CHEM. CORP., 382 U.S. 172,177 (1965).the conflict can be seen in following cases IMAGE TECHNICAL SERVICES INC. V EASTMAN KODAK CO. 125 F. 3d.1195 (9TH Cir. 1997);IN RE INDEPENDENT SERVICE ORGANIZATION ANTITRUST LITIGATION(XEROX) 203 F. 3d. 1322 (fed. Cir. 2000);CSU V XEROX CORP. 131 S. Ct. 1077(2001); INTELGRAPH CORP. V INTEL COORP. 195 F.3d. 1346,1358-59 (Fed.Cir. 1999)NOBEL PHARMA AB V IMPLANT INNOVATIONS, INC., 141 F. 3d. 1059,1069 (Fed. Cir. 1998) ;CR BOARD, INC. V M3 SYSTEMS, INC.157 F.3d. 1340 (Fed. Cir. 1998).)). It may be submitted at this point that this “stereotypical generalization” is not entirely correct ((As argued by ALDEN F. ABOTT & SUZANNE T. MICHEL in The Right Balance of Competition Policy and Intellectual Property Law: A Perspective on Settlement of Pharmaceutical Patent Litigation, IDEA, The Intellectual Property Law Review, Vol. 46, No.1, 2005 that , “IP do not confer monopoly power in the economic sense, and in the past, antitrust law often did more to create artificial impediments to efficient business transactions than to correct monopolistic interferences with the efficient business transactions.”)). From the point of view of maximizing social welfare an inherent tension exists between this two ((As KAPLOW puts it,”A practice is typically deemed to violate the antitrust laws because it is anticompetitive. But the very purpose of the patent grant is to reward the patentee by by limiting competition, in full recognition that the monopolistic evils are the price society will pay.” Extension of Monopoly through Leverage”, Columbia Law Review, 85 (1985):515.)). What the vertical movement reveals is that, from its legislative origins, intellectual property was not concerned with the idealized individual and his rights but rather was a government derived strategy for the development of competitive advantage ((See generally, CHRISTOPHER MAY, The Venitan Movement: New Technologies, Legal Innovation and the Institutional Origins of Intellectual property; p.7-30 in the Intellectual Property Rights, Critical Concepts in Law, Vol. III Ed. By: DAVID VAVER , Routeledge, (2006).)).

In fact, from an economics point of view, IP law is primarily concerned with the provisions of appropriate ex ante incentives (and increasing competition in innovative markets), while competition law is primarily concerned with ex post incentives (and increasing competition in product markets).

Legal protection can be viewed as a restraint on competition as is required in order to promote competition. Competition can only evolve as a regulatory mechanism in an economically meaningful manner once the results of the productive labor are protected.

The patent system encourages innovation and its fruits, and because the underlying goal of the antitrust laws is to promote competition, the patent and antirust laws is to promote competition , the patent and competition laws are complementary ((LOCTITE CORP. V ULTRASEAL LTD., 781 F 2d 861, 228 USPQ 90 (Fed. Cir. 1985)ATARI GAMES CORP. V NINTENDO OF AMERICA, INC.,897 F. 2d 1572, 14 USPQ2d 1034 (Fed. Cir. 1990).)).

More recently it has been recognized that these two legal regimes, properly understood seeks to promote innovation and consumer welfare- albeit through two different mechanisms- IP law by protecting innovators (and thus financial returns), competition by combating restrictions on the competitive process that may harm consumers and slow innovation ((ALDEN F. ABBOTT & SUZANNE T. MICHEL, The Right Balance of Competition Policy and Intellectual Property Law: A Perspective on Settlements of Pharmaceutical Patent Litigation, IDEA, The Intellectual Property Law Review Vol.46, No. 1 , 2005 at p.2.)). Each had a direct specific goal which can’t be harmonized with that of the other and it would lead to a false trail if the two regimes are seen in isolation.

In order to promote innovation and welfare an appropriate balance be struck between these two regimes ((See the FEDERAL TRADE COMMISSION, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy,http://www.ftc.gov/os/2003/10/innovationrpt.pdf (accessed on 18th Sept. 2008).)). There might be a situation where IPR’S can allow a company to leverage its possession of those rights in order to engage in a monopolization or anticompetitive behavior beyond what is expressly allowed by the intellectual property grant this is the situation which competition law attempts to remedy. The competition law thus provides a significant limit to the extent of market power an IPR can bestow. However, competition law regime which unduly limits the investment return of the successful inventor will discourage inventions hence calling for an optimal IP protection in the light of the competition laws ((THOMAS M. JORDE & DAVID J. T. , Rule of Reason Analysis of Horizontal Agreements: Agreements desired to Advance Innovations and Commercialize Technologies, 61 ANTITRUST L.J. 579;581-83 (1993).)).

Whether IP creates monopoly?

The word MONOPOLY has been derived from MONOS-alone + POLEIN-to sell. The word was most probably used for the first time in England by THOMAS MOORE in UTOPIA (1516) ((For a brief historical background refer to WILLIAM H. FRANCES & ROBER C. COLLINS, Cases and Materials on Patent Law including Trade Secrets-Copyrights-Trademarks, Fourth Ed., West Pub. Co., St. Paul, Minn. 1995 p.64-80)). The economists of the CLASSICAL SCHOOL OF ECONOMICS starting with JEAN BAPTIST SAY, were concerned that a system of patents protecting the results of technological research would have extensively adverse effects on price level and dynamism of economic competition and “monopoly over ideas” would benefit individual inventors and companies at the expense of “society and industry ((.For eg. CHAMBERLIN(1937), SCHERER(1984),SOTCHMER(1991) express not dissimilar concerns about dissimilar concerns about the anticompetitive effects generated by a system of patents, see GUSTAVO GHIDINI…..at p.13.)).”

The antitrust laws were in existence long before the IP laws and deal with appropriation of what should belong to others. A valid patent gives the public what it did not earlier have. It is an obfuscation to describe a patent as an exception to the general rule against monopoly. Consequently, the use of word monopolist with respect to patentee is pejorative and should be avoided. As per POSNER (2005) use of the word monopoly with regard to IPR is unfortunate. Patent rights are not monopolies in the antitrust sense of the word. Not every patent is a monopoly, and not every patent confers market power- it depends on the availability of alternative products and the success of the idea. Further, the IPR’s are themselves limited within themselves in terms of extent and scope. Advantage gained by a new technology does not convert a possessor into a prohibited monopolist ((see CORWIN & LLEWELYN, Intellectual Property: Patents, Copyright, Trademarks, and Alied Right Fifth Ed. Thomson & Maxwell , 2003 ; also see SCHENCK, A.G. V NORTON CORP. ,713 f.2d782, 218 USPQ2d 698 (Fed. Cir. 1983.) ; JAMESBURY CORP. V LITTON INDUS. PRODS., INC., 756 f.2D 1556, 255uspq 253 (Fed. Cir. 1985); ABOTT LABS. V BRENNAN, 952 F. 2d 1346, 21 USPQ 253 (Fed. CIr. 1992); LOCTITE CORP. V ULTRASEAL LTD., F.2d 861, 228 USPQ 90 (Fed. Cir. 1985).)). It must be noted that when a patent is obtained it does not exclude the patent owner from competition laws ((ATARI GAMES CORP. V  NINTENDO OF AMERICA, INC., 897 F 2d. 1572, 14 USPQ2d 1034(Fed. Cir.1990).market power acquired through “superior skill, foresight, and industry”, should not be condemned, although the anticompetitive exercise of this may be prevented, UNITED STATES V. ALUMINIUM COMPANY OF AMERICA, 148 F.2d 416 (2d cir.1945).)). The underlying purpose behind the exclusivity granted by IPR’s is to promote competition in the long term by stimulating the development and production of new goods. In fact, IP laws are critical in stimulating innovations and ensuring dynamic competition ((see JAMES LANGENFELD & DAVID S., Innovation and U.S. Competition Policy, 34 Antitrust Bull. 1, 1-3 (1989).)). They are limited rights subordinated to a social purpose. There exclusiveness is in fact a sort-term public welfare monopoly which promotes the competitive economy of which it itself is a vital part. The competition law did not the question the exercise of excluding faculties as such, but only the enactment of further anti-competitive behavior by the IPR holders aimed at exploiting their position, and the consequential generation of further anti-competitive effects. Such further exercise whereby IPRs are used as a “LEVER” to expand market power beyond their essential anti free-riding function could be restricted by Competition law ((see GUSTAVO GHIDINI,INTELLECTUAL PROPERTY AND COMPETITION LAW the innovation nexus, (EE PUB., UK, 2006) AT P.102)).

IPR is abused if it is employed to unduly restrict competitive equilibrium far beyond the legal boundaries afforded by same right ((see T. VINJE, MAGILE: Its Implication on the Information Technology Industry,14 EIPR, 1992,397.)).

Both regimes support competition by, “encouraging investment based on risk ((see LOCTITE CORP. V ULTRAWEAL CORP. 781 F. 2d. 861, 876-877, 228USPQ 90 (Fed. Cir. 1985).)).”

IP embodies information that is a public good and so, in the absence of property rights, an innovation will be intimated, thus the need of IPR’s. The law also recognizes that the dynamic benefits from IPR’s come at an allocative cost, in that the use of the innovation will be suboptimal: information is relatively costless to transmit, and its efficient price is therefore zero; exclusionary rights, on the other hand, enable the patentee to set a positive price for the information, thus reducing the output and flow of that information. By giving rights to an innovation that are exclusive but limited in scope and duration, an IPR awarded under patent law attempts to strike a balance between these competing concerns ((see W. NORDHAUS, Invention, Growth and welfare: A Theoretical Treatment of Technological  Change,Cambridge: MIT Press, 1969; also W. BOWMAN, Patent and Antitrust Law: A Legal and Economic Appraisal, Chicago: University of Chicago Press,1973; W. BAXTER, “Legal Restrictions on the Exploitation of the Patent Monopoly: An Economic Analysis,” Yale Law Journal, 76 (1966): 267.)).

Competition law impacts on the exercise of the innovator’s rights- and therefore on its reward – by restricting certain practices involving the IPR. The IP grant seeks to protect property rights, and, in so doing, limits competition. In contrast, competition law generally reflects the premise that consumer welfare is best served by removing impediments to competition. However, this previous short-run view of competition technological progress contributes at least as much to social welfare as does the elimination of allocative inefficiencies associated with non-competitive prices ((see R. BARRO, “Economic Growth in Cross-section of Countries,” Quarterly Journal of Economics, 106(2) (May 1991): 407-444)).

There is, therefore, a growing willingness to draw a harmonious synergy between two poles in the form of monopoly and competition, in order to promote competition in new products and processes tomorrow. Thus IPR and competition law are now seen as complementary ways of achieving efficiency in a market economy.

 CONCLUSION

The IPR’s shall be used as a shield by the patent owner and not as a sword to eviscerate competition unfairly and conversely the treble damage threat of antitrust liability should not be used to thwart good faith efforts at patent enforcement.

A proper balancing of the two regimes is required in order to promote innovation and thus consumer welfare.

Recommendations:

  1. More economic and policy analysis of the full impact of IP on the competition and innovation in a world of rapid technological change and network effects is required.
  2. Impact of IPR on R&D is required to be investigated.
  3. Study of the ways to limit and balance the protective and innovative effects of IP vis-a-vis there impact on competition.
  4. In order to assess the likelihood of antitrust liability based on conduct involving IP, it is typically necessary to perform a rigorous economic analysis of the likely competitive effects of that conduct which in turn requires a study of the nature and scope of the different IPR’s.
  5. The protection must be matched by an equally imperative concern of overprotection as it may impose social costs by stopping or discouraging others from pursuing developmental activities.
  6. Keeping a broad public domain itself encourages innovation and competition- and ultimately the expectation of lower prices, better services and broader public choices.
  7. There is indeed a need of catalyzing the evolution of openly legitimate contestable markets with transparent and justifiable regulations coupled with appropriate incentives for fair and dynamic competition.
  8. There is a need to fine-tune the concerns of private individual with the welfare of all ((As reflected in ARTICLE 27 of the UNIVERSAL DECLERATION OF HUMAN RIGHTS, 1948, that “Everyone has the right to the protection of the moral and material interests resulting from any scientific, literary or artistic production of which he is the author” and further that “ everyone has the right…to share in scientific achievements and its benefits.”)). (this point becomes more relevant in case of pharmaceutical industry).

The effect of IPR’s in social life and democratic culture need be empirically determined ((See PROF. ANIL GUPTA on http://www.wipo.org/tk/en/publications/769e_unep_tk.pdf)). Thus it is finally submitted that, the law should aim at molding the IP law to allow further innovations in both technological and economic context of R&D and industrial exploitation, while preserving and promoting a scenario of dynamic competition in which innovation stimulate competition and competition is supported by innovation. This balance helps to develop innovation not as sheltered from, but on the contrary as stimulated by competition thereby harmonizing the social welfare effects in many respects in many respects associated with the competitive development of innovation.