1. © 2006 McDermott Will & Emery. The following legal entities are collectively referred to as "McDermott Will & Emery," "McDermott" or "the Firm": McDermott Will & Emery LLP, McDermott Will & Emery/Stanbrook LLP, McDermott Will & Emery Rechtsanwälte Steuerberater LLP, MWE Steuerberatungsgesellschaft mbH, McDermott Will & Emery Studio Legale Associato and McDermott Will & Emery UK LLP. These entities coordinate their activities through service agreements. This communication may be considered advertising under the rules regulating the legal profession. www.mwe.com Boston Brussels Chicago Düsseldorf London Los Angeles Miami Munich New York Orange County Rome San Diego Silicon Valley Washington, D.C. Intellectual Property Rights and Competition Law: in balance or in conflict? Duncan Curley Partner, Intellectual Property, Media and Technology McDermott Will & Emery UK LLP, London

2. www.mwe.com The Lisbon Objectives To be the worlds leading knowledge-based economy by 2010 Lisbon Council, March 2000

3. www.mwe.com The Lisbon Objectives and Intellectual Property Rights In the context of the Lisbon objectives, there is a need for strong IP protection to foster innovation in Europe Deputy Director General Stoll, DG Internal Market (European Commission), at The Pan-European IP Summit, Brussels, 2 December 2004

4. www.mwe.com Intellectual Property Rights - basics Monopoly or quasi-monopoly rights Examples: patents and copyright They are exclusionary rights

5. www.mwe.com The role of competition policy in fostering innovation It is a longstanding topic of debate in economic and legal circles: how to marry the innovation bride and the competition groom Contrary to what some might think, competition is a necessary stimulus for innovation Mario Monti, European Commissioner for Competition Policy, January 2004

6. www.mwe.com The role of competition policy in fostering innovation IP law and competition law have a complementary role to play in promoting innovation to the benefit of consumers Mario Monti, European Commissioner for Competition Policy, January 2004

7. www.mwe.com European competition law - basics The EC Treaty - Article 81 - Article 82

8. www.mwe.com Article 81 Article 81 regulates joint conduct (e.g. cartels) Article 81 can impact on IP license agreements, technology transfer agreements and other IP pooling arrangements

9. www.mwe.com Article 81 The European Commissions approach to IP license agreements and Article 81 was substantially modified and modernised in 2004, with the aim of encouraging technology licensing in Europe The Technology Transfer Block Exemption

10. www.mwe.com Article 81 and the Lisbon Objectives The new rules on technology licensing will effectively contribute to the dissemination of technology within the European Union, in line with the objectives set at the Lisbon Council European Commission Press Release, April 2004

11. www.mwe.com Article 82 Prohibits undertakings with a dominant position on a particular market from conducting themselves in a way which amounts to an abuse of their market power, in circumstances where the abusive conduct is incapable of objective justification Article 82 is concerned with unilateral conduct

12. www.mwe.com Policy behind Article 82 The functioning of competition is disturbed not only by cartels (see Article 81) but also by economic predominance Increasing market domination corresponds to a decreasing intensity of competition Lack of competition lessens the incentive of a dominant firm to increase overall performance by means of cost reduction and innovation The Role of Economics Analysis in the EC Competition Rules D. Hildebrand, 2002

13. www.mwe.com Restricting access to technology – an abuse? A dominant firm may fall foul of Article 82 by restricting access to the use of technology, to the detriment of consumers – Article 82(b)

14. www.mwe.com Intervention by the European Commission A dominant position may be based on control over access to the technology, e.g. through the ownership of intellectual property rights… …and so in certain circumstances the European Commission will intervene…

15. www.mwe.com When will the European Commission intervene? The Magill case Exceptional circumstances

16. www.mwe.com When will the European Commission intervene? In recent years, the European Commission has taken a more interventionist stance in cases where it believes IPRs are being abused

17. www.mwe.com The IMS Health case not a new product (as in Magill) merely a me too product and yet the European Commission intervened

18. www.mwe.com The Microsoft case Microsoft refused to supply interoperability information to Sun Microsystems, so as to allow Sun to offer its own work group server operating system product, in competition with Microsofts own work group server product

19. www.mwe.com The Microsoft case Hardware + Software: Operating SystemMiddleware Application Software

20. www.mwe.com The Microsoft case The European Commission decided in March 2004 that this was an abuse of a dominant position under Article 82 Microsoft was ordered to disclose information so as to allow its competitors to compete on an equal footing with Microsoft…

21. www.mwe.com Compulsory licensing? …even if this required Microsoft to license its IP to its competitors (including 3 patents!)

22. www.mwe.com What intellectual property rights? The interoperability information requested by Sun constitutes valuable intellectual property protected by copyright, trade secret laws and patents Microsoft submission to the Commission of 17 October 2003

23. www.mwe.com The Commissions position It is implicit in Suns request that Sun intends to be provided with specifications that it will then be able to implement in its products. It is possible that such a use could be prevented by Microsoft relying on intellectual property rights. Furthermore, the specifications at issue may constitute innovations that are currently not disclosed and are protected by trade secrecy Paragraph 190 of the Commissions Decision

24. www.mwe.com The Commissions position It cannot be excluded that ordering Microsoft to disclose [its] specifications and allow […] use of them by third parties restricts the exercise of Microsofts intellectual property rights Paragraph 546 of the Commissions Decision

25. www.mwe.com The Commissions position The Commission argued that Microsoft was stifling innovation in the market for work group server operating systems…

26. www.mwe.com The Commissions position The major objective justification put forward by Microsoft relates to Microsofts intellectual property over Windows. However, a detailed examination of the disclosure at stake leads to the conclusion that, on balance, the possible negative impact of an order to supply on Microsofts incentives to innovate is outweighed by its positive impact on the level of innovation in the whole industry (including Microsoft)… Paragraph 783 of the Commissions Decision

27. www.mwe.com The Commissions position [T]he need to protect Microsofts incentives to innovate cannot constitute an objective justification that would offset the exceptional [Magill-type] circumstances identified. Paragraph 783 of the Commissions Decision

28. www.mwe.com Intellectual Property Rights and Competition Law: in balance or in conflict? The Commissions arguments proceed on the basis that if Microsoft was allowed to continue its leveraging practices there was a risk that innovation in the work group server operating systems market would be stifled…

29. www.mwe.com Intellectual Property Rights and Competition Law: in balance or in conflict? …but the Commissions arguments do not appear properly to address the wider effect of the Microsoft decision, which may erode the IP protection available to certain (dominant) companies

30. www.mwe.com Microsofts position A crucial part of this case rests on the rights of companies to invest in research and development, innovate, produce new products to meet customer demand and then retain the right to earn a return on that investment Chris Parker, Director of Law and Corporate Affairs, Microsoft (May 2006)

31. www.mwe.com What is the right balance? Report prepared by the Economic Advisory Group for Competition Policy, as part of the European Commissions recent review of policy under Article 82 (July 2005): …even if a refusal to deal harms consumers in the short-run, it may be socially beneficial in the long-run. If the bottleneck is the result of investment or innovation activities of the dominant firm then forcing the firm to give its competitors access to the bottleneck is an expropriation of the returns of the firms efforts. This may discourage this and other firms from investing in the future, and it may reduce incentives to innovate. Tolerating a (temporary) monopoly may be the best way to promote investment and innovation incentives…

32. www.mwe.com Intellectual Property Rights and Competition Law: in balance or in conflict? According to Microsoft, the European Commission has… [committed]…the biggest encroachment on intellectual property in European competition law history …opened the vaults of a bank to hand money out to passers-by Microsofts Counsel, Ian Forrester QC, before the Court of First Instance, April 2006

33. www.mwe.com Intellectual Property Rights and Competition Law: in balance or in conflict? Conclusions An Article 82 policy review is underway. The Microsoft decision is on appeal to the Court of First Instance. Watch this space…