The judgment of the European Court of Justice ("ECJ") of 29 April 2004 in IMS[fn1] marks an important new phase in the developing EU case law concerning the relation between competition law and intellectual property. It does so by providing what appears to be a new answer to the question: what are the "exceptional circumstances" in which an IPR holder who holds a dominant position on a market infringes Article 82 of the EC Treaty (which prohibits abuse of a dominant position) by refusing to grant a license of that IPR?

The ECJ's 1995 Magill judgment found there were "exceptional circumstances" where a refusal to license prevented the appearance of a new product, there was customer demand for the new product, the refusal was not objectively justified, and the effect was to reserve to the right holder a "secondary market."

Magill -- a copyright case involving highly unusual facts -- has given rise to enormous controversy. Are the conditions it states the only ones which can constitute "exceptional circumstances," or is that concept open-ended? What is the meaning of the phrase "secondary market," and can Article 82 ever require a dominant company to license IPRs to enable another company to compete with it on the market where it is dominant? What is the measure of "indispensability" when determining whether refusal to license is abusive?

The ECJ's judgment in IMS is not perfectly clear, but a close reading seems to yield the following:

• The conditions in the Magill test are "sufficient" to find an infringement of Article 82. This tends to confirm that other circumstances may also give rise to infringement, so that the Magill test is not exhaustive.
• The Magill test can be met even when the aspiring licensee intends to compete on the same market as the IPR holder. However, the licensee must intend to introduce "new" products or services on that market, rather than merely "duplicating" the products or services already offered by the IPR holder. In other words, refusing a license to prevent price competition is not abusive, whereas refusing a license with the effect of preventing innovation is.
• It remains a requirement of the Magill test that denial of the license renders the introduction of the new product impossible. For this purpose, even if there are other means available to the aspiring licensee to enter the market, it is sufficient to find refusal of a license abusive if resort to those other means would not be "economically viable."

This reformulation of the Magill test appears to entail a significant dilution of IPRs held by dominant companies. In view of the lack of clarity in the language used, there is some doubt whether the ECJ (in this case consisting only of a three judge panel) intended the full implications of that language. Thus, it cannot be excluded that, when the European courts are given a further opportunity to consider the matter, they may seek to bring some clarification.

Magill

In Magill, a publisher wished to create a new periodical containing the broadcasting timetables of all the various broadcasters in Ireland. The broadcasters held a copyright in their respective timetables, which they declined to license to the publisher. The publisher complained to the Commission, which ordered the broadcasters to grant the necessary licenses. The ECJ rejected the broadcasters' appeal, enunciating the conditions constituting "exceptional circumstances"[fn2] described above.

Tierce Ladbroke v. Commission[fn3]

The Commission had rejected a complaint by Ladbroke, a company operating betting shops in Belgium, which sought to force operators of French horse races to provide a license transmission of sound and pictures of the races in the betting shops in Belgium. The ECJ rejected an attempt by Ladbroke to invoke Magill, both because the French horse race enterprise was not present on the betting market in Belgium, but also because, even if it had been, "the refusal to supply the applicant could not fall within the prohibition laid down by Article [82] unless it concerned a product or service which was either essential for the exercise of the activity in question, in that there was no real or potential substitute, or was a new product whose introduction might be prevented, despite specific, constant and regular potential demand on the part of consumers."[fn4] This language seemed to suggest that the Magill list of "special circumstances" was exhaustive (especially since Ladbroke pleaded to the court that it was not), but that, under Magill, the "essential for the activity in question" requirement was an alternative to, and not cumulative with, the "new product" requirement.

IMS

IMS is in the business of providing information to the pharmaceutical industry on sales of pharmaceutical products in Germany. For that purpose, IMS developed, in consultation with its customers and with doctors and pharmacies, a map of Germany segmented into "bricks" or geographical reporting units, and known as the "1860 Brick Structure," which, under German law, is covered by copyright. Seeking to compete with IMS, NDC attempted to develop its own brick structure, but discovered that customers and suppliers of data insisted on using the 1860 Brick Structure. They had participated in its elaboration, and would incur costs in using data prepared with another segmentation; as a result, IDC would have had to offer a product based on its own structure at a price so low as not to be viable.

IDC complained to the Commission. The Commission issued an interim decision ordering IMS to grant a license. IMS obtained an interlocutory order from the CFI suspending the Commission's decision, which the Commission then withdrew. In parallel, IMS sued before a German court, obtaining a preliminary injunction against IDC using the 1860 Brick Structure. Before proceeding to the merits, the German court made a reference to the ECJ under Article 234 of the EC Treaty, requesting guidance on the application of the Magill doctrine.

In their pleadings before the ECJ, IMS asked the court to hold that the "exceptional circumstances" test could only be satisfied if denial of the license prevented the aspiring licensee from offering a new product on a market other than that on which the right holder operated; in other words, that Article 82 could never require a right holder to license the IPRs to compete with the right holder on the same market. By contrast, the European Commission and the complainant asked the ECJ to hold that there is no requirement of two separate markets; rather, it should be sufficient that the IPR is an indispensable input to permit competition with the right holder on the market on which it carries on business.

The ECJ's response was very finely nuanced. First, it seems to imply that the Magill tests are not exhaustive. This seems to follow from the reference to both Volvo v. Veng and Magill as sources of the "exceptional circumstances" doctrine;[fn5] the possible circumstances in Volvo v. Veng are quite different from those in Magill (see footnote 2, above). This is further confirmed by the ECJ's statement that the Magill tests are "sufficient" -- leaving open the possibility that there are other circumstances which are also sufficient.

Second, following the lead of the Opinion of Advocate General Tizzano, the ECJ gave a new interpretation of the meaning of the conditions in the Magill test: there is an abuse "only where the undertaking which requested the license does not intend to limit itself essentially to duplicating the goods or services already offered on the secondary market by the owner of the copyright, but intends to produce new goods or services not offered by the owner of the right and for which there is a potential consumer demand."[fn6] Although the way in which the word "secondary" is used may give rise to some confusion,[fn7] the conclusion intended by the ECJ, as shown by the precise answer it gave to the German court's questions, seems to be the following:[fn8] if the right holder has a dominant position, there is an abuse if the refusal to license prevents the appearance of a new product, even on the same market as the one on which the right holder is operating. Apparently, where the Magill test is applied, refusal to license by a dominant company is abusive if it prevents innovation on the market on which the right holder operates, but not if it merely prevents price competition on that market.

The German court had also asked the ECJ two questions regarding the relevance of possible factual issues relating to the indispensability of access to the 1860 Brick structure to permit NDC to compete. NDC argued that participation by customers in elaborating the 1860 Brick Structure had made them dependent on it, and that users' switching costs to a new segmentation system would be so high as to render the use of that system by a competitor economically unviable. The ECJ confirmed that these were relevant issues. It cited Bronner[fn9] as supporting the proposition that it must be "impossible or at least unreasonably difficult" for the competitor to compete without access to the relevant IPR, and that operation without such access must be "economically viable for production on a scale comparable to that of the undertaking which controls the existing product or service."[fn10]

Comment

The judgment is important because:

• It appears to provide a novel solution to some ambiguities in the case law under Magill: the Magill test is not exhaustive, and when it is applied, it renders abusive refusal to license a company wishing to compete on the same market as that of the IPR holder, provided that the competitor intends to introduce a "new" product and would be effectively prevented from doing so absent a license. This would appear to increase the exposure of right holders to attack from competitors seeking licenses to compete with them on their own markets, and from competition authorities acting in support of such competitors. The latter will now concentrate on alleging that they intend to introduce innovative products -- a claim which can probably be made with some degree of plausibility in virtually all cases.[fn11] Moreover, the judgment confirms that the "exceptional circumstances" test is open-ended, and not limited to the conditions set forth in Magill.
• The judgment shifts the conceptual framework within which is conducted the appeal against the Commission's decision of 24 March 2004 in the Microsoft case, and any further enforcement action which the Commission may undertake against Microsoft. It gives increased importance to the question whether Microsoft's refusal to license interface specifications has a negative impact on innovation, and whether Microsoft is right in insisting that its competitors are merely seeking to "duplicate" or "clone" its products.
• The judgment provides yet another example of a divergence between the approaches of the EU and the U.S. in cases involving unilateral infringement. First, the U.S. Supreme Court's decision in Verizon Communications Inc. v. Trinko makes it clear that the courts should rarely impose upon a monopolist a duty to deal with its rivals. In that case, the Court refused to find that Verizon had an antitrust duty to share with its competitors in the provision of local telephone service access to assets (i.e., elements of Verizon's local telephone network) that it otherwise would not sell separately to consumers or competitors. The Court concluded that forced sharing of assets in these circumstances (1) "may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities;" (2) "requires antitrust courts to act as central planners, identifying the proper price, quantity, and other terms of dealing;" and (3) "may facilitate the supreme evil of antitrust: collusion." While the Court did not exclude the possibility that a monopolist's refusal to cooperate with rivals could violate the antitrust laws, it will be the rare case, indeed, in which these three concerns do not arise.[fn12] Second, no U.S. court has found that a refusal to license IPR violates the antitrust laws; on the contrary, the U.S. courts have generally held that such a refusal is lawful. While some courts of appeals (prior to Trinko) declined to exclude the possibility that a refusal to license IPR could constitute an antitrust violation, creating instead a presumption that the refusal to license is a presumptively lawful exercise of the IPR, no plaintiff has yet succeeded in rebutting that presumption. Of course, given that the Supreme Court's expressed concerns with forced sharing in Trinko will apply with equal, if not greater, force to IPR, it appears even less likely that a U.S. plaintiff could succeed in challenging a unilateral refusal to license IPR.
• In view of the lack of clarity in the language of the judgment, and its potentially far-reaching consequences, it is possible that, when the European Courts next have the opportunity to pass on the issues presented, they may choose to issue some clarification. The judgment may therefore not represent the last word on the subject.

 

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Footnotes

1: IMS Health v. NDC Health, Case C-418/01.

2: The notion that there could be circumstances in which refusal to license IPRs constituted an abuse of a dominant position was first stated by the ECJ in Volvo v. Veng, Case 238/87 [1988] ECR 6211. There the ECJ noted that refusal by a car manufacturer to license design rights to a body parts manufacturer was not "in itself" an abuse, but there could be an abuse if it was coupled with refusal to supply spare parts to repairers, excessive pricing of spare parts, or ceasing production of spare parts for old models.

3: Case T-504/93[1997] ECR 927.

4: Paragraph 131.

5: Paragraph 35.

6: Paragraph 49.

7: In paragraph 45, the ECJ says that "it is determinative that two different stages of production may be identified and that they are interconnected, the upstream product is indispensable in as much as for supply of the downstream product." This suggests that it equated the "upstream/downstream" distinction with the "primary/secondary" distinction. In the IMS context, that approach has the effect of ignoring the market on which the IPR holder is operating, if that market is separate from the IPR.

8: Thus, in para 52, the ECJ concludes: " . . the refusal by an undertaking which holds a dominant position and is the owner of an intellectual property right over a brick structure which is indispensable for the presentation of data on regional sales of pharmaceutical products in a Member State, to grant a license to use that structure to another undertaking which also wishes to supply such data in the same Member State, constitutes an abuse of a dominant position within the meaning of Article 82 EC where the following conditions are fulfilled:

• the undertaking which requested the license intends to offer, on the market for the supply of the data in question, new products or services not offered by the copyright owner and for which there is a potential consumer demand;
• the refusal is not justified by objective considerations;
• the refusal is such as to reserve to the copyright owner the market for the supply of data on sales of pharmaceutical products in the Member State concerned by eliminating all competition on that market."

9: Case C-7/97 [1998] ECR I-7791.

10: Paragraph 28.

11: Query whether the right holder should be permitted to justify a refusal of a license on the ground that the right holder has the intention to introduce the same innovation as that intended by the aspiring licensee.

12: The Court distinguished cases involving concerted refusals to deals by horizontal competitors, noting that these cases present greater anticompetitive concerns and are amenable to the simpler remedy of nondiscrimatory treatment. In addition, the Court noted that its holding in the leading case for antitrust liability based on a unilateral refusal to cooperate with a rival (Aspen Skiing) "is at or near the outer boundary of § 2 liability." Moreover, "[t]he Court [in Aspen Skiing] found significance in the defendant's decision to cease participation in a cooperative venture. The unilateral termination of a voluntary (an thus presumably profitable) course of dealing suggested a willingness to forsake short term profits to achieve an anticompetitive end."