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On July 3, the European Commission ("the Commission"),which is in charge of (among other things) enforcing European antitrust law ("EC competition law"), ordered U.S. provider of pharmaceutical sales data IMS Health ("IMS") to license its German copyrighted data reporting structure called the "1860 brick structure" (essentially a map of Germany segmented into 1860 geographic areas or "bricks") to competitors on non-discriminatory, commercially reasonable terms. The order follows a complaint by IMS competitors NDC Health of the U.S. ("NDC") and Azyx Geopharma of Belgium ("Azyx") that IMS abused its dominant position on the market for pharmaceutical sales data in violation of EC competition law by refusing to license them the structure. The Commission's order is an "interim measure" issued pending the Commission's decision on the merits of the complaint.

Factual Background¹

IMS is the world's largest provider of pharmaceutical data. In Germany, it provides pharmaceutical sales data based on the 1860 brick structure. The brick structure is used to report the estimated sales of pharmaceutical products in each zone, and it allows sales and data reports to be broken down into small geographic areas. IMS created the structure in the 1970s in cooperation with the pharmaceutical companies, and has since revised it, most recently in 1999. IMS owns the German copyright in the brick structure.

NDC and Azyx entered the German pharmaceutical sales data market in 1999. They initially attempted to distribute their regional sales information based on their own division of the German territory. The new entrants quickly discovered potential customers were not interested in pharmaceutical sales data presented this way because it did not correspond to the territorial division already in place within the industry. NDC and Azyx then started using IMS' "brick" structure, which prompted IMS to sue these companies in the Frankfurt District court for copyright infringement. Although NDC and Azyx Geopharma disputed the validity of IMS' copyright in the brick structure, the Frankfurt court upheld IMS' claim for copyright infringement and ordered the new entrants to stop using the 1860 brick structure or any structure derived from it. NDC and Azyx subsequently asked IMS for a license to use the 1860 brick structure, but IMS refused.

In December 2000, NDC and Azyx filed an EC competition law complaint with the European Commission's Directorate General for Competition. The complaint alleged that IMS abused its dominant position on the German market for pharmaceutical sales data by refusing to grant NDC and Azyx a license to the brick structure in violation of Article 82 of the EC Treaty. They requested the Commission to grant interim measures that would require IMS to license the brick structure under commercial and non-discriminatory terms.

The Commission investigated the complaint, collecting information from around 110 German pharmaceutical companies. It found that the brick structure, which was necessary in order to engage in viable pharmaceutical data reporting, had become a standard in Germany. It concluded that NDC and Azyx were unlikely to come up with an alternative data reporting segmentation without infringing IMS' copyright.

Following an expedited procedure, the Commission on March 14, 2001 sent IMS a Statement of Objections (a formal complaint) and notice of intention to impose interim measures. According to the Commission, IMS' refusal to license in effect foreclosed all actual and potential competition in the German market for pharmaceutical data, and constituted a prima facie abuse of its dominant position in Germany and a violation of Article 82 of the EC Treaty. On July 3, the Commission took the formal decision to impose interim measures, for the first time since 1995 and in only the fifteenth case in which interim measures were imposed since it was clearly established that the Commission was empowered to do so in 1980.² IMS will be required to grant licenses to the brick structure to NDC and Azyx; the royalties due under the license are to be agreed between the parties and failing such an agreement, will be set by independent experts based on transparent and objective criteria.

IMS has communicated its displeasure with the decision. It is expected to seek a ruling from the Court of First Instance preventing the interim measure from being enforced until the European Commission has taken a final decision in the case, which may not occur before 2002. In its final decision, the Commission may confirm the compulsory licensing regime provided in the interim measures and/or impose other measures, such as fines. The final decision may also be contested by the parties before the Court of First Instance and the European Court of Justice.

Legal Analysis

The Commission alleges in its Statement of Objections that IMS, in refusing to license the brick structure to NDC and Azyx, breached Article 82, the basic EU Treaty provision restricting dominant market players from distorting competition by abusing their privileged market position.

The refusal to license an intellectual property right will not normally constitute an abuse of a dominant position under Article 82. In reaching its decision, the Commission relied on earlier cases ultimately decided by the European Court of Justice holding that in certain exceptional circumstances a refusal to license may nevertheless be found to constitute an abuse.³

In its 1995 Magill judgment⁴, the European Court of Justice ruled that the refusal of a dominant firm holding an intellectual property right to grant a license cannot in itself constitute an abuse of a dominant position, but that the exercise of an exclusive right may, in exceptional circumstances, involve an abuse. The Magill case arose from a refusal by three major broadcasters to license TV listings, protected by copyright under Irish law to an independent publisher of TV listings, Magill TV Guide.

The Commission found the broadcasters abused their dominant position in the market for TV listings in breach of Article 82 in light of a number of exceptional facts. First, the IP license was indispensable for carrying out the business of publishing a general TV guide in Ireland: there was no actual or potential substitute for the intellectual property from each broadcaster. Second, the refusals to license had prevented the emergence of a new product for which there was a potential consumer demand: a consolidated weekly guide of the three broadcaster's listings. Third, there was no objective justification for the refusal to license based on the activities carried out by the right owner.⁵ Fourth, the broadcasters had exercised their copyright to reserve for themselves the secondary market for guides containing that information, excluding all competition in the secondary market for TV guides. The Commission's finding was ultimately upheld by the European Court of Justice.⁶

In its Ladbroke judgment⁷ of 1997, the Commission was confronted with a complaint by a Belgian betting agency against two firms holding the exclusive rights to televised pictures and audio commentaries on horse races and to market them in Austria and Germany. The betting agency, Ladbroke, alleged the two firms abused their dominant position in violation of Article 82 by refusing to license it the right to retransmit audiovisual broadcasts of French horse races in Belgium. It argued the Commission should apply the holding of Magill to order the rightholders to grant Ladbroke a license. However, the Commission refused to do so, and its view was confirmed by the ruling on appeal of the European Court of First Instance.

The Commission found in applying the reasoning of Magill that (1) Ladbroke itself enjoyed a dominant position on the Belgian horse races services market, and it did not need a license to introduce a new product; (2) the license was not indispensable because sound and images, although helpful, are not essential to carry out the activity of a betting agency; and (3) images of horse races are not indispensable since they are shown after the bets have been placed. On appeal, the Court of First Instance noted that "[t]he refusal to supply [Ladbroke] could not [violate 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 demand on the part of consumers" The Court seems to suggest in the context of Magill and Ladbroke that the refusal to license may be considered an infringement of subparagraph (b) of Article 82, which explicitly prohibits "limiting production, markets or technical development to the prejudice of consumers."

The Court appears to have further refined its Magill decision in the 1998 Oscar Bronner judgment⁸,involving a case that did not deal with licensing of intellectual property rights but a request for access to a distribution network of a dominant Austrian newspaper by a small independent publisher. The small independent publisher, Oscar Bronner, complained before the Austrian courts that Mediaprint, a publisher of two Austrian newspapers with a large market share, refused to grant it access to Mediaprint's nationwide early-morning newspaper home-delivery network in violation of Article 82 EC Treaty. Oscar Bronner contended that the access requested was essential for its business since it was not economically feasible, due to the limited circulation of its newspaper, to establish its own distribution network. The European Court of Justice was requested by the highest Austrian court to interpret whether the fact pattern presented to it would fall under Article 82 EC Treaty.

The Court concluded that there was no requirement under Article 82 to grant access to Mediaprint's distribution network. It stated that the duty to grant access to the dominant company's goods or services is limited to circumstances in which access is "indispensable" to the plaintiff company's ability to carry out its business and where the denial of access by the dominant company is likely to eliminate all competition.⁹ The court noted that it was undisputed that other distribution methods existed, like mailing, retail shops, and kiosks. The court ruled that even though these alternatives were less advantageous for the distribution of certain newspapers, this drawback proved insufficient to warrant treating Mediaprint's distribution network as an essential facility. Furthermore, the Court noted that no technical, legal, or economic obstacles existed that would make it difficult for any other publisher, alone or in partnership with other publishers, to establish its own nationwide home-delivery scheme. For such access to be regarded as indispensable, it would be necessary, at the very least, to establish the economic impracticality of creating a second newspaper home-delivery scheme for a circulation comparable to that of the existing scheme.¹⁰

The Bronner judgment suggests that the Magill case should be understood to mandate compulsory licensing of intellectual property rights where:

• the intellectual property is indispensable to carrying on the complainant's business;
  
• no substitutes exist for the intellectual property -- significantly, the Court clarified its previous jurisprudence in Magill by adding that a facility is only "indispensable" to the business when no actual or potential substitutes exist;
  
• the dominant operator's refusal to license intellectual property eliminates all competition on the market; and
  
• the dominant operator's refusal is not objectively justified.

The Commission found that these conditions warranting a compulsory license were met in the facts of the IMS Health case:

• the 1860 brick structure is considered indispensable for NDC and Azyx to carry on their business;
  
• there is no actual or potential substitute for the brick structure as a result of it having become a data reporting format standard in the industry;
  
• IMS' refusal to license the brick structure eliminates all competition on the market for pharmaceutical data reporting in Germany; and
  
• IMS' refusal is not objectively justified.

As in Magill, the existence of the copyright in the protected subject matter central to the IMS case, the 1860 brick structure, is subject to some controversy. As noted, the complainants raised the invalidity of the copyright in the brick structure as a defense in the copyright action brought before the German courts by IMS. However, the German courts have so far upheld IMS' copyright claim. As the Commission examines competition law violations and does not have the power to decide on the validity of national copyright rights (which is exclusively a matter for the national courts to decide), it was bound to assume that IMS does hold German copyright protection over the brick structure.¹¹ So far, the cases in which the Commission has considered imposing a requirement to license on a dominant market player relate to copyrights and design rights. It remains to be tested whether the reasoning will apply to other intellectual property rights, in particular patents, and if so whether stricter or more lenient conditions apply.

Conclusion

The Commission's decision is significant because it imposes a compulsory license on a holder of intellectual property rights with a strongly dominant (indeed monopoly) position on the market, and it does so by way of a preliminary measure.

The decision reaffirms the willingness of the Commission to impose interim measures to provide immediate relief in competition law cases and prevent further distortion of competition that may be irreversible. To order such interim measures, the Commission must find the complainant's competition law grievances prima facie well founded and identify a serious risk of irreparable harm to the complainant.

The interim measures imposed in the IMS case are to be seen in the context of the Commission's current policy of rigorous antitrust enforcement, which was the hallmark of the tenure of Belgian Commissioner Karel van Miert and has been continued by his successor, the Italian Mario Monti. Recent examples of this policy include the thorough investigations of mergers such as AOL Time Warner¹², Warner Music/EMI¹³, and GE/Honeywell¹⁴ (cases in which the investigations resulted in the imposition of stringent conditions, a prohibition decision or the ultimate unraveling of the merger), and of abuses of dominant positions, such as the ongoing investigations of Microsoft Corporation.

The Commission has gone out of its way to stress that the exceptional circumstances of the IMS case warranted the exceptional measure imposed. The IMS decision does not foreshadow a new wave of aggressive competition law enforcement against intellectual property owners. Also, it remains to be seen whether the decision will be challenged before the European Court of Justice and if so, whether it will be upheld. Nevertheless, the decision does underline the fact that intellectual property right holders are not completely immune from the application of EC competition law, and cannot in all circumstances invoke their intellectual property rights to prevent the operation of competitive forces in the markets in which they operate.

 

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1/ The European Commission has not (yet) published its decision to impose preliminary measures. The description and analysis below are based on statements released by the Commission about its decision and press reports. See the Commission's press releases of 14 March 2001 and 3 July 2001.

2/ This power to impose interim measures is based on Article 3, Regulation 17/62 [1962] OJ L 13/204 and was confirmed by the European Court of Justice in Case 792/79 R, Camera Care v Commission [1980] ECR 119.

3/ See Case C-238/87, Volvo v. Veng [1988] ECR 6211, Joined cases C-241/91 and C-242/91, RTE and others v Commission (Magill) [1995] ECR I-743; Case T-504/93, Tierce Ladbroke v. Commission [1997] ECR II 923, and Case C7/97, Oscar Bronner v Mediaprint [1999] ECR I 2981.

4/ Case C-241/91, RTE and others v Commission (Magill) [1995] ECR I-743.

5/ The reasons that are accepted under EC law as justifying abusive conduct by a dominant firm under Article 82 are generally quite limited and include, for example, safety, quality and good usage of the product provided. (There is no true "balancing test" under Article 82 that takes into account benefits of the conduct for competition and consumers.)

6/ The Magill judgment has since been referred to by several national competition authorities applying national competition law to similar fact patterns. For example, in the Netherlands, the Dutch Competition Authority investigated a complaint by a leading Dutch newspaper against the main Dutch television broadcasters regarding their refusal, as the statutory right owners, to provide this newspaper with information on TV listings (Telegraaf/NOS and HMG). Applying the principles of the Magill EC case law, the NCA obliged the parties to initiate negotiations to reach agreement on such supply at reasonable terms. The Dutch Competition Authority has perhaps been more aggressive than the European authorities in requiring dominant companies to grant access. See e.g., the KPN/Denda and Audax/Edi Press cases.

7/ Joined cases C-241/91 and C-242/91, Tierce Ladbroke v. Commission [1997] ECR II 923.

8/ Case C-7/97, Oscar Bronner v Mediaprint [1999] ECR I 2981.

9/ As Advocate General Jacobs put it, the dominant undertaking must have a "genuine stranglehold on the related market"; "it is not sufficient that the undertaking's control over a facility should give it a competitive advantage."

10/ The Advocate General Jacobs had stated in his opinion on the case that in assessing refusals to deal by a firm controlling an essential facility, it is important not to lose sight that the primary purpose of Article 82 is to prevent distortion of competition - and in particular to safeguard the interests of consumers - rather than to protect the interests of particular competitors. This implies that a refusal to grant access only amounts to an abuse of dominant position if it has an adverse impact on consumers. Such conduct will only have an adverse impact on consumers if the dominant firm's final product is sufficiently insulated from competition to give it market power.

11/ Another controversial element is the European Commission's involvement in the case in spite of the fact that the elements of the case may be said to concern principally if not exclusively the German territory, as the Commission only intervenes in cases where trade between EU Member States is affected. It is to be noted that the Commission has in the past found this requirement to be fulfilled without much difficulty, even in cases where the territory of only one Member State was concerned. It is likely that the Commission has deduced an effect on trade between Member States from the fact that IMS' refusal to license the brick system prevents competition from data providers outside Germany.

12/ Case No COMP/M.1845 - AOL./Time Warner of 11 October 2000, available online in .pdf format.

13/ Notified on May 5, 2000.

14/ Notified on February 2, 2001, OJ C46 of February 13, 2001; see press release at the Commission's website.

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Reprinted with permission from Managing Intellectual Property, September, 2001.