IP Rights and Competition Law: Contradiction or Collaboration?

Leela Baskaran and Tan Shi Wen discuss the Guidelines on Intellectual Property Rights and Competition Law.
The interaction between the laws relating to intellectual property (“IP”) and competition has given rise to interesting questions for debate ever since the Malaysia Competition Act 2010 (“CA 2010”) came into force in 2012.
On the surface, there appears to be a general tension between IP and competition laws. IP laws confer certain exclusivity on a proprietor whereas competition laws, in contrast, seek to preserve the open and free nature of a market. This friction intensifies where the owner of an IP right (“IPR”) begins to cause difficulties for its competitors to enter markets or begin to abuse its dominant position. Having said that, IPRs and competition law are not necessarily inharmonious as the promotion of market efficiencies may lead to greater innovation and variety in a market.
The Malaysia Competition Commission (“MyCC”) considers that the two are inevitably intertwined and had, on 6 April 2019, issued the Guidelines on Intellectual Property Rights and Competition Law (“Guidelines”) with the main aim of providing guidance on MyCC's approach in respect of competition issues that may arise from matters relating to IPRs. The Guidelines are to be read together with other guidelines issued by MyCC.
The Guidelines characterise IP as ‘creations of the mind’, such as inventions, literary and artistic works, designs, as well as symbols, names, and images used in commerce; this may comprise patents, copyright, integrated circuits, industrial designs, trademarks, confidential information, plant varieties, and geographical indications.
As the definition of “goods” under the CA 2010 includes property of every kind, whether tangible or intangible, the MyCC’s position is that IP falls within the purview of competition law and any dealings involving IPRs which are anti-competitive (“Chapter 1 Prohibition”) or an abuse of a dominant position (“Chapter 2 Prohibition”) by an IPR owner may fall foul of the CA 2010 and attract the concern of the MyCC.
In addition to the MyCC’s Guidelines on Market Definition (which is a separate set of guidelines), the MyCC in the Guidelines clarified that, for conduct involving IP, the MyCC would normally define the relevant market based on one of the following:
  1. the product market which refers to the final or intermediate products incorporating the IP;

  2. the technology market which refers to the processes or technology incorporating the IP; or

  3. the innovation or research and development (“R&D”) market which refers to the intangible knowledge or know-how that constitutes the IP.
The MyCC further clarified that it would not define a relevant market in cases involving the licensing of IP; the MyCC would focus on what the legal rights granted to the licensee actually protect.
In the Guidelines, the MyCC provided an extensive (but non-exhaustive) list of conduct involving IPRs and sought to illustrate how such types of conduct may potentially fall foul of the Chapter 1 Prohibition or the Chapter 2 Prohibition.
Section 4(1) of the CA 2010 prohibits horizontal or vertical agreements which have the object or effect of significantly preventing, restricting, or distorting competition in any market for goods or services.
Vertical Agreements
The Guidelines provide that the relationship between an IPR owner and a licensee is normally regarded as a vertical arrangement. Potentially, competition issues may arise from vertical arrangements include:
  1. vertical licensing agreements - the Guidelines set out specific vertical restrictions common in vertical IPR agreements such as vertical price fixing, territorial and field-of-use restrictions, exclusive licensing, exclusive dealing, tying and grant-backs, and illustrate how they may give rise to anti-competition concerns;

  2. vertical arrangements with horizontal dimensions - the Guidelines recognise that vertical arrangements may also have an adverse effect on horizontal competition in either licensing or product markets. An example would be a resale price maintenance obligation imposed by an IPR owner to create a cartel at the downstream level by subjecting all its licensees to the same resale price maintenance condition.
Notwithstanding the above, an anti-competitive agreement will generally not be considered “significant” if the agreement comes within the safe harbour threshold, i.e. for an agreement between competitors, where the parties have a combined market share of less than 20% in the relevant market and for an agreement between non-competitors, where all the parties individually have less than 25% market share in the relevant market.
Horizontal IPR Agreements
Certain kinds of horizontal arrangements between enterprises relating to price fixing, fixing of trading conditions, sharing market or source of supply, or limiting or controlling production, market outlets or market access, technical or technological development and investment are deemed to be anti-competitive under section 4(2) of the CA 2010. The safe harbour threshold applicable for vertical arrangements discussed above do not apply to section 4(2) infringements and the MyCC does not have to define the relevant market share and/or determine the competitive effect for such arrangements. The only defence for infringing enterprises is to invoke section 5 of the CA 2010 and prove that there is significant identifiable technological, efficiency, or social benefit directly arising from the agreement.
The Guidelines acknowledge that ownership of IPRs does not necessarily confer market power upon the owner. Market share is not by itself conclusive of dominance although in general, MyCC will consider a market share above 60% to be indicative that an enterprise is dominant. That said, MyCC recognises that the market power of an enterprise also depends on a range of competitive conditions in the relevant market including, among others, the enterprise’s ability to act without concern about competitors, barriers to entry, and supply and demand conditions.
Nonetheless, an enterprise found to be dominant due to its IPR is not in itself acting illegally unless it abuses its dominant position. In practice, concerns about an abuse of a dominant position in a market may arise from the following non-exhaustive list of conduct:
  1. Excessive pricing or other unfair trading condition – these include practices that may amount to excessive pricing (including post expiration royalty where royalty is imposed after expiration of a patent) although the Guidelines recognise that a holder of IPRs needs to have the ability to charge higher prices to recover R&D costs and any intervention by the MyCC will take this into consideration so as not to affect incentive to innovate;

  2. Non-competition clauses – these prohibit the use of competing technology or the manufacture, distribution, or sale of any other product with the intention of restricting the manufacture or sale of competing technology or trademarked goods;

  3. Product hopping – one such example includes where a brand name pharmaceutical company withdraws its original product and forces customers to switch to a new reformulated product with no therapeutic advantages for the sole purpose of foreclosing the market for generic competitors;

  4. Refusing to grant licences – while an IPR owner has the right to refuse to grant a licence for the use of its IPR, such refusal may be abusive if, for example, a dominant enterprise’s technology or product is indispensable to a derivative product in a secondary market;

  5. Discriminatory conditions – these include discrimination by applying different conditions to equivalent transactions that, among others, discourages new entrants or forces an enterprise to exit the market; 

  6. Tying, grant back, or bundling – these include imposing contractual conditions which have no connection with the subject matter of the contract. The practice of mandatory patent package licensing (i.e. where a patent owner refuses to grant a licence under one patent unless the licensee accepts additional patent licences) may be permissible where interlocking or complementary patents are necessary for the full production of a product, but would be anti-competitive if there is an element of coercion and the additional patents are not necessary.

  7. Predatory pricing – examples include royalty stacking, predatory pricing, refusal to license patents which are essential for products to be manufactured in accordance with prescribed standards (“SEPs”), or refusal to allow access to SEPs on fair, reasonable, and non-discriminatory terms (this is a standard in the European Union and the United States of America whereby owners of SEPs are not allowed to prevent access to the SEPs if their competitors are willing to obtain licences for reasonable royalty);

  8. Buying up scarce input supply with no reasonable commercial justification – an example is where a dominant enterprise buys up all the supplies of essential raw materials needed for the manufacture of a patented drug to prevent competing enterprises from producing their own competing patented drugs.

  9. Others – examples include margin or price squeezing or offering loyalty rebates and discounts to buyers by requiring a minimum volume purchase to foreclose the market from rivals.
Although the Guidelines have yet to address areas which the CA 2010 arguably may have a greater impact, such as the franchise industry or technology transfer and R&D agreements, the Guidelines serve as a basic guide for arrangements involving IPRs as they provide greater clarity on how the MyCC views the interaction between IPRs and competition law. IPR owners may also use the Guidelines to reduce the risks of falling foul of the prohibitions, and to protect themselves against anti-competitive activities of their potential or actual competitors.

You may view the full issue of Skrine’s Legal Insights Issue 3/2019 here.