Ehlermann, Claus-Dieter

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The Competition Law Approach to Global Intellectual Property and Telecommunications Market Integration - The Implications of the New Regime for Global Competition Policy

Chicago-Kent College of Law

Chicago-Kent Law Review Volume 72 Issue 2 Symposium on Global Competition and Public Policy in an Era of Technological Integration Article 11 December 1996 The Competition Law Approach to Global Intellectual Property and Telecommunications Market Integration - The Implications of the New Regime for Global Competition Policy Claus-Dieter Ehlermann Follow this and additional works at: https://scholarship.kentlaw.iit.edu/cklawreview  Part of the Law Commons Recommended Citation Claus-Dieter Ehlermann, The Competition Law Approach to Global Intellectual Property and Telecommunications Market Integration - The Implications of the New Regime for Global Competition Policy, 72 Chi.-Kent L. Rev. 501 (1996). Available at: https://scholarship.kentlaw.iit.edu/cklawreview/vol72/iss2/11 This Article is brought to you for free and open access by Scholarly Commons @ IIT Chicago-Kent College of Law. It has been accepted for inclusion in Chicago-Kent Law Review by an authorized editor of Scholarly Commons @ IIT Chicago-Kent College of Law. For more information, please contact jwenger@kentlaw.iit.edu, ebarney@kentlaw.iit.edu. A COMPETITION LAW APPROACH TO GLOBALINTELLECTUAL PROPERTY ANDTELECOMMUNICATIONS MARKETINTEGRATIONCLAUS-DIETER EHLERMANN*My subject is "A Competition Law Approach to Global Intellec-tual Property and Telecommunications Market Integration." I wouldlike to point out that I am really not an expert on intellectual propertyrights. Also, my experience with competition law in practice is rela-tively recent. During the five and one-half years when I was in chargeof DGIV, I was never particularly concerned with global intellectualproperty rights. We were concerned with intellectual property rights,but not global intellectual property rights. Unlike all other partici-pants, I will not present original ideas. I will limit myself to discussingpotentially relevant elements of my experience as head of DGIV.Let us take intellectual property as the first subject, and here wecan turn to the new group exemption, which is almost ready for adop-tion. There will no longer be one group exemption for patents andanother one for knowhow. There will be only one. We had difficultiesbasing our decisions on relevant data-what are we really regulating?What is the reality? And it is probably the last time that DGIV willput out a legal text without first doing a Green Paper or White Bookand asking for submissions and discussions. By the way, that seems tome to be the only way for the regulator to respond to this dilemma-what is the factual basis? One has to listen to opposing views.The final version of the group exemption will be less ambitiousthan the initial one, as we have made an attempt to move closer toeconomic reality. The most important innovation in the current draftis that the group exemption will not apply to licensees who alreadyhave forty percent market share overall. This is intended to avoid thestrengthening of dominant positions and, as the official explanationnotes, the facilitating of exclusionary practices. I am sure that thisaspect will be subject to debate.* Professor of Law, European Law Institute, Florence and Member of the WTO Appel-late Body.CHICAGO-KENT LAW REVIEWLet me now switch to individual cases. The first case whichcomes to mind here is the Magill judgment, where, contrary to whatmany of us expected, the Court of Justice upheld a decision by theCourt of First Instance. The Court of First Instance had approved aCommission decision declaring a specific practice of television broad-casters to be abuse of a dominant position. The television broadcast-ers had used a copyright theory to deny to Magill, the Applicant, thepossibility of publishing a weekly survey of the television programsthey broadcast. The court's decision thus represents a direct interfer-ence with the role of a copyright and goes beyond earlier cases involv-ing intellectual property rights.I suppose that the intellectual property rights community waspretty upset by the judgment, and if the Commission were to makemass use of this new jurisprudence, I think it would have importantconsequences. Personally, however, I do not expect the Commissionto make frequent use of the Magill possibilities, simply because Magillseemed to me to be a borderline case. Moreover, one of the elementswhich is not addressed at all, but seems to me important in the under-standing of what is going on, is whether there was any serious justifica-tion for applying copyright principles in the first place. The copyrightwas in a list of programs that a TV station produced, and I do notconsider that really an original work that intellectual property rightsshould protect. That is at least my personal position. My view hasbeen "Let's not exploit this judgment to the full," and the Commissionprobably will not.As I mentioned, however, there are also earlier cases. In theFord case, for example, the issue involved rights relating to body partsfor automobiles. The Court had to deal with two factors. First, wasthere really dominance? And second, was the refusal to allow othersto produce these parts an abuse? Whether there was dominance is avery difficult question. It is necessary to distinguish between twokinds of dominance. The first is what I call horizontal or market dom-inance: Microsoft is, for example, horizontally dominant with respectto all its competitors on certain markets. There was a tendency inDGIV to apply, more or less mechanically, the principles used in hori-zontal cases to another type of dominance, what I call family or sys-tem dominance. This occurs where a firm controls a system, like anautomobile, and you have suppliers and distributors that are part ofthat family, and who depend, of course, as members of the family, onthe producer of the car. I consider it fundamentally wrong to apply to[Vol. 72:501A COMPETITION LAW APPROACHthat situation mechanically, automatically, concepts which competi-tion lawyers apply in cases of horizontal dominance.The Kodak case in the United States addressed this dilemma acouple of years ago, and it is one of the most difficult ones I havecome across in my five and one-half years. Nobody will convince methat this is a pure competition issue. It depends very much on whatnotion of competition you have, what notion of restriction of competi-tion you have, and whether you are a single-goal follower or one whobelieves that competition policy should pursue several goals. Euro-pean competition law, contrary to at least part of American competi-tion law theory, pursues several different objectives. At least if one ishonest, protecting small and medium-sized companies is based on thetheoretical underpinning of freedom of contract, and that is totallycontrary to the Chicago School.This leads me to a different consideration. We have had argu-ments within the Commission about whether problems of this kindshould be addressed by case law or whether one should legislate. Youmay be astonished to hear that I am in favor of legislation. I was veryhappy that on the automobile body-part issue, the Commission pro-posed a directive (which-miracle of miracles-sought protection forthree years and not for seven, or twelve, or thirty). Why am I in favorof legislation? Basically because it increases predictability. There isan element of uncertainty with respect to the determination of bothdominance and abuse, and all these issues involve not only delicateeconomic considerations, but also value judgments. As a result, theoutcomes are hardly foreseeable by economic operators. That issomething which industry clearly does not like, and it should beavoided.Another group of cases involves pooling-of films, of rights torecords, disks, etc. It comes close to David Gerber's concept of net-works and the role of intellectual property in these networks. I do hotremember the name of the joint venture which was being discussedbetween the United States Department of Justice and DGIV whenDiane Wood was still with the Justice Department, and where, foronce, we were not totally on the same line. MTV complained about apool of very powerful worldwide producers and owners of intellectualproperty with respect to records. It illustrates the delicacy of the situ-ation. On the one hand, small and medium-sized owners of copyrightsneed to pool in order to be able to reasonably license their rights.But, is the same true for giants like Philips? The respective impactson competition are likely to be very different.19961CHICAGO-KENT LAW REVIEW1. MergersThe Commission is known for being 'elatively generous with re-spect to research and development. It has been criticized in Germanyfor being too generous. According to one of the arguments, the Com-mission does not realize that there is a separate market for R&D tech-nology. Now, as far as I remember, the first merger case in which aseparate market for research and development technology was identi-fied was Shell Montacatini, where two dominant technologies werebeing combined. The solution was to separate the technology market,which was considered world-wide, from the rest of the joint venture,and not to allow the joint venture to pool the two dominanttechnologies.Another interesting case, which you might want to look at, isGlaxo-Wellcome. Glaxo bought Wellcome, apparently because of in-teresting research going on there. Again, the two markets were con-sidered to be separate. The drug market is traditionally national,while, the decision says, the intellectual property market is probablyworldwide. The problem was solved because Glaxo has a very impor-tant position on certain national markets for a migraine drug which itwas willing to license. And, in addition, the Commission said thedominant position was vulnerable because there are other drug com-panies working on, and probably putting on the market before the endof the century, a similarly powerful drug.I will close this chapter by drawing your attention to a significantsentence in one of the relatively few prohibition decisions on mergersthat happens to be on the telecommunications side. It is the MSGMedia decision, the second after the famous De Havilland decision.The sentence reads:Although a monopoly in a future market that is only just beginningto develop should not necessarily be regarded as a dominant posi-tion within the meaning of the merger regulation, the assumptionthat no market dominance exists presupposes that the future marketin question remains open to future competition, and therefore themonopoly is only temporary.2. TelecommunicationsIt is useful to distinguish here between two separate develop-ments which are nevertheless strongly interrelated. The first isdemonopolization. I prefer this term to deregulation because ademonopolized situation might require more regulation than youneed under the monopoly. You know probably that there are Council[Vol. 72:501A COMPETITION LAW APPROACHresolutions which provide for the abolition of all monopoly rights,both for services and for infrastructure, from January 1, 1998, with anexception for peripheral, less-developed networks-Spain, Portugaland Greece, where an additional five-year period would bring it to2003, and a two-year possibility for Luxembourg as a very small net-work. The Commission adopted in July of this year a draft directiveunder Article 90, the famous provision which addresses state-ownedenterprises and enterprises with special rights, exclusive rights. Thisdraft is very, very interesting for all those who are concerned, not onlywith telecommunications, but also with regulated industries in gen-eral. The directive, once adopted, will consolidate the legal situationfor telecommunications services and infrastructure, plus the exemp-tions, from January 1, 1998. Until then we will remain in a transitionalperiod of partial liberalization.If time permitted, I would love to compare telecommunicationswith other regulated sectors like transport, particularly air transport,postal services and electricity. In none of these sectors do we see asimilar movement. Airlines are the most comparable. The legal roadpursued has been different-not Commission but Council action. Thearea which is most frustrating, most disappointing, is electricity. It isnot because of the greater economic insight and wisdom of Europeanpoliticians that liberalization has occurred in telecommunications. Itis because of the technological revolution. If we had a similar techno-logical revolution in electricity, and similar worldwide exchanges, theelectricity markets would not remain what they are. And here onesees clearly the benefits of technology, evolving with extraordinaryspeed, and evolving worldwide, and not only on national markets.Very briefly, with respect to restructuring in the telecommunica-tions industries. In the Union, there are two dimensions-one is theopening of national markets in view of the internal market, and theother is worldwide competition. Europe traditionally has had toomany operators, because all these markets were national monopolies.Therefore, some of them have to join together within Europe. In ad-dition, if you are not linked to other players in other parts of theworld, you will not be a world player on the telecommunications mar-ket. This brings to mind three groupings-one is Unisource, whichbrings together telecommunications firms from Spain, the Nether-lands, Sweden and Switzerland, with AT&T as their potential businesspartner. A second one that was approved by the Commission afterlong and difficult negotiations is called Concert, a joint venture be-tween British Telecom ("BT") and MCI. The third one, which is giv-1996]CHICAGO-KENT LAW REVIEWing rise to the biggest problems, technical and political, is Atlas, a jointventure between Deutsche Telekom and France T616com; their Amer-ican partner is Sprint. The problems are with Atlas, not with At-las+Sprint. These are restructuring operations among existingtelecommunications operators, but you also have, of course, the entryof new operators. All member states, I think, have now given a sec-ond or even a third license for mobile communications operations.Then you have joint ventures focused on services to the businesscommunity-data communications, internal communications, etc.,with a view to moving later into public voice communications. Themain players in Germany are utilities, which have their pockets full ofmoney, monopoly rents-regional electricity companies, because Ger-many does not have a national electricity monopoly. They are all do-ing extremely well, and they are putting their money, of course, intotelecommunications-satellites, media software. Their internationalpartners are very often the Baby Bells.From a competition point of view, these joint ventures are, on theone hand, extremely beneficial, because the number of players is in-creased. But, at least during this transitional phase, there is a dangerthat they will strengthen existing monopoly positions, because even ifyou take away the legal monopoly right, you do not immediately elim-inate the factual monopoly. A firm that has its network in place andhas its infrastructure remains dominant. And that is very much theissue with Atlas (Deutsche Telekom and France T616com). The Com-mission is seeking to open up the market more rapidly through paral-lel networks, but that might not be enough. One also has to controlrestraints on competition agreed to by the parties; this cannot be doneby creating possibilities on other networks. For inspiration, the bestexample is what has been done by MCI and BT in discussions with theCommission.There have also been some decisions prohibiting mergers. It isinteresting that after DeHavilland, the only prohibition decisions fromthe Commission have been in the telecommunications sector. Thefirst of these (second after DeHavilland) is Media Service, a companyformed by Deutsche Telekom, Bertelsmann (after Warner, I think thebiggest producer of boxed films, etc. in the entertainment business)and Kirch, which holds the most rights to films. Bertelsmann andKirch are both in pay TV, and the idea was to establish together tech-niques to control access to pay TV, a sort of gatekeeper function, andthe assumption of the Commission was that if these three together do[Vol. 72:501A COMPETITION LAW APPROACHthat, there will be no other competition on the German market, youcan forget about it. Therefore, the prohibition.In another recent prohibition three Nordic companies-the Nor-wegian and Danish telecommunications operators and the Swedishconglomerate Kinnevik-agreed to set up a satellite system just forScandinavia. It would have created a dominant position on the Scan-dinavian market.And the last one which the Commission has forbidden (at therequest, by the way, of the Dutch government, which does not havemerger control, but which asked the Commission to step in, as other-wise Community rules would not apply) is a grouping between theLuxembourg RTL and Radio Monte Carlo, both of them very impor-tant on the publicity side for private television, plus the most impor-tant producer of films. It is a little like the situation in MSG MediaService. That is a very recent decision. These then are the structuralcases.On the behavioral side, this transition in the telecommunicationsarea requires frequently the application of Article VIII, because alltools are used, or potentially useable by the dominant incumbents, totry to prevent newcomers from attaining a market share, and this canbe done with the help of the state through the licensing process.There is a case in the pipeline with respect to Italy in which the gov-ernment has asked for something like a billion deutschmarks fromOmnitel, the second mobile telephone operator, but has asked for nomoney from the incumbent Italian telecommunications operators.This means a high entrance fee for the newcomer, and no fee for theincumbent-it should be the other way around. And you can useother devices as well, such as numbering, telephone directories, rights-of-way, interconnects and lines (in the beginning, at least, newcomersneed the lines of the incumbent telecommunications operators).Remedies are transparency, unbundling, separate accounting, and, ofcourse, competitive infrastructure. The decision to open up infra-structure recognizes that as necessary to prevent abuses. Privatizationis, of course, not a suitable remedy, because it merely replaces a publicmonopoly with a private one. According to the newspapers, the latestoffer of the Europeans at the WTO with respect to telecommunica-tions is subject to certain ownership restrictions imposed by theFrench, the Belgians, and, I think, the Spanish. It is also said that theywould be willing to waive those restrictions in return for eliminationof certain ownership restrictions that still exist in the United States.In any event, I do not believe that ownership restrictions will be intro-19961508 CHICAGO-KENT LAW REVIEW [Vol. 72:501duced at the level of the Community. The deregulatory forces in tele-communications are much stronger than the regulatory forces,because of the weakness of the European Union's political system andthe difficulties of reaching decisions among fifteen member states.Therefore, it is perfectly possible that the deregulatory process in Eu-rope will lead to a freer market than anywhere else.

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The Competition Law Approach to Global Intellectual Property and Telecommunications Market Integration - The Implications of the New Regime for Global Competition Policy

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