Committee on Development and Intellectual Property (CDIP)
Geneva, May 7 to 11, 2012
Study on the Anti-Competitive Enforcement of
Intellectual Property (IP) Rights: Sham Litigation
prepared by the Institute for Applied Economic Research (IPEA), Brasilia 1 The Annex to this document contains a Study on the Anti-Competitive Enforcement of Intellectual Property (IP) Rights: Sham Litigation Report prepared under the project on Intellectual Property and Competition Policy (CDIP/4/4/REV). This Study has been prepared by the Institute for Applied Economic Research (IPEA).
The CDIP is invited to take note of the information contained in the Annex to this document.
Study on the Anti-Competitive Enforcement of
Intellectual Property (IP) Rights: Sham Litigation
Brief Remarks about the Theory Predatory Conduct and its Application to Sham Litigation 7
First Questions 8
A complex equation 10
A sham issue 12
The USA and the EU: A Vexatorious Proximity 14
An Unneeded Multiplicity 14
An Initial Definition 15
The Singular Issue of IP Abuse of Competition 15
The Present Research 17
An Initial Research Grid 18
The Response of the Various Agencies 19
The U.S. Report 20
The Mexican Report 24
The Spanish Report 25
The Italian Report 31
The Turkish Report 32
The Data Collected Through Autonomous Research 33
Australia and New Zealand 34
South Africa 37
The Brazilian Case: A Special Research 42
Competition Authority: Non IP Cases 43
Competition Authority: The IP Cases 46
The Second Stream of Cases: the Anticompetitive Exercise of IP Rights Illicitly Acquired 60
The Status of Illicit Acquirement of IP Rights in This Study 63
1. In the context of its Intellectual Property and Competition Policy Project, the World Intellectual Property Organization (WIPO) has signed a Cooperation Agreement with the Institute for Applied Economic Research (IPEA), a public foundation of the Brazilian Republic Presidency, aimed at the elaboration of a study on sham litigation.
2 The objective of this study was to trace a worldwide frame of the current state of the anticompetitive use of the judicial process to enforce intellectual property rights, also known as Sham Litigation. Sham litigation has been object of controversy, as it connects the exercise of allegedly legitimate rights to the idea of abuse of its uses, meaning (in economic terms) a strategic use with the objective of harming or excluding a rival from the market. A possible tentative definition for sham litigation on a strictly economic perspective is predatory or fraudulent litigation with anticompetitive effect, i.e., the improper use of the courts and other government adjudicative or granting processes against rivals to achieve anticompetitive ends. The Study suggests that the anticompetitive use of judicial actions to unduly protect intellectual property might be considered one type of non-price predation strategies. Hence, the economic tools developed to identify this kind of practice can be useful here, too.
3 Tension between Intellectual Property Rights and Competition Law is not a singular case. In fact, both have a lot in common, as their systems of law and policies are aimed at promoting innovation and economic growth. Nonetheless, there are potential conflicts associated to the means used by each system to promote these goals. But it is exactly because it is usual in Economics to deal with trade-offs and conflicts of goals, that the convergence of Law and Economics can be very productive in this area of research and public policy.
4 During the investigation, every effort was made to analyze the following aspects, all of them involving, in some sense, strategic movements from an incumbent firm:
actions between competitors with the aim of covering collusive practices;
frivolous actions moved against or through governmental agencies with the aim of taking time and keeping, artificially, property rights in course.
5 Starting from the concept of predatory behavior developed by the new trends in industrial organization literature, the Study suggests that it is feasible to develop an analogical rationale to deal with the controversial matter of sham litigation, as it appears in the classic case law as well as in recent judicial and administrative cases.
6 Traditionally, the predatory problem has been identified through the observation of whether the dominant firm has incurred losses in the short run in a particular market forcing the exit (or not allowing the entrance) of a rival firm, expecting that its abnormal profits could be obtained in future markets. The development of the Game Theory deepened the understanding of predatory behavior. It demonstrated that in the presence of asymmetric information (about market conditions, costs, a particular ”taste” for predation or simple strategy of other firms), or imperfect flow of information in the financial markets, predation is theoretically possible, even in the absence of such entry barriers that traditionally were thought to be a necessary condition for such behavior. As a result of the Industrial Organization’s recent developments, the understanding of predatory pricing has evolved from the ideas of losses incurred by the firm that adopted those practices or of profit recovery in the future to damage to the consumer and/or to economic efficiency. The Study suggests that this perspective must be taken into account for an accurate treatment of sham litigation, as well.
7 In sham litigation, EU and US doctrines are singularly close. The tests developed under Noerr-Pennington and ITT Promedia cases are very similar. Under Noerr-Pennington the first question to be answered is whether, according to a objective standard (a average player would so act), the firm initiating the legal action reasonably could be held to believe it had rights to protect, which is more or less the same as the test proposed by the Commission in ITT Promedia. Here, only objective factors are taken into consideration. They relate to the relevant impediments that the firm initiating the proceeding reasonably knew at the time the lawsuit was initiated, and which would prevent it from succeeding. Second, both tests propose that if one can find that there was no merit to the case the court will have to decide whether the lawsuit was conceived in a plan whose goal was to eliminate competition, the last inquiry being an inquiry into the subjective intent of the dominant undertaking.
8 Another similar treatment is found in the case law dealing with use of Government processes for anticompetitive purposes: the utilization by a player of an unwarranted multiplicity of Government remedies, where the unreasonable behavior should be sought not in one single petition, but in the reiteration of such process. When dealing with a series of lawsuits, the question is not whether any one of them has merit--some may turn out to, just as a matter of chance--but whether they are initiated pursuant to a policy of starting legal proceedings without regard to the merits and for the purpose of injuring a market rival. The inquiry in such cases is prospective: were the legal filings made, not out of a genuine interest in redressing grievances, but as part of a pattern or practice of successive filings undertaken essentially for purposes of harassment? Therefore, a second but related set of criteria is required whenever the possible misuse of Government processes for anticompetitive purposes occurs by proliferating petitions even though a number of them may be found rightful, but the multiplicity itself cannot be shown as reasonable under an objective standard.
9 In order to ground the Study on reliable data, a representative number of jurisdictions have been solicited information. The request for information recited the following filters:
“The administrative or judicial procedures concerning any of the rights covered by Article 1.1 of TRIPs, brought to the attention of Intellectual Property authorities or antitrust agencies, where at least one of the following aspects is conspicuously present:
(a) procedures where the final favorable prospects for plaintiff (or requiring party) is evidently improbable, but the initiation or continuation of the procedure by itself is liable to have anticompetitive effects; or
(b) procedures multiplied on the same or closely related causes of action where such reiteration of actions or requests (even though each one action or request by itself would be procedurally reasonable) also is liable to have anticompetitive effects; or
(c) other actions, initiatives of requests where the benefit to plaintiff or requesting party could result from the initiation or continuation of the procedure itself rather than the final result of the exercise, and such initiation or continuance by itself is liable to have anticompetitive effects; or
(d) any actions, initiatives of requests, which under domestic law is classifiable as abuse of right or abuse of process, and such abuse is liable to have anticompetitive effects.”
10 As can be noted, such research grid would cover issues in excess of the ITT Promedia or the PREI Tests.
11 Such filter (a) does not limit itself to the initiation of the procedure: the continuation of a process that had shown to be evidently improbable is also covered; (b) exceeds the simple PREI standard (but follows POSCO) by covering a multiplicity of claims, even though any one of them could be held as rightfully initiated or continued, when such proliferation of petitions by itself may be evidently unneeded to attain the petitioner’s rights; (c) stresses that the issue at stake is the use of the governmental process - as opposed to the outcome of that process – that is the source of an anticompetitive effect; (d) looks for a player’s behavior that under the pertinent law is deemed to be an abuse of a substantive right or a procedural abuse, and also is liable to have an anticompetitive effect.
12 The grid did not mention any subjective assessment of intention of anticompetitive effects nor required that a specific anticompetitive effect had actually occurred. The same grid was utilized to induce the autonomous research, that is to say, the pursuance of facts and law beyond the information provided following the request direct to the various foreign agencies. As it was utilized as an uniform filter for the study, and officially informed as such to the various consulted administrations, this study shall conform to its boundaries, except where otherwise indicated.
13 The Study analyzes relevant information submitted in the responses from the European Commission, Chile, the Russian Federation, the U.S., Mexico, Spain, Republic of Korea, Italy, Turkey, and Brazil.
14 The study demonstrates that the abuse of petition to affirm intellectual property rights in an anticompetitive manner is a very sensitive issue. The PREI/POSCO/PROMEDIA set of tests is the most common standard to evaluate such cases. Even in jurisdictions where no mention is made to these standards, some complex filtering is carried out. But, as stated in the US Report, “this standard is difficult to meet, and very few cases have met the stringent test”. The economic perspective can be helpful as it stresses the effect on competition, therefore, on consumer welfare and economic efficiency of conducts adopted by firms with market power.
15 A modern reading of predatory practices suggests a chance of focus on predatory behavior, from profit recovery in the future to damage to the consumer and/or economic efficiency. Sham litigation cases could be seen by the same lens. Other path is already being taken, as Brazilian case law shows and, in a certain way the Astra-Zeneca case: avoiding the stringent set of test imposed by EU and US doctrines and investigating and convicting cases for anticompetitive practices. It is clear that, following formal and stringent criteria, competition authorities and courts worldwide may be dismissing a significant number of (true) cases.
16 Here the Competition Law requirements of assuring social welfare through efficient handling of the economic activity, and the purposes of the Intellectual
Property Law to stimulate creation and innovation are clearly entangled; no future development of this field of law may possibly ignore the theme of this study. The present research has shown the need for deepening the international debate around the identification criteria of anticompetitive use of intellectual property. Following formal and stringent criteria, competition authorities and courts worldwide may be dismissing a significant number of cases, which is especially sensitive in the global economy of the twenty-first century, a knowledge economy.