Restrictions in patent licensing agreements and article 85, Treaty of Rome

Abstract

Technological innovation is generally accepted as being in the public good. Among measures designed to stimulate the innovative process is the patent system - a system based on an unproven hypothesis that limited legal monopoly is indispensable to attaining a significant level of innovation. Yet, almost certainly the most potent stimulant to innovation is workable competition: the competition which is both fair and effective in the marketplace. Exceptionally, patents can render the competitive process unworkable. Agreements based on the existence of a patent, which itself could be invalid, can impair or distort the working of competition. Indeed, they may be designed to eliminate effective competition from the marketplace. Theoretically, the patent is a strictly limited exception to society's basic preference for free and fair competition over monopoly. This theory is reflected in the application of Article 85 to licensing agreements which distort workable interstate competition within the Common Market. That prompts several basic questions. What are, or appear to be, the primary causes of innovation? What are the main elements of workable competition? How is the market defined in competition law? What is involved in the application of Article 85 to licensing agreements? These questions are answered at considerable length before analysing EEC competition policy on restrictive licensing agreements. This policy is vigorously opposed by business interests in several Member States.

Its opponents contend that the policy attacks, or at least threatens, the very existence of the patent as a stimulant to innovation. The thesis rejects this. It also rejects as being largely fictional the non-interventionist argument that the policy will cause a substantial reduction in patent licensing on the Common Market, to the detriment of competition. Patent holders are often compelled to license their technologies by economic realities of the market environment.

The present policy is economically and intuitively sound. It is: licensing agreements prohibited by Article 85 are excusable only if they are indispensable to the attainment of economic or technical progress, the basic goal of patent policy. In practice, a restriction of competition appears to be indispensable when it either induces or compensates substantial risk-taking in respect of necessary investments or, where risk is insubstantial, permits amortization of a significant part of necessary investments which otherwise is beyond recovery. This hypothesis is fully developed in the analysis of competition policy. The mere existence of a patent does not render any licence indispensable to securing the aims of the patent system, or place any licence beyond the reach of Article 85. The inherent restriction is no longer a tenable hypothesis in Community competition law. It is not an axiom of legal logic. Indeed, it is illogical when analysed in the thesis.

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