The European Court of Justice (“ECJ”) has rendered its eagerly awaited judgment in the long-running IMS Health case (Case C-418/01, IMS Health v. NDC Health). At the heart of this case is the question of the very delicate balance between intellectual property rights and competition law, since the ECJ had to rule on the question under which circumstances a dominant IP right holder might be forced to grant a licence to a competitor pursuant to Article 82 EC (which prohibits abuse of dominant position).
The pre-IMS case law can be summarised as follows: Article 82 EC does not, as a rule, oblige a dominant IP holder to license his IP rights, and the refusal to license does not, in itself, constitute an abuse. For an abuse to exist, there must be additional abusive behaviour, and exceptional circumstances must prevail, as set out in the Oscar Bronner and Magill cases. In Magill,for example, the refusal to license prevented the appearance of a new product, for which there was consumer demand. The refusal was not objectively justified and the effect was to reserve to the IP right holder a secondary market. The Magill case gave rise to a lot of controversy and the IMS Health case presented an opportunity for the ECJ to provide further clarity. The IMS ruling shows, inter alia, that, in the ECJ’s view, the exceptional circumstances retained in the Magill case are not exhaustive.
The IMS Health case concerned a dispute between IMS Health and NDC Health, which both provide data on sales of pharmaceutical products in Germany. IMS Health supplies pharmaceutical companies with German regional sales data on pharmaceutical products, formatted according to a structure of 1860 or 2847 “bricks” which each correspond to a designated geographical area. Those structures were developed by IMS in collaboration with the pharmaceutical industry and have in practice become the industry standard for reporting sales data. In 2000 IMS discovered that certain competitors, including NDC Health, were using its copyright protected brick structure, and obtained preliminary injunctions from the German courts. NDC consequently filed a complaint with the European Commission based on Article 82 EC and the Commission ordered IMS to grant a copyright licence to NDC. However, that decision was later suspended by the President of the European Court of First Instance. In the context of parallel national proceedings, in July 2001, the Regional Court of Frankfurt am Main referred several questions to the ECJ for a preliminary ruling relating to the refusal by IMS to grant a licence to use its copyright-protected brick structure to NDC, who had tried, in vain, to develop alternative brick structures.
Advocate General Tizzano delivered his Opinion in October 2003, suggesting an extensive interpretation of the Magill case law. In his view, a refusal by an IP right owner who holds a dominant position to grant a licence entails an abuse of dominant position within the meaning of Article 82 EC where: a) there are no objective justifications for such refusal; b) the subject matter of the IP right in question is an input that is indispensable for competing on a secondary market and c) the undertaking seeking the licence intends to produce goods or services of a different nature which, although in competition with those of the IP right owner, answer specific consumer requirements not satisfied by the existing goods or services.
The criteria suggested by the Advocate General significantly broadened the scope of compulsory licensing under Article 82. The “input” requirement contained in the Opinion opens the door to compulsory licensing of copyright protected software, a process patent or know-how which serves as an input for a downstream market. This could have far-reaching consequences.
The ECJ, in its judgment of 29 April 2004, broadly followed the Advocate General’s reasoning, although it used different language.
The ECJ, firstly, dealt with the indispensability requirement and observed that it is for the national court to determine whether the product or service at issue is indispensable to an undertaking in order to carry on business in the relevant market. In that context, the national court must consider whether there are products or services which constitute alternative solutions, even if they are less advantageous, and whether there are technical, legal or economic obstacles capable of making it impossible or at least unreasonably difficult for an undertaking seeking to operate in the market to create such alternative products or services. Referring to the Bronner case, the ECJ recalled that, in order to accept the existence of economic obstacles, it must be established that the creation of alternative products or services is not economically viable for the production on a scale comparable to that of the undertaking which controls the existing product or service. The ECJ added that, in the case of IMS’s brick structure, the national court may take into consideration the fact that a high degree of participation by the pharmaceutical laboratories in the improvement of the brick structure may have created a technical dependency by users on that structure. In such circumstances, it is probable that those laboratories would have to make very significant technical and financial efforts to be able to use data presented on the basis of an alternative structure. The supplier of that alternative structure might, therefore, be obliged to offer terms which are such, as to rule out any economic viability of business on a scale comparable to that of IMS. The ECJ thus confirmed that in order to determine whether access to the IPR concerned is indispensable, account must be taken of the costs of switching for the customers.
Next, the ECJ addressed the issue of when a refusal to license by a dominant firm that owns an indispensable product constitutes an abuse. The Court recalled that the exclusive right to reproduction forms part of the copyright holder’s rights, so that the refusal to license cannot, in itself, constitute an abuse of a dominant position. Nevertheless, the exercise of an exclusive right may, in exceptional circumstances, give rise to abusive conduct prohibited by Article 82 EC. In the ECJ’s view, the refusal by a dominant undertaking, which owns a copyright of a brick structure indispensable to the presentation of regional sales data on pharmaceutical products in a Member State, to grant a licence to use that structure to another undertaking which also wishes to provide such data in the same Member State, constitutes an abuse where the following three conditions are fulfilled:
(i) the undertaking which requested the licence must intend to offer, on the market for the supply of the data in question, new products or services not offered by the copyright owner and for which there is a potential consumer demand
(ii) the refusal is not justified by objective considerations
(iii) the refusal is such as to reserve to the copyright owner the market for the supply of data on sales of pharmaceutical products in the Member State concerned by eliminating all competition on that market
The ECJ stressed that it is for the national court to determine whether those conditions are fulfilled. The national court must thus decide whether, in fact, a licence is essential to preserve competition and to give consumers something they would not otherwise be offered.
The practical application of the above conditions remains unclear and possibly far-reaching. The main issue is what is meant by “new product”. IMS argued that the “exceptional circumstances” test laid down in the Magill case could only be satisfied if the refusal to grant a licence prevented the aspiring licensee from offering a new product on a secondary market other than that on which the IPR holder is active. The ECJ did not follow this argument and considered as abusive a refusal to license a company wishing to compete in the same market as that in which the IP holder is active, provided that the competitor intends to introduce a “new” product and would be prevented from doing so without a licence.
This will increase the right holders’ exposure to challenges from competitors seeking licenses in order to compete on the right holders’ own markets. Such challenges will be based on an argument that they wish to introduce a new product; an allegation which could be made with some degree of credibility in a considerable number of cases. For example, new functions can easily be added to software. It is clear from the above that the language used by the ECJ will have to be clarified in future cases.