Compulsory Licensing of Intellectual Property Rights With emphasis on The Incentives Balance Test

Abstract: The general rule in EC law is that a holder of an intellectual property right is not obliged to license the use of that right to others. However, situations exist where intellectual property rights suffer some limitations because of the prevalence of other conflicting interests. A dominant firm can, as the holder of an intellectual property right, be forced to grant a license to one or more undertakings if it has abused this right and in doing so distort the competition on the relevant market as recognised under Article 82 EC. There is a lack of detailed provisions concerning compulsory licensing in European Competition law. This obligation must therefore be based on case law. The IMS Health judgement defines the current view of the ECJ. The Court stated that a refusal to grant a license is abusive if four criteria are at hand, namely that the product must be indispensable for carrying on a particular business, the refusal is preventing the emerge of a new product for which there is a potential consumer demand, that it is unjustified and such as to exclude any competition on a secondary market. However, the Commission changed the legal standard set out by the Court when it introduced the incentives balance test in the Microsoft Decision. This new balance test, under which the Commission can order a compulsory license, is suppose to answer if a negative impact of a compulsory licence on dominant firm's incentives to innovate is outweighed by its positive impact on the level of innovation in the industry as a whole. Although the incentives balance test takes consideration of dynamic efficiencies, and innovation, which is generally perceived to be the largest single factor behind welfare improvement, the test has been highly controversial, both from a legal and an economic perspective. Hence, the purpose of this master thesis is to evaluate whether the incentives balance test, used in Microsoft granting a compulsory license, is economically founded, and legally acceptable. Economic theory does not give a conclusive answer as to whether 'competition drives innovation' or 'innovation is best fostered - and financed - by dominant firms with significant monopoly power'. Whether competition promotes innovation better than concentration depends, among other things, on the nature of the innovative process and the innovative environment, as well as the characteristics of the industry under consideration. The effects of a compulsory license on the incentives to innovation are quite complex. A balancing act is required between short-term allocative ex post benefits and long-term dynamic ex ante efficiencies. Regarding intellectual property rights recent economic theory has started to move away from the traditional perspective of intellectual property rights as mechanisms for innovation. Studies show that strong intellectual property rights may even discourage the innovation process. The analysis of the incentives balance test shows that it is indeed questionable. Although concentrating on innovation, which is one of the most important factors in the new knowledge-based economy, and furthermore taking appreciation of the function of intellectual property rights, it is complex to apply. This because it requires a case-by-case assessment where different efficiencies should be balanced between each other, a trade-off which economic theory does not give an answer to. The methodology of the test gives it a subjective open-ended nature that results in a loosening of the circumstances when a compulsory license can be ordered and, as a consequence, leads to a considerable degree of legal uncertainty.