The Confluence of Competition and Patent Law
Strauss Water Ltd. ("Strauss"), develops, produces, and markets environmentally-friendly drinking-water heating and cooling Water Bars for in-home and business use.[1] In 2017, Strauss filed a lawsuit against five defendants, claiming each of them is involved, in some form or another, in the counterfeiting of Strauss's water filter cartridges. [2] Of note, Strauss has invested in the protection of its rights, through the registration of patents, patent designs, and trademarks in Israel and worldwide.
The defendants have denied these claims, asserted several defenses, and filed a counter-suit. First, the defendants claimed they do not sell counterfeit water filter cartridges but rather, replacement cartridges for the original product. Therefore, the defendants claim that they are not engaging in misleading or deceptive conduct nor are they making false or misleading representations regarding their water filter cartridges. Second, they argued that they negotiated with Strauss over the sale of its original water cartridges, but the company set conditions that the defendants could not accept. Consequently, Strauss refused to sell the defendant's spare parts, as well as original water cartridges. As a consequence of this, the defendants have filed a counter-suit where they claimed that Strauss was using its position as a monopoly in the market for water bars to exclude potential rivals. The defendants have argued that Strauss holds a monopoly in the relevant market and is using its monopolistic power in a way that harms competition and the public. The defendants have stated that Strauss was pursuing strategic practices, and among other things, was setting extremely high prices for the original water filter cartridges, illegally tying the service agreement to the purchase of cartridges, and refusing to sell the defendants spare parts for the original cartridges. Therefore, they petitioned the court to declare Strauss as a monopoly in the relevant market as well as to compel Strauss to sell the defendants' spare parts and the original water filter cartridges for a reasonable price. Defendants ask, at the very least, for the price charged to them be no higher than the one charged to the company's "full service" customers.[3]
The defendants have tried to base the claim that Strauss must sell its water cartridges on competition laws.[4] However, Strauss claimed, that coercing a patentee to exploit its patent is a compulsory license. Thus, it falls under the unique authority of the Patent Registrar under Section 117 of the Patents Act.
One of the first questions discussed by the court was whether the existence of patent law negates the applicability of competition law. The court held that the fact that a monopoly holder (in accordance with competition law) is also a patent holder does not exempt them from the application of competition law, and therefore the patent holder is subject to both laws. To that end, the court clarifies that although both patent law and competition law use the term "monopoly", competition law is concerned with the economic status of a monopoly in the relevant market. On the other hand, patent law is concerned with the protection of the patentee's invention and their proprietary rights, regardless of their position in the market. Hence, an entity could be regarded as a monopoly under patent law while not under competition law, and vice versa.[5]
Moreover, the court recognized that the Patents Act and the Economic Competition Law run parallel and both could be applicable when a patentee holds economic monopoly power over a market. The subordination of a patentee to both patent and competition legislation could be understood as vesting the authority to grant a "compulsory license" to a monopoly patent holder with the Patent Registrar as well as with the court.[6] The question remains, however, what is the relationship between section 117 of the Patents Act and Economic Competition Law? Specifically, do the various strains of law give a plaintiff the right to choose which route to take?
In its decision, the Court held that competition law cannot be used to compel a patent holder to allow the exploitation of the invention that is the subject of the patent. The Court reasoned that although the provision pertaining to compulsory licensing is rarely applied, the Israeli legislature outlined a specific legal arrangement under which one's request to force a patentee to exploit its patent will be examined.[7] In other words, the court found the provision pertaining to compulsory licensing to be a form of Lex specialis;[8] Meaning that although competition law applies parallel to patent law when a patentee also holds an economic monopoly, there is a variance when the issue in question is of patent exploitation. In this specific regard, the legislature has adopted a special mechanism that grants the Patent Registrar the power to consider whether or not the patentee should be compelled to allow others to exploit the patented invention.
The Court stated that this particular arrangement does not prevent the general application of competition law. Thus, if consumers were to claim that the prices set by Strauss reflect an abuse of their monopolistic power in the market, rather than their patent rights, then, competition law would indeed prevail.[9] Moreover, under the specific arrangement adopted within patent law, the fact that the patentee (i.e., Strauss) holds monopoly power within the specific market can be considered. Nevertheless, the power to grant a compulsory license is under the unique authority of the Patent Registrar.[10] That is to say, that although competition law and patent law run in parallel, the courts held that when a party aims to force a patent holder to allow the exploitation of its patented invention, patent law provisions prevail over competition legislation. Thus, the court dismissed the claim on a preliminary grounds; a lack of authority.
Although the court recognizes the limited expertise and ability of the Patent Registrar to take into consideration competition interests, it argues that allowing the competition authority to consider these interests, which are at the heart of patent laws suffers from the same weakness.[11] Therefore, the Court held that attempts to coerce a patentee to allow exploitation of its patented invention, even in circumstances where the patent holder also holds monopoly power in the relevant market, should be done using patent law as the lodestar.[12] In this instance, the defendants should have approached the Patent Registrar and not the Court with their complaint.
Broadly, Strauss Water Ltd., v. Gal established that when a party aims to force a patent holder to allow the exploitation of its patented invention, asking the Patent Registrar to grant a compulsory license is the right course of action.
It is certainly correct that allowing competitors to negate the foundations of the patent law system using competition could lead to undesirable consequences. Further, if one accepts the idea of patents as an incentive mechanism for innovation;[13] surely, there are advantages to the intrinsic approach taken by the court. At the same time, the court's decision neglects to take into consideration how seldom compulsory licenses are granted[14] or the long term possible implications of poorly designed compulsory licensing. For instance, forcing a patent holder to license can harm the value of its rights and ultimately hinder innovation. Moreover, the Court's decision renders the patentee’s obligations under competition law nearly useless in practice. Finally, it appears that the Court's approach was too broad. The result is a decision that does not fully take into consideration whether there are other potential, preferable, intervention mechanisms.
The Strauss Water Ltd., v. Gal case, rises the aftermarket dilemma in durable goods. While the goods are sold in the primary market, spare parts and maintenance services are provided in the aftermarket. There are vertical relations between the primary market and the aftermarket since the aftermarket starts after the purchase decision has already been made. [15]
The aftermarket poses a good study case to survey the conflict between patent laws and competition laws. Products that are sold in the primary market may be protected by patents, thus empowering the patent holder to determine how much to sell, to whom, and at what price. The propriety right may also enable the patentee to refuse to sell spare parts to independent service organizations that act in the aftermarket. Consumers who chose to buy a certain brand in the primary market may find themselves locked-in with a particular manufacturer due to switching costs that strain their mobility to other brands. By using patent rights to refuse to deal, the manufacturer may exclude rivals and stiffen competition in the aftermarket.
The famous case of Kodak demonstrates this dilemma. Kodak was a manufacturer of micrographic and photography equipment, holding dozens of patents for its different products. During the 1980s, Kodak was facing harsh competition from Independent Service Organizations that offered customers better prices for aftermarket’ services. Kodak reacted with a refusal to sell spare parts to Independent Service Organizations. The data showed that prices went up. The Independent Service Organizations filed a lawsuit in court, arguing that Kodak manipulated its dominant position in the market.[16] The district court dismissed the complaint, reasoning that Kodak’s proprietary rights include the right to refuse to deal. In the appeal, the Federal 9th Circuit Court reversed the summary judgment.[17] In 1997 the Ninth Circuit considered the case another time on remand and affirmed a jury verdict that awarded the plaintiffs $72 million.[18] Furthermore, it allowed a 10-year injunction that requiring Kodak to sell the spare parts for its machines at reasonable, non-monopoly and nondiscriminatory prices.
The court of appeals emphasized that a patent does not immunize the patentee from the application of the Anti-trust laws. It ruled that a monopoly may not refuse to sell patented products unless it shows a legitimate business justification. In that case, the data showed that Kodak did not distinguish between patented and non-patented products and applied its exclusionary practice to exclude rivals. Kodak’s defense, relying on its patents’ rights, was rejected on the ground that Kodak failed to prove that it acted to protect its patents. The court found that Kodak’s purpose was to prevent ISOs from competing with Kodak's service organization for the repair of Kodak equipment. The court based its decision on competition laws, providing the plaintiff's remedies according to competition laws, although Kodak's “refusal to deal” practice has mostly relied on its patents.
The Kodak judgment represents an approach that limits the patent holder when turning into a monopoly. As a monopoly, the patent holder’s activities are scrutinized under competition law and may be restrained in the name of competition. A more moderate approach was adopted by the court in a case brought before it several years later, in the case of Xerox. Again, the manufacturer, holding patent rights, refused to sell patented products to Independent Service Organizations that threatened its dominance in the aftermarket. Here, the court found a legitimate justification for the exclusionary practice on the ground of protecting the patents. The Federal Circuit Court adopted an approach in favor of the patentee, emphasizing that the mere refusal to deal is not in itself wrong. Nevertheless, the court did not negate regulatory intervention in case the patentee abuses its rights.[19]
The verdict in the Kodak case provoked a legal debate. Our purpose in this article is not to analyze the pros and cons of the verdict but to point out the need to assess the conflict between patent laws and competition laws. The Kodak approach recognizes this conflict and balances it by applying to a patent holder their obligations as a monopoly. This approach does not deprive the patent owner of their rights under the Patent Law rather, it restrains their rights when becoming an economic monopoly. At that special point, the public interest requires the application of competition laws to maintain competition and to prevent exclusion of rivals out of the market.
Patent rights do not automatically confer a patent holder with a dominant market position, but in certain circumstances, they may lead to the formation of economic market power. At that point, when a patent holder becomes a monopoly in the relevant product market, the Economic Competition Act comes into action. This act explicitly prohibits a monopoly from an unreasonable refusal to trade, therefore providing a specific answer to cases where a monopoly acts strategically to exclude their rivals out of the market. The Economic Competition Act is the right legal arena to deal with abuse of market dominance and its anti-competitive ramifications. A compulsory license that may be imposed on a patentee according to the Patents Act is a general remedy against abuse of rights but surely not the only appropriate remedy to stop a patentee from leveraging their dominance to avoid competition from legitimate competitors. By dismissing the case on the grounds of less authority, the court missed the opportunity to examine a monopolistic behavior and its implications on the market and deprived the defendants of their rights according to the Economic Competition Act without a discussion of the substance of the matter.
[1] See Strauss Water Hone Page. Available at: https://www.strauss-water.com/
[2] Strauss Water Ltd. V. Avi Gal and others, file no. 16853-04-17, August 28th 2019. The appeal was closed with the consent of the parties: appeal no. 8110/19, May 27th 2020.
[3] See Strauss Water Ltd., v. Gal, at p.3
[4] See section 29 of the Economic Competition Law -1988 (previously titled the Restrictive Trade Practices Act, 1988) (hereinafter – the "Competition Law").
[5] See the court's decision in Strauss
[6] Strauss Water Ltd. V. Gal. See also, 3/97 Magal Security Systems Ltd. v. Commissioner of Antitrust 2001.
[7] See the court's decision in Strauss
[8] See also, Aharon Barak, Interpretation in Law: General Theory of Interpretation 569 (1992).
[9] See the court's decision in Strauss.
[10] See court's decision in Strauss.
[11] See the court's decision in Strauss.
[12] See the court's decision in Strauss.
[13] Shapiro, C. and D. Teece (1994), “Systems Competition and Aftermarkets: An Economic Analysis
of ’Kodak’”, The Antitrust Bulletin, Vol. 39/1, at p. 158
[14] European Patent Office (EPO) (2018), Compulsory licensing in Europe. Available at: http://www.epo.org/compulsory-licensing
[15] For example: C Shapiro & D Teece, “Systems competition and aftermarkets: an economic analysis of Kodak” 39(1) The Antitrust Bulletin (1994) 135, 139.
[16] Eastman Kodak Co. v Image Technical Services Inc. et al 504 US 451 (1992)
[17] Image Technical Services Inc. v. Eastman Kodak Co. 903 F. 2nd 612 (9th Cir. 1990). The Supreme Court affirmed the Ninth Circuit's denial of Kodak's summary judgment motion reversing the district court: 504 US at 458.
[18] Image Technical Services Inc. v Eastman Kodak Co. 125 F 3d 1195 (9th Cir 1997)
[19] P. 1327-1328.
