Intellectual Property Enforcement Guidelines

Intellectual Property Enforcement Guidelines

TABLE OF CONTENTS

Part 1: Introduction......................................................................................................................... 3

1.1 Purpose of Guidelines............................................................................................................ 3

1.2 Organization of Guidelines...................................................................................................... 4

Part 2: The Competition Law / Intellectual Property Interface............................................................. 5

2.1 Intellectual Property Laws...................................................................................................... 5

2.2 Competition Law................................................................................................................... 7

2.3 Competition Law/IP Law Interface: Enforcement Principles.................................................... 9

The Bureau applies the same general competition law principles to business arrangements involving IP as it applies to conduct involving other forms of property..................................... 10

The Bureau will not assume that IP rights confer market power................................. 12

The Bureau will generally consider the licensing of intellectual property rights to be pro- competitive 13

Part 3: Application of the Competition Act to Intellectual Property................................................... 13

3.1 General Issues........................................................................................................................ 14

3.1.1 Market Definition..................................................................................................... 14

3.1.2 Market Power......................................................................................................... 17

(i) Market Concentration......................................................................................... 18

(ii) Supply Side Substitution.............................................................................. 19

(iii) Ease of Entry............................................................................................... 20

3.1.3 Competitive Effects Analysis.................................................................................... 21

(i) The Horizontal and Vertical Distinction................................................................. 21

3.1.4 Efficiency Analysis...................................................................................................... 22

3.2 Analysis Applied to Specific Conduct: Hypothetical Case Examples...................................... 25

Mergers Involving IP........................................................................................................... 25

Conspiracy Involving IP....................................................................................................... 29

Abuse of Dominance Involving IP........................................................................................ 30

Exclusive Licensing.............................................................................................................. 31

Exclusive Dealing and Market Restriction............................................................................. 34

Output Royalties.................................................................................................................. 36

Price Maintenance............................................................................................................... 38

Tied Selling.......................................................................................................................... 38

Cross-Licensing and Pooling Arrangements.......................................................................... 40

Refusals to License.............................................................................................................. 41

Standard for Liability........................................................................................................... 42

Essential Facility.................................................................................................................. 42

Background on Network Industries...................................................................................... 44

Network Access..................................................................................................... 45

Foreclosure of Complementary Products.................................................................. 47

Denying Access to Complementary Product Suppliers.............................................. 48

Policy Advocacy and the Role of section 32..................................................................................... 50

Part 1: Introduction

1.1 Purpose of Guidelines

With the growth of the knowledge‑based economy, intellectual property ("IP")^[1] has become an increasingly important competitive asset. Firms have new opportunities to use their IP strategically. As with any private property, owners of IP generally have the right to exclude others from using their property and to profit from its exchange. Given the intangible nature of IP, it is necessary in many instances to provide a statutory mechanism for owners to enforce their ownership rights in IP comparable to those given other kinds of private property.

Property laws, such as IP laws, which protect owners' rights in their private property, in general encourage the efficient allocation and use of such property. However, no property rights are absolute, and as with any other property rights, there are limits on the manner in which IP rights can be exercised. In particular, limits may be imposed by the Competition Act where necessary to protect and facilitate competitive markets. The Bureau views IP laws and competition laws as complementary ‑ IP laws establish and protect the existence of IP rights and the Competition Act imposes limits on the exercise of these right to ensure that IP is valued and traded efficiently.

While IP laws and competition laws have the same overall objective ‑ the efficient operation of markets ‑ firms may be unclear about the interface between IP laws and competition laws. This uncertainty may lead firms to avoid arrangements that are pro‑competitive, or unknowingly base future business plans on arrangements that could be found to be anti‑competitive under the Competition Act.

The purpose of these Guidelines is to articulate the Competition Bureau's (the "Bureau") enforcement policy as it applies to the assignment, licensing and general use of IP, so as to alleviate any uncertainty that the business community may be facing in this regard. These Guidelines explain how the Bureau will assess business arrangements involving IP. The approach elaborated in these Guidelines is dictated by the fundamental principle that the Competition Act applies to IP as it applies to other forms of property. As with other private property rights, there can be circumstances where intervention under the Competition Act would impose constraints on the exercise of IP rights. These Guidelines discuss the circumstances in which the Bureau will likely seek to impose limits on the exercise of IP rights in order to promote competitive markets.

However, these Guidelines cannot possibly review how discretion will be applied in every situation. The circumstances of each alleged violation of the Competition Act will determine how the Bureau will apply its enforcement discretion. Therefore, individuals should either consult with qualified counsel or contact the Bureau when evaluating the competition law risk associated with any contemplated business arrangement involving IP. The final interpretation of the law rests with the courts and the Competition Tribunal (the "Tribunal").

In developing these Guidelines, the Bureau has considered the approach taken in the 1995 Antitrust Guidelines for the Licensing of Intellectual Property issued by the U.S. Department of Justice and the Federal Trade Commission, and the approach taken in other jurisdictions, including the European Community. These Guidelines are consistent with the North American Free Trade Agreement and the World Trade Organization Agreement on Trade‑Related Intellectual Property Rights, which recognize a country's right to address the anti‑competitive exercise of IP rights.

1.2 Organization of Guidelines

The remainder of these Guidelines is organized in two parts. Part 2 is divided into three subsections. The first subsection discusses the general purpose of IP laws. The second subsection discusses the general purpose of competition law and describes the basic analytic approach used in applying the competition law. The third subsection presents how the Bureau views the interface between competition law and IP laws and explains the three general enforcement principles the Bureau will apply when dealing with IP. Part 3 outlines the specific approach adopted by the Bureau in the enforcement of the Competition Act to business arrangements involving IP. This Part also illustrates the general application of the enforcement approach of the Guidelines to previous case law and discusses a series of hypothetical situations.

Part 2: The Competition Law / Intellectual Property Interface

2.1 Intellectual Property Laws

Private property rights are the foundation of a market economy, facilitating the creation of wealth and prosperity. Private property is granted legal protection, either by common law or by statute, in order to create incentives for investment and trade. Property rights provide incentive for owners to invest in the creation and development of property by allowing owners to benefit from their ownership of that property. The economic incentives underlying ownership are fundamentally the same for all types of private property. Owners profit from their property through exchange, by receiving payment from those who make use of it. This is only possible when owners can control others' access to their property.

IP has unique characteristics which make it difficult for owners to exclude others and profit from their IP. First, IP is typically non‑rivalrous; two or more persons can simultaneously make use of an IP. For example, the fact that a firm is using a novel production process does not prevent another firm from simultaneously using the same process. In contrast, for an input like steel ingots use by one firm prevents concurrent use by another. Second, intellectual property is typically non‑excludable; it is impossible or at least very costly for owners of IP to exclude others from its use without legal recourse. Whereas its owner can physically restrict access to steel ingots, it would be difficult, if not impossible, for the creator of a work of art to prevent it from being copied once the work has been shown or distributed. Lastly, while IP is often expensive to develop, it is easy and inexpensive to copy. As a result, the task of establishing private property rights in IP is more difficult than for other kinds of property and the common and civil law alone has not proven sufficient to protect most IP rights^[2]. Accordingly, legislation has been enacted to provide a mechanism for owners to protect and enforce their rights in their IP. This legislation allows owners to more efficiently participate in market exchanges relating to their IP rights.^[3]

In these Guidelines, "intellectual property rights" (“IPR”) refers to the rights granted under the Copyright Act, the Patent Act, the Trade‑Marks Act, the Industrial Design Act, the Integrated Circuit Topography Act, and other industry‑specific legislation^[4]. The Copyright Act confers upon the creator of a work exclusive rights to produce, reproduce or communicate that work. The Patent Act protects an innovator by granting, for a fixed term, the exclusive right to use or to sell the right to use the invention. The Trade‑Marks Act allows the registration of distinctive marks and confers upon the owner the exclusive right to use its mark. Finally, upon registration of a design the Industrial Design Act confers the right to limit the production and sale of articles that incorporate the design. The Integrated Circuit Topography Act confers similar rights for a topography, which is a design for the disposition of an integrated circuit product. The term "intellectual property rights" also encompasses the protection of IP provided under the common law and the Quebec Civil Code, including the protection given to trade secrets.

2.2 Competition Law

The principle underlying competition law is that the public interest is best served when markets are competitive. Competitive markets are socially desirable because they lead to an efficient allocation of resources. However, if competition is imperfect and firms are able to exercise market power, resources may be allocated inefficiently to the detriment of consumers. Market power refers to the ability of firms to profitably cause one or more facets of competition, such as price, quality, variety, services, advertising, or innovation to significantly deviate from competitive levels for a sustainable period of time^[5]. Competition law seeks to prevent the creation, enhancement or maintenance of market power where this would undermine competition without offsetting economic benefits.

However, since strong property rights are necessary conditions for open and efficient competitive markets, the enforcement of the Competition Act strives to respect basic property rights and does not routinely interfere with their exercise. The Competition Act will infringe on these rights only in circumstances where a remedy is necessary to preserve the public interest through competitive markets.

The Competition Act contains two types of provisions which define the circumstances where intervention in a business arrangement is warranted in order to protect competition: criminal offences and reviewable matters. The most egregious conduct is prohibited under the criminal conspiracy provisions in section 45 of the Competition Act, punishable by fines and imprisonment. Under that section, it is a criminal offence for two or more persons to agree or arrange to prevent or lessen competition unduly.^[6]

The reviewable matters provisions deal with conduct that is generally neutral or pro‑competitive but which may in certain economic circumstances significantly constrain competition. Under these provisions, the Tribunal may order remedial relief if the conduct leads to the specified anti‑competitive effects. Reviewable matters include abuse of dominant position (section 79), exclusive dealing, tied selling and market restriction (section 77), refusal to deal (section 75) and mergers (section 92).

Under the abuse provisions, the Tribunal may issue an order if one or more persons who substantially or completely control a class of business in Canada engage in a practice of anti‑competitive acts which has had, is having, or is likely to have the effect of preventing or lessening competition substantially in a market. Similarly, the exclusive dealing, tied selling, and market restriction provisions authorize remedial orders where the result or likely result of any of those practices is a substantial lessening of competition. The refusal to deal provisions address the refusal by one or more suppliers to supply a person with a product where the refusal precludes the refused person from carrying on business or substantially affects his business. In these circumstances, if the product is in ample supply and the person is unable to obtain supply due to insufficient competition among suppliers, the Tribunal may order one or more suppliers to supply product to the refused person. Lastly, under the merger provisions the Tribunal may, among other things, prohibit a merger or order a divestiture of assets if it finds that a merger or proposed merger prevents or lessens, or is likely to prevent or lessen, competition substantially in a market.

In most cases, enforcement of the Competition Act entails an evaluation of whether the conduct in question has resulted in, or is likely to result in, the harm to actual or potential competition provided for in the particular provision. Conduct is deemed to harm competition when the firm under scrutiny can affect market outcomes through the exercise of market power. The assessment of the likelihood that a firm will be able to exercise market power usually begins with defining the relevant product market. A relevant market consists of the firm(s) under scrutiny and all actual and potential competitors that sell products that consumers consider to be acceptable substitutes. In general, market power will be associated with situations where there is a small number of acceptable substitutes and where entry into the market is either slow or particularly costly.

If it is found that a firm does, or as a result of the transaction is likely to, possess market power, the challenged conduct must be shown to have the prescribed anti‑competitive effects before enforcement action is taken. The effects that must be shown to result from the conduct vary with the offense and thus with the applicable section of the Competition Act.

If the courts determine that there is a violation of the Competition Act, they can impose sanctions in the case of criminal provisions, or order remedies under the civil provisions. This can involve placing constraints on the exercise of private property rights. For instance, if the Tribunal concludes that a proposed merger is likely to result in a substantial lessening of competition, then it could order a divestiture of assets. In this case, the rights of property owners to acquire or dispose of their private property are overridden. Similarly, remedies under the abuse of dominant position provisions can involve (and have involved)^[7] the modification of contracts that were deemed to have the stipulated anti‑competitive consequences. Since such contracts govern the exchange of private property, such a remedy imposes constraints on the exercise of property rights.

2.3 Competition Law/IP Law Interface: Enforcement Principles

The Bureau approaches the competition law/intellectual property laws interface from the broad perspective that both legal frameworks are necessary components to the efficient operation of the marketplace and the enhancement of social welfare. IP laws provide incentives for owners to invest in the creation and development of their property and encourage the efficient use and dissemination of this property within the marketplace. IP laws merely provide a mechanism for owners to establish and enforce their ownership rights for IP comparable to those given other kinds of private property. Once IP is provided a comparable level of protection, society benefits from the application of the Competition Act to IP for the same reasons it benefits from the application of the Competition Act to other forms of property. Competition law facilitates the objectives underlying IP laws by preventing restrictive commercial practices that impede the efficient production and diffusion of goods and technologies.

Based on this perspective, the Bureau takes the following approach in applying the Competition Act to intellectual property:

a. The Bureau applies the same general competition law principles to business arrangements involving IP as it applies to conduct involving other forms of property

b. The Bureau will not assume IP rights confer market power

c. The Bureau will generally consider the licensing of intellectual property rights to be pro‑competitive

(a) The Bureau applies the same general competition law principles to business arrangements involving IP as it applies to conduct involving other forms of property.

Since IP is exchangeable property, it falls within the scope of the Competition Act, which aims to promote the efficient exchange of property. Therefore, in considering business arrangements involving IP, the Bureau will apply the same general competition law principles that it applies to conduct involving other forms of property. In assessing the potential anti‑competitive effects of conduct involving IP, the Bureau will apply the following four‑step analytic framework: (i) define the relevant market or relevant markets, (ii) determine if the firm(s) under scrutiny posses market power in the relevant market(s), (iii) determine if the transaction or conduct has had or will have an anti-competitive effect in the relevant market(s) that results in either an undue lessening or a substantial lessening (prevention) of competition, and (iv) where appropriate, consider any efficiency rationales that may offset the lessening (prevention) of competition. Even though there are some differences between the characteristics of IP and other kinds of property, the Competition Act and the analysis applied in its enforcement are sufficiently flexible to account for these differences. IP does not require fundamentally different enforcement principles.

For example, a firm enjoying a degree of market power in a goods market faced with the possible entry of a close substitute may attempt to preserve its market power by signing a large number of the buyers to long term exclusive contracts. As a result, there may be an insufficient level of sales for the new firm to cover its entry costs, and entry is deterred. The incumbent's contracts may well have a social cost. By preventing entry, the contracts reduce the variety of goods available to consumers and preserve the higher prices charged to those consumers not covered by the contracts. Competition law could intervene to protect society's interest by seeking to restrict the incumbent's ability to contract in this manner. This example could just as well apply to a situation where the market power enjoyed by the incumbent is the result of an IP right. The incumbent having a patent about to expire, for instance, could be trying to extend the life of the patent through these long‑term exclusive contracts. The justification to apply competition law is the same whether the market power comes from an IP right or from another source.

In enforcing the Competition Act with respect to IP, the Bureau will respect the role of the IP, as it respects the role of other private property laws, in providing property owners with the proper incentives to invest in the creation and development of their property. It is not the intention of the Bureau to use the enforcement of the Competition Act to tailor the level of protection granted to a specific property by a specific IP^[8]. Nevertheless, when conduct involving IP is deemed to be anti‑competitive, the Bureau may, as it does with other kinds of property, petition the courts to limit the manner in which owners may exercise their IP rights, in order to correct any harm caused by the anti‑competitive conduct.

(b) The Bureau will not assume that IP rights confer market power.

While an IP owner has the exclusive right to use its property, this does not necessarily give the owner market power. In competition analysis, market power is always defined with respect to the availability of substitutes within a relevant market. Intellectual property laws grant IP holders the right to exclude others from the use of a specific idea, innovation, product, or process. In this sense, the IP holder is granted exclusive rights over the use of the specific property. However, there often exist a number of actual and potential close substitutes for the specific product so that the IP holder is not the sole supplier in a relevant market. For instance, a firm that has a patent on an analgesic may be the sole producer of a particular drug formulation but the presence of both over‑the‑counter and prescription analgesics means that the firm is not the sole producer in the relevant antitrust market. Moreover, there may be a sufficient number of substitutes so that the IP holder is incapable of exercising any market power in the relevant market. Therefore, the Bureau will not presume that an IP right always grants market power. Any assessment of the competitive effects of conduct involving IP will be based on a full market power analysis.

Furthermore, if an IP right does confer market power, this by itself does not warrant enforcement action. A firm is not in violation of the Competition Act if it possesses market power attained solely through a superior quality product, process, the introduction of an innovative business practice, or for exceptional performance.

(c) The Bureau will generally consider the licensing of intellectual property rights to be pro‑ competitive.

Licensing agreements dealing with IP are a common business practice. Licensing represents a means by which IP is traded and it signals the willingness of IP holders to participate in the marketplace. To the extent that licensing increases the pool of agents that use the IP, licensing will distribute and diffuse an innovation or creative work. This ability to exchange and transfer IP can enhance its value and increase the incentive for its creation and use. Licensing arrangements also promote the efficient use of IP by facilitating the integration of IP with other components of production, such as manufacturing and distribution.

Although, simple licensing arrangements could reduce rival firms' incentives to innovate, without other restrictions this conduct would not likely raise concerns under the Competition Act. The licensing of intellectual property, therefore, should generally be considered to contribute positively to the competitive market process and be viewed as being pro‑competitive.

Part 3: Application of the Competition Act to Intellectual Property

As with other kinds of property, the assignment, licensing (or non-licensing) and use of IP is generally considered to contribute positively to the efficient operation of the market place and is therefore viewed as being pro-competitive. Under certain circumstances however, the assignment, licensing (or non-licensing) and use of IP can have anti-competitive effects.

There are a number of factors, many of which are applicable to all investigations, that the Bureau may consider when assessing the potential anti-competitive harm of a particular conduct involving IP. These factors are described in section 3.1. Other factors, specific to the type of conduct or arrangement under investigation, are illustrated in hypothetical scenarios discussed in section 3.2.

3.1 General Issues

The Bureau’s enforcement analysis of the potential anti-competitive harm of a particular transaction or conduct involving IP can be described generically as follows: (i) define the relevant market or relevant markets, (ii) determine if the firm(s) under scrutiny posses market power by examining the level of concentration, the supply substitution factors and entry conditions in the relevant market(s), (iii) determine if the transaction or conduct has had or will have an anti-competitive effect in the relevant market(s) that results in either an undue lessening or a substantial lessening (prevention) of competition, and (iv) where appropriate, consider any efficiency rationales that may offset the lessening (prevention) of competition.

3.1.1 Market Definition

The first stage of the Bureau’s analysis involves defining the relevant market or markets in which there is an anti-competitive concern. Defining a relevant market provides an economically meaningful tool for measuring market power. The market definition exercise focuses solely on demand substitution factors – i.e., possible consumer responses. The potential constraining influence of firms that can participate in the market through a supply response - i.e, a possible production response - is considered subsequent to an initial market definition. Supply substitution is discussed below in section 3.1.2.

Concerns about anti-competitive effects can be prospective, where the transaction or conduct is likely to have a future anti-competitive effect, or retrospective, where the transaction or conduct has already had an anti-competitive effect. In cases where the anti-competitive concern is prospective, as is generally the case in a merger, relevant markets are normally defined through the use of the “hypothetical monopolist” test. Under this test, a relevant market is the smallest group of products and the smallest geographic area such that a sole supplier of these products could profitably maintain a small but significant, non-transitory price increase above what would prevail absent the transaction or conduct. In conducting the hypothetical monopolist test, the Bureau considers a number of evaluative criteria that provide indirect evidence of substitutability.^[9] In many situations, the results of the analysis of each of these criteria are not consistent with a single conclusion, in which case, the market definition that is most supportable by the available information is used.

When the anti-competitive concern is retrospective, as is generally the case of an alleged abuse of dominant position or illegal conspiracy, the hypothetical monopolist test for market definition may not be fully applicable because the monopolization may be real not hypothetical. Prices may already have been increased above competitive levels. Therefore, asking whether an additional price increase could be sustained would be irrelevant; applying the hypothetical monopolist test would lead to the erroneous conclusion that there are available substitutes and there is an absence of market power. Accordingly, in the course of determining the relevant market definition in such cases, the Bureau will take into account the impact of the alleged anticompetitive conduct underlying the investigation. The market definition and competitive effects stages of the Bureau’s analysis will proceed simultaneously.

In general, the definition of the relevant market is likely to be based on functional characteristics of the product and on consumers’ behavior, measured qualitatively in terms of: (i) the views, strategies, behaviour and identity of buyers, (ii) trade views, strategy and behaviour, (iii) end use of products, (iv) physical and technical characteristics of products, (v) the costs incurred by buyers in switching from one product to another, and (vi) other factors.

For transactions or conduct involving IP, the Bureau is likely to assess the competitive effects within the relevant market defined around one of the following: (i) the intangible knowledge or know-how underlying the IP, (ii) the tangible product or process (i.e. the technology) created from the knowledge or know-how, or (iii) the final or intermediate goods resulting from or including the tangible or intangible IP inputs.

The Bureau will generally not define markets specifically around R&D activity or innovation efforts with the aim of determining solely whether a transaction or arrangement leads to a reduction in this activity. The Bureau will instead focus only on those innovation-related anticompetitive effects that appear as direct price or output effects in the markets outlined above. More specifically, the Bureau’s analysis will focus on determining whether a transaction or arrangement would eliminate the “actual potential competition” or “perceive potential competition” of an existing innovation effort directed toward producing knowledge or know-how, a tangible technology, or a final or intermediate good to compete in a current or future relevant market.^[10] The appropriate market definition will depend specifically on the knowledge or know-how, tangible technology, or final or intermediate good toward which the current innovation effort was directed.

Defining a market around intangible knowledge or know-how is likely to be important when the rights to the IP are marketed separately from any technology or product in which the knowledge or know-how is used. For example, consider a merger between two firms that individually license the right to use the underlying know-how of a patented process technology to various independent downstream firms that use this know-how to develop their own firm-specific process technologies. Such a merger may reduce competition in the relevant market for the know-how if the know-how underlying the two firms patented technologies are close substitutes for the downstream firm, there are no (or few) alternative technologies for which the underlying know-how represents a close substitute for that of the merging firms, and there are sufficient barriers preventing the development of new alternative conceptual approaches that would replace the merging firms approaches. This last condition may be the case if the scopes of the two patents protecting the know-how are defined sufficiently broad to prevent the downstream firms from patenting around the technologies. It may also be the case if the development of such know-how requires certain specialized knowledge of assets for which only the two merging firms possess.

In cases involving the licensing of IP, the Bureau will generally treat the license as the terms of trade under which the licensee is entitled to use the IP. The Bureau will not define a relevant market around a licence, but rather will focus on what is actually being protected by the legal rights being granted to the licensee as the starting point in defining the relevant market.

3.1.2 Market Power

The second stage of the Bureau’s analysis consists of an assessment of the degree to which the firm(s) under scrutiny possess market power in the relevant market. This stage of the analysis involves, among other things,^[11] an examination of the level of concentration, the degree of supply side substitution and the entry conditions in the market.

(i) Market Concentration

In assessing the likelihood for competitive harm for any arrangement, the Bureau will examine the degree of market concentration in the relevant market. The degree of concentration in a relevant market often provides a preliminary measure of the competitiveness of that market. In general, the more firms that are included as competitors in a relevant market, the less likely it is that any one firm acting unilaterally, or any group of firms acting interdependently, could increase or preserve its market power through a transaction or through potentially anti-competitive business conduct. Although the fact that concentration is or will be high in a relevant market is not sufficient to justify the conclusion that a transaction or business conduct will lead to an increase or preservation of market power; it is a necessary pre-condition to such a finding. Market concentration measures simply serve to distinguish transactions or business conduct that are unlikely to have anti-competitive consequences from those that require a more qualitative analysis before a conclusion can be reached.

The Bureau’s approach to measuring market concentration typically involves a calculation of the market shares of the firms identified as actual participants in the relevant market.^[12] Market shares may be calculated in terms of the firms’ (i) entire actual output, (ii) total capacity (used and unused), or (iii) total sales (dollar sales or unit sales). The Bureau will generally not challenge a transaction or a potentially anti-competitive conduct if the firm or group of firms under scrutiny possess less than a 35% market share in the relevant market. Additionally, in the case of mergers, the Bureau will generally not challenge a merger on the basis that the interdependent exercise of market power by two or more firms in the relevant market will be greater than in the absence of the merger where the post-merger market share of the largest four firms would be less the 65% or the post-merger market share of the merged entity would be less than 10 %.

Determining accurate market shares on the foregoing basis may be difficult in cases involving IP. Accordingly, the Bureau’s assessment of market power is likely to focus on qualitative factors indicating the competitive significance of market participants, particularly the conditions of entry into the relevant market. In such cases, the Bureau will examine market factors such as the views of buyers and market participants to qualitatively assess competitive significance.

(ii) Supply Side Substitution

Firms that are likely to respond to a price increase in the relevant market within one year with minimal investments are considered at the market share stage of analysis. Firms that are unable to respond within the one year time frame or whose entry requires considerable investment are considered when analysing barriers to entry.

The following factors are relevant to determining if a firm will divert sales within one year in response to a price increase: (i) the cost of substituting production in the relevant market for current production ("switching cost”), (ii) the extent to which the firm is committed to producing other products or services, and, (iii) the profitability of switching from current production.

In general, the Bureau will determine whether a firm not currently supplying the relevant product can profitably respond to a small but significant increase in the price of this product within one year. Only the volume of output that is likely to be supplied in the relevant market at this price will be included in market share calculations.

(iii) Ease of Entry

In examining the effects of a particular arrangement involving IP, the Bureau will also consider the extent to which the practice itself erects or has erected barriers to entry or alternatively, induces or has induced competitors to exit the market. For example, the need to have access to intellectual property or the possession of critical R&D facilities and know-how can make entry difficult. In addition, high switching costs caused by the presence of an intellectual property or a licensing arrangement could create substantial barriers to entry. IP may also provide incumbents with important first mover advantages or network effects may foreclose the market to all but one major supplier, including potential entrants. For example, an incumbent enjoying network effects^[13] may temporarily reduce prices, preventing the adoption of alternative technologies until its established base is large enough to foreclose the market from future competition or use its IP in strategic preemptive cost reduction or research and development initiatives that discourage entry. An incumbent may also deter new entry by introducing new systems or components that are incompatible with those of potential competitors or exclude potential competitors by making pre-announcements of pending new products or updates, encouraging customers to delay purchases, and discouraging them from testing existing new products.

However, in contrast to these possible entry deterring effects, the presence of IP may require the development and adoption of compatibility standards which can facilitate entry as a new competitor may be able to enter by supplying a single component rather than a complete system.

3.1.3 Competitive Effects Analysis

The principal focus of the Bureau’s competitive effects analysis is to determine the extent to which a transaction or a certain conduct increases or preserves market power within a relevant market. In evaluating the competitive effects of any transaction, licensing arrangement, or other form of implicit or explicit contractual arrangement among firms that involves an IP, the Bureau will assess whether the arrangement is primarily horizontal or vertical in nature or whether it has substantial aspects of both. The positive finding that an arrangement is horizontal in nature is a necessary condition for concluding an arrangement has increased or preserved or is likely to increase or preserve market power within the market.

(i) The Horizontal and Vertical Distinction

An arrangement is vertical if it creates a relationship between parties involved in complementary production activities. Examples include: the acquisition of retail shoe outlets by a shoe manufacturer, the licensing of the copyright of a song’s lyrics by a song writer to a singing artist, and the sale of aspartame produced by a company that owns the patent protecting the know-how to a soft drink company that uses aspartame as a sweetener. Alternatively, an arrangement is horizontal if it creates a relationship between parties involved in substitute production activities. Examples include a merger between two national running shoe manufacturers or an agreement between competing compressed gas companies to fix prices.