The inventive create, the law taketh away

Your copyright? Your invention? You may have to share the fruits of your efforts with rivals. John Edwards, left, considers whether innovation is being stifled

The perception that innovation is the lifeblood of commerce is particularly valid in the context of the ever expanding communication and information industries. The increasing diversion of global resources to this area offers attractive prospects for wealth creation. But as investing inventors evaluate new research and development projects, they should be aware that prospective returns may be capped as a result of fresh legal applications of economic dogma which can only serve to prune entrepreneurial reward. It is a moot point whether recent developments represent something new, but they have certainly highlighted an ominous threat to the fruits of invention. If innovation is to be encouraged in a dynamically developing market, it is essential that a careful balance is found between restricting abuse of competitive advantage and allowing intellectual property rights to realise their full value.

The development in European law of the essential facilities doctrine, whereby ownership of a critical facility may not necessarily permit sole use of that facility, and the introduction of schemes of compulsory licensing both operate to lift the unrestrained exercise of monopoly rights.

We are also now seeing further pressure on the monopolisation of inventive developments in the form of collaborative standard setting by industry groups trying to promote the development of new markets.

Probably the most famous example of the essential facilities doctrine is the European Court of Justice decisions in the Magill TV listings cases in which the domination of the broadcasters, BBC, ITV and RTE, arguably derived both from a de facto monopoly flowing from the circumstances of programme scheduling and from the existence of monopoly rights in the copyright in the listings information. The commission decided that such monopoly could not be exploited regardless of their competitors' positions and the existence of their intellectual property rights did not alter that principle. The Court of Justice affirmed this reasoning in its decision when it stated: "The appellants' refusal to provide basic information by relying on national copyright provisions thus prevented the appearance of a new product ... for which there was a potential consumer demand."

The Magill cases confirmed at the highest level of judicial authority the principles derived from earlier commission decisions in Sealink and Elliniki Radiophonia which stated that "... a company or group which is in a dominant position and which owns or operates a facility or part of an infrastructure which its competitors must use to carry on their business is obliged by Article 86 to grant access on a non-discriminatory basis to its competitors. Whether the dominance results from the ownership of a facility or from other factors is irrelevant. `Non-discrimination' means that the dominant company is obliged to treat its competitors as users of the facility on equal terms as its own operations."

While lawyers may argue about the minutiae of the decisions, the message to be derived from this line of legal principle must constitute a warning to the investing inventor that if he is funding gateway or enabling technology (ie a technology that competitors may need to use to get to the market place effectively) he risks diluting the rewards for his efforts. In these cases monopoly profits may not be allowed to flow from monopoly rights.

Interestingly, the same principle in action is to be observed, though achieved by compulsory licensing schemes (in all but name), with regard to the regulation of software copyright and conditional access systems. Under Article Six of the Software Directive, a person having a right to use software is given the right to decompile the programme to the extent necessary to create another "inter-operating" programme.

Additionally, the Advanced Television Services Regulations 1996 provides that the holders of industrial property rights to conditional access products and systems have a general duty to ensure that licensing to manufacturers of consumer equipment is done on fair, reasonable and non-discriminatory terms.

A similar result may derive from the actions of industry associations keen to enhance the development of a new market by the creation of standard setting. In the communications area for example, the GSM MOU association has been fanned for participants seeking to set standards for the development of the GSM market. Necessarily the association's deliberations have produced standards requiring the utilisation of individually owned intellectual property rights. The consequential pooling and mandatory licensing arrangements proposed have attracted much controversy (including concerns of anti-trust infringement). Though the cause of this constraint on monopolisation may be different (and very arguably promoted by a longer-term view of self- interest), the resulting potential deterioration in return on intellectual property rights may have the same effect.

Recognising the developments of these constraints upon return, our investing inventor may need to think carefully about the amount of capital to be applied to the development of any technology that is vulnerable to the imposition of such constraints. If the R&D project relates to a gateway or enabling technology, the owner of the resultant cash cow will not be allowed to milk his new asset to the disadvantage of his competitors. But, where inventive skills are applied to customer applications, such restraints are not imposed.

Entrepreneurs should therefore vet their R&D portfolios carefully and perhaps ensure that their sole efforts are directed to customer or retail applications. Enabling or gateway technologies should be pursued by means of industry-wide collaborative effort since, if all are to share in the reward, they may feel it appropriate to ensure so far as possible that all contribute to the costs of development. In other words, the careful entrepreneur should consider designing his R&D effort to secure development of enabling technologies by means of joint venture research and development programmes, reserving more of his own resources for the "killer apps" that he will not have to sharen

John Edwards is managing partner of the US-based law firm Sidley & Austin.