Anti-Competitive Agreements of Intellectual Property Rights

Anti-Competitive Agreements of Intellectual Property Rights under the Competition Act,  2002

-    Suhita Mukhopadhyay ,Company Secretary ,    

1. INTRODUCTION

Technology backed enterprises are based on information and knowledge. Starting from Ford Cars  to Microsoft Software are the product of  knowledge and its organized application. Information and knowledge is protected by law on Intellectual Property Rights (IPRs). IPRs help to generate production and foster commercial activities. Intellectual Property Rights are regarded as intellectual property   that protects applications of novel ideas and information which have commercial value in the market place.  . Inventions through IPR, their application to industry generate market power for the owners. There is requirement of maintenance of balance between IPRs and their application to industry for a stable economy without exploitation of the consumers by a handful of producers.

IPRs are considered mother of enterprise and industrial growth though it is said that they dampen competition. Competition law engenders orderly production. It  means sellers  independently look for consumer support to maximize profit or achieve other business objectives. Consumers buy products in the market place at such price that gives them surplus. IPRs and competition are co-related and their relationship cannot be overlooked. Caution in the interest of the consumers has to be exercised to maintain equilibrium in the economy.

2. COMPETITION IN MARKET PLACE

Competition in the market place is common and  essence of business enterprise. It gives  facility of  multiple choice for  consumers at  most acceptable prices. Competition causes  maximum utilisation of available resources for enterprises. Competition gives the benefit of welfare to consumers. Their welfare is increased as the consumers  buy larger quantity of quality products at lower prices. Fair competition is beneficial for consumers, producers, distributors and this benefits  society as a whole leading to balanced economic growth. Fair competition is important in a market place. Every Government aims at the  maintenance of fair competition without which there will be profiteering by producers resulting in loss of equilibrium in  the economy. Competition   is   considered unfair  in cases of   collusive price fixation, restriction in output  causing price increase, creation of hindrances to check free entry of producers in the  formation of  cartels, allocation of markets, tie-in sales, predatory and discriminatory pricing etc.

3. COMPETITION POLICY AND LAW

Competition policy  includes steps taken   by the Government affecting the  behavioral pattern of enterprises in the market place. Existence of a policy on competition  efficiency of producers is witnessed ushering   in maximum welfare to the society keeping  profit at a reasonable level. Competition policy and law have been introduced in all member countries of the World Trade Organisation (WTO). India as a member of WTO has also enacted the law on competition, the Competition Act,2002 which came into effect on and from 19th June,2003.  Competition policy includes two elements, namely the policy itself and the law introduced for the growth of healthy competition considered essential for the market, its growth vis a vis the economy and the consumers.

(i) Competition Policy : It is the policy adopted by the Government which reflects inter alia its attitude towards Competition, trade policy, foreign direct investment, de-regulation  that encourages orderly competition beneficial for the economy.

(ii) Competition Law : The Competition Act,2002 amended in 2007 is in force in the country. The law was passed to end anti-competitive practices with least interference from authorities. Market operators are required to abide by the legal stipulations.

 Competition is important to business and IPR considered the foundation of industry and services lessens competition. Law on competition gives rise to orderly competition. During the exercise of a right by an enterprise, if a trade practice is not permitted which is to the detriment of market or competition or affects consumer interest, it ought to be assailed under competition law. Competition law aims at ending imperfect competition in the market.

The Competition Act, 2002(`COMPETITION ACT’)

 The Competition Act, 2002, amended in 2007 came into force on 31st March,2003 . Inter alia the provisions of the Act, S 3 prohibits anti-competitive agreements including agreements entered in relation to IPRs. The preamble to the Act states that the Act has been enacted to establish a Commission to prevent anti-competitive practices, promote and sustain competition, protect the interest of the consumers and encourage free trade in the market. The Act has been made operative in parts on different dates  excepting  the provisions of Ss 5 and 6 which deal with combination and regulation on combination.  S 3 deals with anti-competitive agreements which affect the market and Ss (5) of S 3 of the Act states the prima facie IPRs are not considered anti-competitive though they have the characteristic of monopoly. Agreement under the Act includes any arrangement, understanding or concerted action entered into between parties. It may not always be in writing between the parties intended to be enforceable in law. Accordingly, the conduct of the parties are important in categorizing arrangements under the Act.  The Acts which protect IPRs and are mentioned in S 3 include  :

(i)    the Copyright Act,1957;(ii)   the Patent Act,1970;(iii)  the Trade Marks Act,1999;(iv)  the Geographical Indications of Goods ( Registration and Protection) Act,1999;(v)  the Design Act,2000; and (vi) the Semi-Conductor Integrated Circuits Layout Design Act,2000.

Each of the aforesaid Acts have been enacted for protection of each of the intellectual properties which are different in nature. Patents deal with inventions, trade marks deal with brands, geographical indicatins deal with place of origin, designs deal with industrial designs and semi-conductor integrated circuit lay out design deal with electronic products. S 3 prohibits anti-competitive agreements entered between persons which act  against enterprises or persons at different stages or levels of the production chain in different markets,  supply, distribution, storage, sale or price  or trade in goods or  services including :

(a) tie-up arrangement; (b) exclusive supply agreement; ©  refusal to deal; and(d) re-sale price maintenance.

The aforesaid agreements are said to be against the objective of the enactment of the Act.

Under 4(2) of the Act, abuse of dominant position by an enterprise is considered unfair or discriminatory.  Abuse of dominant position is applicable to IPR holders if  they by  being a dominant player in the market   exploit their position to achieve unusual advantage. However, mere market dominance in respect of a particular product is not considered bad per se . It is the unfair advantage which an enterprise obtains from such dominance which amounts to abuse and  is regarded as bad. An enterprise which enjoys dominant position being the right holder of any intellectual property prima facie enjoys protection of the relevant Act on IPR but if such holder engages in any activity which falls within the scope of  S 4 which defines abuse of dominant position by an enterprise in the market the protection granted by the Act will not be applicable. Dominant position means a position of strength enjoyed by an enterprise, in the relevant market, in India which enables it to :

(i)  operate independently of competitive forces prevailing in the relevant market; or

(ii) affects its competitors or consumers or the relevant market in its favour.

 Acts performed by  enterprises which lead to abuse of dominant position which falls within the meaning of S 4 of the Act are as follows:    

(a) (i)    directly or indirectly, imposes unfair or discriminatory condition in purchase or sale of goods or services; or

(ii)   price in purchase or sale (including predatory price) of goods or services; or

(b)  limits or restricts –

(i)  production of goods or provision of services or market therefor; or

(iii) technical or scientific development relating to goods or services to the prejudice of consumers; or

© indulges in practice(s) leading to denial of market access in any manner; or

(d) makes conclusion of contracts subject to acceptance by other parties of supplementary obligation which ,by their nature or according to commercial usage, have no connection with the subject of such contracts; or

(e) uses dominant position in one relevant market to enter into, or protect, other relevant market.

The term, predatory price means  sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production or goods or services with the objective of reduction of competition or elimination competitors.

As regards IPRs unreasonable conditions attached will attract the provisions of anti-competitive agreements stated in S 3. Therefore, licensing norms likely to affect prices, quantity, quality or variety of goods and services will attract  the scope of the  law so long they are not reasonable with reference to the bundle of rights attached to each IPR.

A licensing arrangement for an IPR which includes restrictions affecting competition in the market would be an abuse of dominant position and would fall under the purview of the Competition Act. Further in a situation where an arrangement by which Research and Development activities of two or only a few enterprises could be engaged might affect competition for development of new goods and services. Exclusive and cross licensing issued by parties possessing marketing power also attract the provisions of competition law.

Practices  in the field of IPRs which do not enjoy exemptions inter alia include the following:  

1.   Patent Pooling is considered to be  restrictive trade practice. The term means locking up of all technology in respect of an intellectual property in a few hands by means of a pooling agreement. Such agreements make it  difficult for outsiders to compete with the parties to the pooling agreement. Therefore, an enterprise manufacturing a particular product and  entering  into agreement to pool their patents and entering  into an agreement to not to grant licenses to third parties, fixing quotas and price for  the products produced on the basis of  patent owned  by  operating in the market fall in the category. Pooling effect could keep away new entrants in the market. Patent  Pooling  could give advantage of super profits and promote imperfect competition being against government policy and the Competition Act. Patent pooling is commonly experienced in the Drug  and high technology based industries.

2.  Tie-up arrangement entered amongst few enterprises is another form of restrictive practice that creates market imbalance and leads to imperfect competition. An instance where a licensee of a particular product is also required to buy some other material along with the main product in the nature of a tag on item which forecloses opportunities to other producers fall in the category. There are many instances of barring licencees from competing or to handling goods with those of the patentee.

3.   Agreement including a clause requiring for  payment of royalty by the licencee even after the expiry of the patent period or payment for unpatented products along with the patented know-how  fall under restrictive trade practice and the exemption under S 3(5) does not hold good.

4.  Agreement including a clause restricting competition in Research and Development or prohibition imposed on a licensee from using  rival technology would take away  exemption granted under S 3(5) of the Act and such  agreements would be  anti-competitive.

5. Agreement by which a  licensee may be subjected to a condition not to challenge the validity of IPR in question is an anti-competitive agreement and such agreement does not enjoy immunity granted u/s 3(5).

6. A licensee may be required to grant back to the licensor any know-how or IPR acquired and not to grant licenses to anyone else. This is likely to augment the market power of the licensor in an unjustified and anti-competitive manner thus leading to withdrawal of privilege u/ Ss 5 of S 3.

7. An agreement by which the  licensor  fixes a price of a product at which the licensee should sell in the market is an anti-competitive agreement and the immunity u/s 3(5) is withdrawan.

8. An agreement by which the licensee may be restricted territorially or according to categories of customers is anti-competitive and the protection granted u/s 3(5) is lost.

9.  A licensee may be coerced by the licensor to take several licenses in intellectual property even though  all may not be the required by the licensee. The agreement is said to be package licensing and is regarded anti-competitive and is outside the exemption granted u/s 3(5).

10. A condition included in an agreement between a Licensor and Licensee imposing quality control on the licensed patented product beyond those necessary for guaranteeing the effectiveness of the licensed patent is anti-competitive practice and no protection u/s 3(5) can be enjoyed.

11. Any agreement which includes restriction of  the right of the licensee to sell the product of the licensed know-how to persons other than those designated by the licensor may be violative of competition and is anti-competitive and outside the scope of protection u/s 3(5).

12. Agreement by which there is restriction on the use of a  trade mark by the  licensee shall be regarded anti-competition as it restricts competition to select the free use of a trade mark by the licensee. Such agreement falls under the scope of anti-competitive agreement.

13. Agreement to grant indemnity to the licensor to meet expenses and the action of infringement in proceedings is anti-competitive within the meaning of S 3(5).

14. Undue restriction on licensee’s business shall be considered to be anti-competitive. Restriction on  use of a drug could be a restriction on the licensee if it is stipulated  by  an agreement that the medicine should be used  for humans and not animals even though it could be used for both humans and animals. This leads to withdrawal of the exemption granted u/ s 3(5).

15. Agreement limiting the maximum use of a patented invention on the licensee may affect competition  and the immunity granted by  S 3(5) stands withdrawn.

16. Any agreement wherein a condition is  imposed on the licencee to employ or use staff designated by the licensor is likely to be regarded as an anti-competitive agreement and is liable to be outside the purview of S 3(5).

Penalty Provisions

 Competition Commission of India(CCI) is empowered to enquire into unreasonable conditions attached to  IPR agreements and can impose penalty upon each of such right holder or enterprises which are parties to such agreements or abuse which shall not be more than ten per cent of the average turnover for the last three preceeding financial years. In case an enterprise is a Company, its directors/officials who are found guilty are liable to be proceeded against and punished.

Additionally CCI has the power to pass inter alia any or all of the following orders (S 27):

(i)   direct  parties to discontinue and not to re-enter into such agreements;

(ii)  direct the enterprise concerned to modify the agreements;

(iii) direct the enterprises concerned to abide by such other orders as the CCI may pass and comply with the directions, including payment of costs, if any; and

(iv) pass such other order or issue such directions as it may deem fit.

In case of abuse of dominant position u/s 4 by virtue of an IPR by an enterprise, in addition to the above penalties, the CCI has the power to order division of enterprise under S 28 to end dominant position in the market place and foster ideal market conditions for presence of competition in the market to help the operation in the market with healthy competition for the benefit of the consumers. Orders by CCI under S 28  may be any of the following as stated in the Ss:

(i)    transfer or vesting of property, rights, liabilities or obligations;

(ii)   adjustment of contracts either by discharge or reduction of any liability or obligation or otherwise;

(iii)  creation, allotment, surrender or cancellation of  shares, stock or securities;

(iv)  formation or winding-up of an enterprise or the amendment of the Memorandum of Association or Articles of Association or any other instrument regulating the business of any enterprise;

(v)   extent to which, and the circumstances in which, provisions of the order affecting an enterprise may be altered by the enterprise and the registration thereof;

(vi) any other matter which may be necessary to give effect to the division of the enterprise.

Ss of S 28 states that any loss of office for any of the above orders do not  entitle the right to claim compensation for the cessor even though there is a clause for compensation in the contract, Articles of Association or else where.

CCI may during the pending of any inquiry into abuse of dominant position, if conditions of S 33 are met may order restraining any party from carrying on the offending act until the conclusion of the inquiry or till further orders.