conspectus of intellectual property related...
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CHAPTER –III
CONSPECTUS OF INTELLECTUAL PROPERTY
RELATED ANTICOMPETITIVE BEHAVIORS
IN TRADE AND BUSINESS
CHAPTER -III
CONSPECTUS OF INTELLECTUAL PROPERTY
RELATED ANTICOMPETITIVE BEHAVIORS
IN TRADE AND BUSINESS
3.1 Introduction
It is widely believed that the presence of strong intellectual property rights spurs
innovation, which in turn leads to higher economic growth and increasing benefits for all.
The argument seems natural as securing property rights is basic for a well-functioning
market economy. No economic agent exercises productive effort without the certainty of
controlling its fruits.1 What is true for physical effort must be true for the intellectual
efforts also. Economic propositions justify that ideas should be protected and available
for sale, just like any other commodity. There is a general rule that monopoly acquired by
IPRs is not bad. There are certain exceptions to this rule. The power gained through some
natural and legal advantage such as a patent, copyright, or business acumen can give rise
to liability if a seller exploits his dominant position in one market to expand his business.
But “intellectual property” has come to mean not only the right to own and sell ideas, but
also the right to regulate their use. Consequently, the IP owners tend to indulge in
anticompetitive activities. This creates a socially inefficient monopoly, and what is
commonly called intellectual property might be better called “intellectual monopoly.”
Developing countries and economies in transition like India tend to be more
vulnerable to anti-competitive practices. This is due to high entry barriers, less diversified
and smaller markets, relatively asymmetric firms, in addition to the general conditions
which allow dominant firms to abuse their position. Some developing countries do not
1 Michele Boldrin and David K. Levine, The Case Against Intellectual Property, January14, 2012, available @ http://www.globalcitizen.net/data/topic/knowledge/uploads/20090503182538579.pdf,accessed on 29-12-2012.
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have competition laws in place and, in those that have laws; their competition authorities
have limited experience and resources for effective enforcement. Fortunately India has
enacted Competition legislation on par with international commitments and the CCI is
doing a tremendous job within the limits of its legislative competence.
In India Government monopolies exist because some services have to exist for
everyone with their availability not being subject to market forces or the ability to pay.
Other reasons include protecting the public welfare. However, there is argument that
subsidizing some businesses creates inefficiencies and can risk producing an inferior
product or service for all customers. There is no perfect answer to the issue; government
monopolies will continue to be a work in progress subject to political and public interests.
Most of these monopolies are utility monopolies. In countries like India, utility
monopolies are the most influential of all monopolies, whether private or public. Because
utilities are near absolute necessities, people have no choice but to pay in spite of
unreasonable price hikes and weak service. As such, unless the economy collapses,
utilities have little incentive to improve service and decrease price. To make things
worse, the expenses and infrastructure required to provide a utility usually leave few
options in terms of choice. This means the dangers associated with a utility monopoly are
very real to our modern way of life and our economy while utilities monopolies represent
the norm, not the exception.
Anti-competitive practices have implications for the economic growth and
development of nations. Such practices restrict competition and deteriorate consumer
welfare by creating entry barriers and price increases, which lead to efficiency and
innovation concerns. Cartels are one of the most harmful anti-competitive practices and
cause significant damage to the economy as well as to consumers. Abuse of a dominant
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position by firms owning Intellectual Property is another type of anti-competitive
conduct, which can be exercised by large firms, both multinationals and state-created
monopolies, such as utilities, transport and telecommunications, in relatively smaller
markets. However, there are some practical difficulties in this regard. First, developing
economies often have smaller markets and, hence, only a small number of firms can
benefit from economies of scale and operate efficiently. That is why markets in
developing countries are more likely to be concentrated. Secondly, the established large
firms in developing countries play an important role in increasing investment. Therefore,
these economies are likely to benefit from relatively lax rule son abuse of dominance.
Thirdly, in countries where the priority is on equal income distribution, policies may be
designed to support small firms representing poorer parts of the society vis-à-vis large
and dominant companies. These factors should be considered carefully by developing
countries in designing their competition law and policy, in particular the rules on abuse of
dominance. Economic efficiency concerns should be weighed against public interest
concerns in the best way. The objectives of the competition law should be clearly
reflected in the law. Further, there are different approaches to abuse of dominance in
developed countries, such as the EU and US, arising from different assumptions as to
which types of conduct are harmful and how difficult it is to distinguish harmful types of
conduct from others. Regardless of the type of approach to abuse of dominance, the
assumptions made and the economic factors dominant in a country should be analysed
and grounded on economic reality.
IPR protection may endow companies with significant market power. While IPR
policies increase incentives to innovate in an economy, they may cause efficiency losses
due to abuse of market power by companies protected by IPR regime. This problem is
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more pertinent in developing countries considering the fact that innovating companies are
usually situated in developed countries. Developing countries need to strike the right
balance between competition and IPR policies, particularly patent policies, depending on
their productive, imitative and innovative capacities as well as their openness to attract
foreign direct investment from developed countries.
In an economic system based on free competition, monopoly rights are generally
a bad thing. The term “Competition” refers to a situation in a market place in which
firms/ entities or sellers independently strive for the patronage of buyers in order to
achieve a particular business objective, such as profits, sales, market share etc. The
competition is also seen as an ordering force which ensures efficiency of economic
processes, since resources are steered to the most productive supplier. So we find
plethora of antitrust legislations in most of the developed world. But it must be
acknowledged that without monopoly incentives a nation's stock of intellectual property
may suffer. What is therefore required is a balance between these opposing forces—the
need for a free economy balanced against the need to stimulate innovation.
IPRs are, by definition, exclusive marketing rights (monopolies) which States
grant for a limited or extendable period of time. Motives vary, but the tool essentially
serves the purpose of stimulating innovation and investment by securing the potential of
appropriate returns on the investment of time, financial and human resources. Exclusive
rights, by definition, amount to a limitation of competition. They are therefore seen at
variance with principles of market access and level playing fields sought by competition
rules, in particular the restrictions on horizontal and vertical restraints, or on the abuse of
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dominant positions.2 The interface between IPRs and competition law has evolved
several types of restraints on competition. While no one has sought to contend that
licensing agreements are per se anticompetitive, the focus of these restraints is typically a
licensing agreement which could adversely affect competition by artificially dividing
markets among enterprises and possibly impeding the development of new goods and
services.
More specifically, the phenomenon of exclusive licensing, manifested through
several unilateral market tactics by enterprises such as tie-in arrangements, exclusive
dealing, licensing restrictions (covering grant back clauses, extensions of IPR terms and
field of use restrictions) as well horizontal agreements (like pooling and cross-licensing
by parties collectively possessing market power), have attracted the attention of
competition regulation authorities across the world.
3.2 Rationale behind the regulation of ACTPs
Anticompetitive practices lead to undesirable price controls and diminished
individual initiatives towards quality enhancement. This may result in markets to
stagnate. This in turn may hamper economic growth.
3.2.1 Importance of free and fair competition
Market economy can function properly only if there is free and fair competition.
In a competitive market all the competitors will try to gain consumer confidence and
increase its market share by continuously trying to improve the quality of the goods, look
to reduce prices and find more efficient means of production. Competition is believed to
yield consumer surplus. The difference between the price that consumers are willing to 2 Cottier, Thomas and Meitinger, Ingo, The TRIPs Agreement Without a Competition Agreement?. Fondazione Eni Enrico Mattei Working Paper No. 65-99. Available at SSRN: http://ssrn.com/abstract=200622 or http://dx.doi.org/10.2139/ssrn.200622
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pay for a good and the market price that they actually pay for a good is called as the
consumer surplus. The determination of consumer surplus is illustrated in the following
figure. A WTO report observes: “There are reasons to believe that developing economies
tend to be more vulnerable to anti-competitive practices than developed countries. The
reasons include: high ‘natural’ entry barriers due to inadequate business infrastructure,
including distribution channels, and (sometimes) intrusive regulatory regimes;
asymmetries of information in both product and credit markets; and a greater proportion
of local (non-tradeable) markets. Thus it may be particularly important to protect,
consumers in developing countries against cartels, monopoly abuses, and the creation of
new monopolies through mergers. Bid rigging in public procurement markets (i.e.
collusive tendering) is also pervasive in many developing economies, and merits vigorous
enforcement initiatives”.3
Calculation of consumer surplus4
3 WTO, Trade Policy Review – Report by the Secretariat: INDIA (2007), WTO Document No. WT/TPR/S/182. p. 96. 4Available @ http://www.cliffsnotes.com/,accessed on 10-06-2013
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In this figure the consumer is ready and willing to pay price 9 for 1 unit of good
but he actually pays 5.
Generally the consumers possess poor information regarding product, its current
market price, the price range or the quality of the suppliers, and comparable products or
services. Over a period of time, traders acquire the power to manipulate the market. They
intend to retain the fixed percentage of profits, and this is possible only by restraining or
eliminating competition. The means to achieve that objective are infinite and that is why
any legislative definition of anti-competitive practice or conduct is general, inclusive and
also states that the practices prescribed as anti-competitive are not exhaustive.
3.2.2 Competition and Consumer welfare
Competition in market enhances consumer welfare and creates an effective
allocation of resources. As stated in the foregoing that most business enterprises attempt
to enhance market power and monopolize the market, as such competition does not arise
automatically in all markets. Governments and statutory regulators are well placed to take
steps to rectify adverse effect of monopolization of markets by few. A balanced amount
of regulation does not mean that the benefits of free competition in the market are
entirely eroded. Individuals and other businesses that may be adversely and unfairly
affected by anti-competitive activities in a market can more effectively seek redress if
clear regulatory regime is in place. One more valid argument for the prohibition of anti-
competitive agreement is that it will prevent international cartels from indulging in anti-
competitive practices in our country. Hence keeping in view the interest of the consumers
and to promote a healthy competition in the market the anticompetitive agreements are
required to be prohibited. These prohibitions acts as a check on enterprises or persons
who may indulge in anti-competitive agreements or have tendency to manipulate the
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market, and therefore, prohibits them from entering into agreements, which may have the
potential of restricting competition in the market.
3.3 Regulation of ACTPs under TRIPS
It is true that the TRIPS envisage protection of IPRs across the nations on some
well defined uniform norms. But the protection of IPRs has no end in itself. It has end to
achieve viz., technological and economic development.
3.3.1 Integration of National Economies with World Economy
While consumers were envisaged as the ultimate beneficiaries of the liberalized
markets this premise holds only when consumers are responsive to price and output and
thus able to seek the best price-quality combination on offers. If demand is inelastic and
switching costs are high or unfair trade or abusive practices prevent them acting in their
best interest they will not be able to enjoy the advantages of a competitive market.5
As national economies integrate into the world economy through liberalization,
barriers to trade are normally eliminated. In such an open international economy, no
country can escape the effects of anticompetitive practices originating outside their
national borders, such as international cartels or mergers and acquisitions, which may
restrict competition. Further small and medium-sized firms in developing economies are
facing practical problems. These include business networks providing support for the
‘insiders’ and making it more difficult for ‘outsiders’ to enter particular activities or
markets. Such practices restrict the development of entrepreneurial capabilities due to
lack of competition. For these reasons, it is becoming particularly important to tackle
these problems both at regional and national levels. This can be achieved by including
5Cseres K.J., What Has Competition Done for Consumers in Liberalised Markets? (2008) Vol.4, Issue 2, The Competition Law Review, pp.77-121
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competition provisions in regional trade agreements, especially between developing
countries.
The very essence of IP rights entails a trade-off. On the one hand, IP rights
provide economic incentives to innovate, but on the other, the exclusive rights that they
confer to achieve is likely to result in monopoly prices and associated welfare losses and
prevent access by other innovators. In the short run, this information is largely privatised.
In the long run, information protected by IP rights falls into the public domain and
enables follow-on innovation. So there is a trade-off between incentives on one side and
costs to consumers and limited access for follow-on innovators on the other. It is
therefore crucial to have the right balance in the system.6
3.3.2 Treatment of Anticompetitive Trade Practices under TRIPS
TRIPS contain the following provisions regarding anti-competitive practices in
contractual licenses:
1. The rights of members to act against abuse of IPRs are acknowledged, provided such
actions are consistent with the agreement.7
2. Members agree that some licensing practices or conditions pertaining to intellectual
property rights which restrain competition may have adverse effects on trade and may
impede the transfer and dissemination of technology.
3. Nothing in this Agreement shall prevent Members from specifying in their domestic
legislation licensing practices or conditions that may in particular cases what
constitute an abuse of intellectual property rights having an adverse effect on
competition in the relevant market. As provided above, a Member may adopt,
6 Gowers, Review of Intellectual Property, December 2006, available @http://www.official- documents. gov.uk/document/other/0118404830/0118404830.pdf,accessed on 29th December 2012. 7 Article 8 of the TRIPS Agreement.
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consistently with the other provisions of this Agreement, appropriate measures to
prevent or control such practices, which may include for example exclusive grant
back conditions, conditions preventing challenges to validity and coercive package
licensing, in the light of the relevant laws and regulations of that Member.8
4. The agreement also provides for compulsory licenses under a scheme. This agreement
provides grounds for compulsory licensing as a remedy correcting anti-competitive
practices in general and IPR-related anti-competitive practices in particular.9
5. There are also procedural rules concerning consultation and cooperation between a
WTO Member enforcing its measures regarding licensing-related competition control
and another Member whose national or domiciliary is alleged, under the former’s
competition law, to engage in licensing-related anti-competitive practices.10
6. TRIPS establish minimum standards for intellectual property protection and the
competition provisions are (as a concession) an exception.11 If minimum IPR
standards are ensured, no affirmative obligation exists to introduce competition rules
to promote trade or dissemination of technology.12 A complaining Member must
prove that a private firms’ anti-competitive conduct is the effect of an action, i.e.
direct involvement, rather than a non-action by another Member.13 It is left to
8 Articles 40.1 and 40.2 of TRIPS Agreement. 9 Article 31 of TRIPS Agreement deals with compulsory licensing in case of patents, although it is phrased as ‘other use without authorization of the right holder’. 10 Ibid. Articles 40.3 and 40.4 11Ullrich, H. ‘Expansionist Intellectual Property Protection and Reductionist Competition Rules: A TRIPS
Perspective’. In Markus, K. E. and Reichman, J. H. eds., International Public Goods and Transfer of
Technology under a Globalized Intellectual Property Regime, (Cambridge: Cambridge University Press, 2005), pp. 733-734. 12Thus, national legislative bodies alone have the right to reasonably determine which practices are anti-competitive and forbidden. 13This can be inferred from WTO panel reports in Japan-Measures Affecting Consumer Photographic Film and Paper, WT/DS44/R, adopted on 22 April 1998, par. 10.41; and Argentina-Measures Affecting the Export of Bovine Hide and the Import of Finished Leather, WT/DS155/R, adopted on 16 Feb. 2001, paras. 11.49 and 11.51.
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Members’ domestic law to determine which practices are forbidden as anti-
competitive. When a country introduces competition rules Articles 8.2 and 40.2
require that the measures must be “consistent” with TRIPS (consistency requirement),
and “appropriate” (appropriateness requirement).
The above list makes it clear that international trade legislation and especially
TRIPS contain the elements of a competition law system. Developing countries have
been encouraged to apply these rules to counter balance the strong IPR protection system
mandated by TRIPS. The road ahead is bumpy as international competition rules lack
precision and require some form of guiding interpretation. Some advantage lies in the fact
that the present flexibilities create substantial discretion for any implementing country.
The likelihood that the WTO dispute mechanism will preclude a country from taking
action against anti-competitive practices affecting technology transfer themselves thus far
appears remote. Still, discretion has its limits. Developing countries may lack experience
or be subject to pressure that may prevent balanced and consistent handling of the
available competition law opportunities. The risk of both over- and under-enforcement
should not be overlooked. Either may prove harmful to developing countries.
The TRIPS Agreement contains limited set of illustrative anticompetitive
licensing practices.14 From the point of view of developing countries there is need to
expand this list as they are likely face such trade practices from MNCs operating from
developed countries.
3.4 ACTPs associated with Intellectual Property in India
The IPRs are capable of producing ACTPs in the production and marketing sectors.
14 For example Article 42.2 of TRIPS Agreement covers only exclusive grant back conditions, conditions preventing challenges to validity and coercive packaging licenses.
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3.4.1 Danger of abuse of Monopoly
The argument that exclusive rights in the form of IPRs are the only way to
promote innovation is not true every time. Exclusive rights protected in the form of IPRs
do create a situation wherein other parties who are capable and willing to produce the
product are stopped from doing so. There is a fair number of instances wherein IPR
protected monopoly has been abused to curb competition.
3.4.2 Classification of Intellectual Property related Anticompetitive Behaviors
As it is already discussed in this chapter the Competition Act incorporates a
blanket exception for IPRs under Section 3(5) based on the rationale that IPRs deserve to
be protected since a failure to do so would disturb the all-important incentive for
innovation, which, itself, would have knock-on effects in terms of a lack of technological
innovation and reflect a lack of quality in goods and services produced. However,
equally, it does draw the line inasmuch as it does not permit unreasonable conditions to
be passed off under the guise of protecting IPRs.15 Thus, in principle, IPR licensing
arrangements which interfere with competitive pricing, quantities or qualities of products
would definitely attract the provisions of competition law in India. While the Act does
create categories of per se illegality such as price fixing, geographical divisions and
market divisions, the standardized treatment extended to these categories as well as to
tying arrangements, refusals to deal, re-sale price maintenance and exclusivity
agreements,the phrase “they cause an appreciable adverse effect on competition” is
highly subjective and the same needs to be concretised by legislative inclusions and
judicial interpretations in India. Generally the older cases involving antitrust and
intellectual property were related to patent misuse whereas the newer ones relate to
15 S. Jain and S. Tripathy, “Intellectual Property and Competition Laws: Jural Correlatives”, 12 (2007) Journal of Intellectual Property Rights, pp. 236-243
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copyright misuse. Patent misuse is a judge made doctrine wherein the patent stands
forfeited if the patent holder uses that patent in an improper way.16 Tying arrangements,
in which a party agrees "to sell one product but only on the condition that the buyer also
purchases a different product, or at least agrees that he will not purchase that product
from any other supplier, have also been held as anticompetitive and in violation of
antitrust laws in various jurisdictions
3.4.3 Anti-Competitive Agreement under the MRTP Act
Prior to the Competition Act, 2002 Competition laws in India were governed by
the MRTP Act, 1969 which was substantially borrowed from U.K Legislations,
particularly the Restrictive Trade Practices Act, 1956 and Resale Prices Act, 1964. This
Act established the Monopolistic and Restrictive Trade Practices Commission.
The emphasis under the MRTP Act was in respect of trade practices that
adversely affected competition and were subject to the rule of reason. Till the cease and
desist order was passed by the MRTP Commission under this Act, a particular trade
practice was not considered void or illegal whereas this is not the case under the
Competition Act. The following trade practices were enlisted and deemed to be
restrictive trade practices and the respondent has to prove his innocence.
3.4.4 Registerable Agreements Relating to Restrictive Trade Practices17
The Act provided for registerable agreements relating to restrictive trade
practices. It provided that every agreement falling within one or more of the following
categories shall be deemed to be an agreement relating to restrictive trade practices and
shall be subject to registration.
16 William M. Landes, Richard A. Posner, The Economic Structure of Intellectual Property Law, (Massachusets: Belknap Press of Harvard University Press, 2003), p. 372. 17 Section 33 of the MRTP Act, 1969.
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a) Agreements restricting purchasers or sellers.
b) Agreement requiring a purchaser of goods, as a condition of such purchase, to
purchaser some other goods;
c) Agreement restricting in any manner the purchaser in the course of his trade from
acquiring or otherwise dealing in any goods other than those of the seller or any other
person;
d) Agreement to purchase or sell goods or to tender for the sale or purchase of goods
only at prices or on terms or conditions agreed upon between the sellers or
purchasers;
e) Agreement to grant or allow concessions or benefits, including allowances, discounts,
rebates or credit in connection with, or by reason of, dealings;
f) Agreement to sell goods on condition that the prices to be charged on re-sale by the
purchaser shall be the prices stipulated by the seller unless it is clearly stated that
prices lower than those prices may be charged;
g) Agreement to limit, restrict or withhold the output or supply of any goods or allocate
any area or market for the disposal of the goods;
h) Agreement not to employ or restrict the employment of any method, machinery or
process in the manufacture of goods;
i) Agreement for the exclusion from any trade association of any person carrying on or
intending to carry on, in good faith the trade in relation to which the trade association
is formed;
j) Agreement to sell goods at such prices as would have the effect of eliminating
competition or a competitor;
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k) Agreement restricting in any manner, the class or number of wholesalers, producers
or suppliers from whom any goods may be bought;
l) Agreement as to the bids which any of the parties thereto may offer at an auction for
the sale of goods or any agreement whereby any party thereto agrees to abstain from
bidding at any auction for the sale of goods;
m) Agreement not hereinbefore referred to in this section which the Central Government
may, by notification specify for the time being as being one relating to a restrictive
trade practice within the meaning of this sub-section pursuant to any recommendation
made by the Commission in this behalf;
n) Agreement to enforce the carrying out of any such agreement as is referred to in this
sub-section.
It was deeming provision and these trade practices were per se illegal in public
interest. These agreements are now called as the anti-competitive agreements under the
Competition Act.
3.4.5 Anticompetitive Trade Practices under the Competition Act, 2002
The Competition Act covers the ACTPs associated with IPRs in more than one
provision. The same is discussed as under.
3.4.5.1 Meaning and scope of ACTPs under the Act
Since attaining Independence in 1947, India adopted and followed policies
comprising what are known as “Command-and-Control” laws. The first competition law
of India, namely, the Monopolies and Restrictive Trade Practices Act, 1969 was one such
law. After 1991the widespread economic reforms were undertaken and consequently the
march from “Command-and-Control” economy to an economy based more on free
market principles made its beginning. In the context of the new economic policy
paradigm, India has chosen to enact a new competition law called the Competition Act,
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2002. The MRTP Act has metamorphosed into the new law, Competition Act, 2002.
Section 3 of the Competition Act states that any agreement which causes or is likely to
cause an Appreciable Adverse Effect on Competition, (hereinafter referred to as (AAEC)
in India is deemed to be anti-competitive. Section 3 (1) of the Competition Act prohibits
any agreement with respect to “production, supply, distribution, storage, and acquisition
or control of goods or services which causes or is likely to cause an AAEC within India”.
The Act does not define AAEC nor there is any thumb rule to determine when an
agreement causes or is likely to cause AAEC. The Act only specifies certain factors
which the CCI must consider for determining AAEC.18 The harmonious interpretation of
different provisions of the Act mandates the CCI to assess both anti-competitive and pro-
competitive elements in the agreement. Section 19 (3) provides the following factors that
the CCI must have due regard to while determining whether an agreement has an AAEC
under Section 3:
(i) creation of barriers to new entrants in the market;
(ii) driving existing competitors out of the market;
(iii) foreclosure of competition by hindering entry into the market;
(iv) accrual of benefits to consumers;
(v) improvements in production or distribution of goods or provision of
services;
(vi) promotion of technical, scientific and economic development by means of
production or distribution of goods or provision of services.
18 Section 19 (3) of the Competition Act,2002.
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CCI has held in many cases that it would be prudent to examine an action in the backdrop
of all the factors mentioned in Section 19(3).19 Section 3(3) of the Competition Act
provides that agreements or practices are presumed to have AAEC in India if they:-
(i) Directly or indirectly fix purchase or sale prices;
(ii) Limit or control production, supply, markets, technical development,
investments or provision of services;
(iii)Result in sharing markets or sources of production or provision of services;
(iv) Indulge in bid-rigging or collusive bidding.
Thus there has to be a direct nexus between cost/ quality efficiencies the
agreement and benefits to the consumers must at least compensate consumers for any
actual or likely negative impact caused by the agreement. Section 3(4) of the Competition
Act provides that any agreement among enterprises or persons at different stages or levels
of the production chain in different markets, in respect of production, supply, distribution,
storage, sale or price of, or trade in goods or provision of services, including (a) tie-in
arrangement; (b) exclusive supply agreement; (c) exclusive distribution agreement; (d)
refusal to deal; (e) resale price maintenance, shall be an agreement in contravention of
Section 3(1) if such agreement causes or is likely to cause an AAEC in India. Statute
makes it very clear that the rule of reason is to be applied to enquire these trade practices.
The Act specifically states that the anti-competitive restraints will not apply with respect
to those horizontal and vertical agreements which impose reasonable conditions to
protect or restrain infringement of IPRs.20 . The decisions by the CCI under Section 3 that
19 For example Automobiles Dealers Association v. Global Automobiles Limited & Anr., CCI Case No 33 of 2011, decided on July 3, 2012. 20 Supra note 18 Section 3(5).
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have gained most significance and have had the greatest impact are those pertaining to
cartelization. In other cases the CCI has not set out any general principles so far.
Section 3 (5) provides for exceptions, it saves the rights of proprietor of any
intellectual property right listed in it to restrain the infringement of any of those rights
regardless of section 3.
Competition laws in all over the world usually places anti-competitive agreements
in two categories namely – horizontal agreements and vertical agreements. Horizontal
agreements are generally viewed more seriously than the vertical agreements. Firms enter
into agreements, which may have the potential of restricting competition. A scan of the
competition laws in the world will show that they make a distinction between
―horizontal and ―vertical agreements between firms. The former, namely the horizontal
agreements are those among competitors and the latter, namely the vertical agreements
are those relating to an actual or potential relationship of purchasing or selling to each
other. A particularly pernicious type of horizontal agreements is the cartel. Vertical
agreements are pernicious, if they are between firms in a position of dominance. Most
competition laws view vertical agreements generally more leniently than horizontal
agreements as prima facie, horizontal agreements are more likely to reduce competition
than agreements between firms in a purchaser seller relationship.
The Act does not use the terms horizontal agreements and vertical agreements.
However the language used in the Act suggests that agreements referred to in section 3(3)
and section 3 (4) are horizontal and vertical agreements respectively. It is to be noted that
section 3(3) and section 3(4) are the main provisions which are mainly attracted to prove
the existence of any anti competitive agreements.
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3.4.5.2 IPRs and Competition Act
The Indian Competition Act, 2002, deals with IPRs such as patents, copyrights,
trademarks, geographical indications, industrial designs and integrated circuit designs.
Where Section 3 prohibits anti-competitive agreements, sub-section (5) thereof says that
this prohibition shall not restrict “the right of any person to restrain any infringement of,
or to impose reasonable conditions, as may be necessary for protecting any of his rights”
enjoyed under the statutes relating to the above mentioned IPRs Therefore unreasonable
conditions imposed by an IPR holder while licensing his IPR would be prohibited under
the Competition Act. An express provision21 is incorporated in the Act which states the
reasonable conditions as may be necessary for protecting IPRs during their exercise
would not constitute anticompetitive agreements. By implication, unreasonable
conditions in an IPR agreement that will not fall within the bundle of rights that normally
form a part of IPRs would be covered under section 3 of the Act.
Section 3 sub section (5) of the Act declares that "reasonable conditions as may
be necessary for protecting" any IPR will not attract section 3. The expression
"reasonable conditions" has not been defined or explained in the Act. Licensing
arrangements likely to affect adversely the prices, quantities, quality or varieties of goods
and services will fall within the ambit of competition law as long as they are not
reasonable with reference to the bundle of rights that go with IPRs. Some of the trade
practices as enumerated by the CCI22 amounting to unreasonable conditions are as
follows:-
21 Ibid. 22 Competition Commission of India, Advocacy Booklet on Intellectual Property Rights , available @ http://www.cci.gov.in/images/media/Advocacy/Awareness/IPR.pdf,accessed on 1-12-2013
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1) Patent pooling- Patent pool is a pool or combination in which the agreements are
enforced by centralized control of essential patent rights. It is an arrangement of
cross-licensing in which several patent owners join together to make individually
held patents available to all members of the group. This occurs when the firms in a
manufacturing industry decide to pool their patents and agree not to grant licenses to
third parties, at the same time fixing quotas and prices. They may earn supra-normal
profits and keep new entrants out of the market. The disadvantage of such a pooling
is that, if all the technology is locked in a few hands by a pooling agreement, it will
be difficult for outsiders to compete. Patent pooling is also known as package
licensing which involves a licensee’s taking several licenses in intellectual property
even though he may not need all of them. This situation comes up due to coercion by
the licensor. On the contrary, if a product has many patentable aspects, it is common
practice to license all patents in a package. All such patents may be recited in this
license agreement.
2) Tie-in arrangement: - Tie-in-clauses are often introduced in the license agreement
through which the owners of patents try to capitalise on the return they obtain from
licensing technology by requiring the licensee to purchase unpatented materials e.g.
raw materials. This practice is adopted in case of process inventions. Such condition
may be express or implied. A licensee may be required to acquire particular goods
solely from the patentee, thus foreclosing the opportunities of other producers. There
could be an arrangement forbidding a licensee to compete, or to handle goods which
compete with those of the patentee.
3) Royalty even after the expiry of IP: - The owner of an IP is entitled to the fruits of
it as long as the period of protection subsists. If he reaps reward even after its
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protection period the same is unreasonable. An agreement may provide that royalty
should continue to be paid even after the patent has expired or that royalties shall be
payable in respect of unpatented know-how as well as the subject matter of the
patent. Such trade practice is anticompetitive.
4) R &D: - There could be a clause, which restricts Competition in R & D or prohibits
a licensee to use rival technology.
5) A licensee may be subjected to a condition not to challenge the validity of IP in
question. This restraint enables the IP holder to protect his right even though it lacks
novelty, originality or creativity.
6) Know-how:- A licensee may require 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.
7) A licensor may fix the prices at which the licensee should sell.
8) The licensee may be restricted territorially or according to categories of customers.
9) Package licensing: - A licensee may be coerced by the licensor to take several
licenses in intellectual property even though the former may not need all of them.
This is known as Package Licensing which may be regarded as anti-competitive.
10) A Condition Imposing Quality Control on the licensed patented product beyond
those necessary for guaranteeing the effectiveness of the licensed patent may be an
anticompetitive practice.
11) Restricting 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.
12) Imposing a Trade Mark use requirement on the licensee may be prejudicial to
competition, as it could restrict a licensee's freedom to select a trade mark.
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13) Indemnification of the licensor to meet expenses and action in infringement
proceedings is likely to be regarded as anticompetitive.
14) Undue restriction on licensee's business could be anticompetitive. For instance, the
field of use of a drug could be a restriction on the licensee, if it is stipulated that it
should be used as medicine only for humans and not animals, even though it could
be used for both.
15) Limiting the maximum amount of use the licensee may make of the patented
invention may affect competition.
16) A condition to employ or use staff imposed on the licensee designated by the
licensor is likely to be regarded as anticompetitive.
17) Grant-back licensing in which a patent licensee must license back to the licensor any
improvement patents (without claiming any financial benefit) may be considered
anticompetitive if there is intent to restrain trade. This augments the market power of
the licensor in an unjustified and anti-competitive manner.
The Indian Competition Act, 2002 recognizes the importance of IPRs such as
patents, copyrights, trademarks, geographical indications, industrial designs and
integrated circuit designs. While Section-3 prohibits anti-competitive agreements, sub-
section (5) thereof says that this prohibition shall not restrict “the right of any person to
restrain any infringement of or to impose reasonable conditions, as may be necessary for
protecting any of his rights” enjoyed under the statutes relating to the above mentioned
IPRs.
By implication, unreasonable conditions imposed by an IPR holder while
licensing his IPR would be prohibited under the Competition Act. This provision is not
very dissimilar to the laws in other countries. In some jurisdictions, restrictions that have
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been regarded as unreasonable, and anticompetitive, include: agreements restricting
prices or quantities of goods that may be manufactured, or curbing competition between
the licensee and the licenser, stipulating payment of royalty after the license period,
certain types of exclusivity conditions, patent pooling, tie-in arrangement, and so on.
But in reality the CCI may or may not take up these pertinent issues on regular
basis. Hence it necessary that an explicit provision is incorporated in Indian IP laws to
this effect.
3.5 Applicability of Interpretative rules to the IPR related ACTPs
The courts all over the world including India have adopted the following
approaches to judge the permissibility of impugned trade practices under the antitrust
laws.
3.5.1 The Rule of Reason23
Under this rule a particular trade practice can be considered as anti-competitive
only after its detailed scrutiny as to its monopoly effects. The effect on competition is
verified on the basis of facts of a particular case. The effect on the market condition,
existing competition, and the actual or probable impact on relevant market are looked
into. The rule of reason is a legal approach where an attempt is made to evaluate the pro-
competition features of the restrictive business practice against its anti-competitive effect
in order to decide whether or not the practice should be prohibited24. If the indication is
very strong and there are no obvious efficiencies from the agreement and no good
explanation that the agreement is the response of market or is helping to deliver
23 The ‘Rule of Reason’ treatment of a practice means that the legality of the practice is evaluated with reference to its economic effects in the relevant markets. 24World Bank/OECD: Glossary of Industrial organization economics and Competition Law ,available @http://www.oecd.org/regreform/liberalisationandcompetitioninterventioninregulatedsectors/2376087.pdf,last accessed on 07-01-2013.
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something better or at lower prices, there is a presumption of anti-competitive effects and
the defendant must come forward to show that there is no market harm. Since there is no
presumption, the plaintiff is required to produce more evidence of market power or its
increase. Supreme Court has observed that to determine whether the restrain promoted or
suppressed competition, it is necessary to consider three matters: first, what facts are
peculiar to the business to which the restraint is applied, second, what was the condition
before and after the restraint was imposed and third, what is the nature of restraint and
what is its actual and probable effect25. Agreements under section 3(4) of the Competition
Act, 2002 are subjected to the test of rule of reason. The rule of reason normally requires
an ascertainment of the facts or features peculiar to the particular business; its condition
before and after the restraint was imposed; the nature of the restraint and its effect, actual
or probable; the history of the restraint and the evil believed to exist, the reason for
adopting the particular restraint and the purpose or end sought to be attained and its only
on a consideration of these factors that it can be decided whether a particular act, contract
or agreement, imposing the restraint is unduly restrictive of competition so as to
constitute restraint of trade26.
3.5.2 The Per Se rule
Per se is a Latin phrase meaning “by or in itself”.27 Once an activity attracts bare
provisions of antitrust law it is presumed to be harmful and therefore it must only be
proved that the impugned activity is not anticompetitive. Certain agreements and
practices are anticompetitive because of their pernicious effects on competition and lack
of any redeeming virtue and they are confusedly presumed to be unreasonable and
25
Tata Engineering and locomotive co. Ltd. v. Registrar of Restrictive Trade Agreements, (1977)2 SCC 55. 26 Mahindra and Mahindra Ltd v. UOI , (1979)2 SCC 529 27 Collins English Dictionary,2003.
85
therefore illegal without any elaborate inquiry as to the precise harm they have caused or
the business excuse for their use. This principle of per se unreasonableness makes the
prescribed restraints more certain to everyone concerned. It also avoids the necessity for
an incredibly complicated and prolonged investigation into the entire history of industry
involved, as well as related industry, in an effort to determine at large whether a
particular restraint has been unreasonable, an inquiry so often wholly fruitless when
undertaken. In U S the rationale for per se rule, in part, is to avoid a burdensome inquiry
into the actual market conditions in situations where the likelihood of anti-competitive
conduct is so great as to render unjustified the cost of determining whether the particular
case at bar involves anti-competitive conduct28. The per se rule, as opposed to the rule of
reason has been applied by the Courts in respect of particularly harmful agreements such
as agreements relating to price-fixing, allocation of territories, bid-rigging, group
boycotts, consulted refusal to deal and resale price maintenance. In India there is no
concept of per se rule under completion law. However, there are other laws which give
ample discretion for courts to regard any particular trade practice as anticompetitive even
without going to the details of it.29But such instances are very rare to find in actual
practice.
3.5.3 The Rule of presumption
Since the Competition Act in section 3(3) uses the term ‘shall be presumed’, it
becomes relevant to elaborate this principle of interpretation while interpreting anti-
competitive agreements. The Evidence Act, 1872 under section 4 clause 2 provides,
28
Jefferson Parish Hospital v. Hyde, (1984), 466 US 2 29 Evidence Act, 1872 under section 4 clause 3 provides for ―conclusive proofǁ which gives an artificial
probative effect by law to certain facts. No evidence is allowed to be produced with a view to combating that effect. In this sense, this is an irrebuttable presumption and the same as what is called as the Per Se rule in US law.
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“whenever it is directed by this Act that the Court shall presume a fact, it shall regard
such fact as proved, unless and until it is disproved”. Hence the expression shall presume
leaves no discretion with the Court to make the presumption and it is a legislative
command to raise this presumption and regard fact concerned as proved unless and until
it is disproved30. The question of calling upon the parties to formally prove a fact does
not arise. The Court is bound to take the fact as proved until the evidence is given to
disprove it. Once there is formal allegation as to anticompetitive trade practice the
presumption is in favour of the accusation and the burden is on the defendant to show that
his activity does not fall under the category of anticompetitive trade practices. Here no
option is left to the court, but it is bound to take fact as proved until evidence is given to
disprove it, and the party interested in disproving it must produce such evidence if he
can.31But the presumption is always rebuttable and it is not synonymous with conclusive
proof32.The principle of shall presume used in section 3(3), has been explained by Courts
in India in numerous cases and the ratio can be applied to interpret the anticompetitive
agreements. Supreme Court has observed that the words shall presume have been used by
Indian judiciary for over a century to convey that they lay down a rebuttable presumption
in respect of matters with reference to which they are used and not laying down a rule of
conclusive proof. The Court also observed that a presumption is not in itself evidence but
only makes a prima facie case for the party in whose favor it exists.33 It indicates the
person on whom the burden of proof lies. But when the presumption is conclusive, it
obviates the production of any other evidence. But when it is rebuttable, it only points out
the party on which lies the duty of going forward on the evidence on the fact presumed,
30
State of West Bengal v. E.I.T.A India Ltd., AIR 2003 SC 4126, para 12; (2003) 5 SCC 239. 31 Sarkar on, Evidence,15th edn, (Nagpur: Wadhwa and Company,1999), p.80. 32 Union of India v. Pramod Gupta, (2005) 12 SCC 1, 31 para 52. 33 Sodhi Transport Co v. State of Utter Pradesh, AIR 1980 SC 1099
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and when that party has produced evidence fairly and reasonably tending to show that the
real fact is not as presumed, the purpose of presumption is over.34
Therefore it can be summarized from the above discussion that in case of
agreements listed in section 3(3) of the Act, once it is established that such an agreement
exists, it will be presumed that the agreement has an anticompetitive effects and the
burden of proof lies on the defendant. Hence the presumption as provided under section
3(3) can very well be rebutted by the party concerned.
3.6 Regulation of Horizontal and Vertical Agreements.
The trade practices which are anticompetitive may be vertical or horizontal as under.
3.6.1 Horizontal Agreements35
Agreements prohibited under section 3(3) are described as horizontal agreements
for they apply to similar or identical trade of goods or provision of services. A careful
reading of section 3(3) prompts that it restricts three things namely agreement, practice
and decision including cartels who are identical or similar trade of goods or provision of
services. Horizontal Agreement is an agreement for co-operation between two or more
competing businesses operating at the same level in the market. The Act under this sub-
section presumes following activities as to have appreciable adverse effect on
competition.
1. Agreement between:-
(i) Enterprises
(ii) Associations of enterprises
34 Ratan Lal and Dheeraj Lal, Commentary on Law of Evidence, 23rd edn, (Nagpur: Lexis Nexis Butter Worths Wadhwa,2010), p..173. 35 A horizontal agreement is one involving direct competitors at the same level in a particular industry, and a vertical agreement involves participants who are not direct competitors because they are at different levels.
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(iii) Persons
(iv) Associations of persons
(v) Person and enterprise
2. Practice carried by:-
(i) Association of enterprises
(ii) Association of persons
3. Decision taken by:-
(i) Association of enterprises
(ii) Association of persons
4. Cartels
Who are engaged in identical or similar trade of goods or provision of services
including cartels only if any of their activity:-
(i) Determines either directly or indirectly purchase or sale prices.
(ii) Limits or controls production, supply, markets, technical development,
investment or provision of services.
(iii) Shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or
number of customers in the market or any other similar way;
(iv) Directly or indirectly results in bid rigging or collusive bidding 36
It is to be noted that under section 3(3) agreements, decisions and practices
between similar trade of goods or provision of services is a condition precedent for
prohibition. For the violation of Section 3(3) (b), it must be established that there exists
an agreement, practice carried on or, decision taken by entities mentioned therein,
36 Supra note 21, Section 3(3)(a)to (d).
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including cartels, engaged in identical or similar trade of goods or provisions of services,
which result in effects mentioned in clauses (a) to (d) of sub-section (3) of Section 3 of
the Act. These include acts that limit or control production, supply, markets, technical
development, investment or provision of services.37
Types of horizontal agreement prohibited under Section 3(3)
Section 3(3) of the Act provides for four types of horizontal agreements that are
presumed to have anticompetitive effects as mentioned above. These agreements are as
under-
A) Agreements that directly or indirectly determine purchase or sale prices
Price fixing agreements, as the name suggests are agreements to fix, directly or
indirectly purchase or sale prices. The term price fixing is applied to a wide range of
actions taken by competitors having a direct effect on price and includes a number of
agreements such as agreements on price, agreements on credit terms, agreements to
adhere to published prices etc. 38The term price fixing generally refers to a process by
which competitors agree upon prices that will prevail in the market for the goods or
services they offer.39 Price fixing agreements between competitors negatively impact
competition as they prevent prices from being fixed by the competitive forces in the
market. Consumers may thus, be forced to pay higher prices for good than they would
pay in competitive market. The aim and result of every price fixing agreements, if
effective, is the elimination of one form of competition. Reasonableness of the power to
fix prices depends upon the power to control the market. The result would be to fix
37 Shri Govind Agarwal v. ICICI Bank Ltd., Shri Norbert Lobo v. Citibank, Shri Gulshan Kumar Gupta v.
BHW Home Finance Ltd. (para 61) Decided On: 07.06.2011 by CCI. (MRTP Cases) 38 World Bank/OECD (1998): A framework for the design and implementation of Competition Law and Policy, World , OECD, 1998 39 Southern Motors Rate Carriers Conference Inc. et. al. v. United States, 471 US 48 (1985
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arbitrary and unreasonable prices. The reasonable price fixed today, may through
economic and business changes become the unreasonable price of tomorrow. Once
established, it may be maintained unchanged because of the absence of competition
secured by agreement for a price reasonable when fixed. Agreements which create such
potential power may well be held to be in themselves unreasonable or unlawful restraints,
without the necessity of minute inquiry whether a particular price is reasonable or
unreasonable as fixed without placing on the government, in enforcing the law, the
burden of ascertaining from day to day whether it has become unreasonable through the
mere violation of economic conditions.
B) Limits or controls production, supply, markets, technical development,
investment or provision of services
Agreements that limit or control production, supply, markets, technical
development investment or provision of services are also considered to be
anticompetitive. An agreement limiting production may lead to a rise in prices of the
concerned product. Similarly, limiting technical development that may help in lowering
the costs of a product, may affect the interests of consumers. Limiting production
maintains high prices by ensuring that there is no surplus and therefore, demand remains
steady; limitation of sales has a similar effect as well as discouraging competition for new
entrants. 40
Agreements for limiting or controlling production are anticompetitive for two
reasons. First, by controlling production competition is hampered in the market. Supply is
kept so low as compared to the demand that artificial scarcity is created. Secondly the
agreement, in effect restricts competition between the parties themselves so that the
40 Livingstone, Dorothy, Competition Act 1998- A Practical Guide, (London: Sweet and Maxwell, 2001)
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efficient ones among them also cannot go ahead with further production and dislodge the
less efficient from the market.
C) Shares the market or source of production or provision of services by way of
allocation of geographical area of market, or type of goods or services, or the
number of customers in the market or any other similar way
This category covers the agreements referred to as market sharing agreements.
Market sharing or market division agreements may be either to share markets
geographically or in respect of consumers or particular categories of consumers or types
of goods or services in any other way. Market sharing agreements are considered to be
anti-competitive as they reduce the choice available to customers in a competitive
market. Such agreements also reduce competition between the parties to agreement.
D) Directly or indirectly results in bid-rigging or collusive bidding
Bid-rigging means any agreement between the enterprises or persons engaged in
identical or similar production or trading of goods or provision of services, which has the
effect of eliminating or reducing competition for bids or adversely affecting or
manipulating the process for bidding.41
3.6.2 Vertical Agreements42
Vertical Agreements are agreements between persons at different levels of the
production chain such as an agreement between a manufacturer and a distributor. Section
3(4) deals with certain specific vertical agreements. Agreement amongst enterprises or
persons at different stages or levels of the production chain in different markets, in
respect of production, supply, distribution, storage, sale or price of, or trade in goods or
provision of services of the following types amount ACTPs of vertical nature. Three key
41 Supra note 36. 42 A vertical agreement involves participants from one or more of the groups—for example, a manufacturer, a wholesaler, and a retailer.
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potential anticompetitive effects of vertical restraints are foreclosure and rising rivals
cost, dampening competition between players in the market and facilitating collusion
between players in the market.43 Vertical restrains can facilitate collusion among
competitors by helping competitors to overcome obstacle they otherwise would face in
attempting to maintain price above competitive levels and they can raise competitors’
cost. By foreclosing or disadvantaging competing firms, vertical restraints create barriers
to entry or expansions so that rivals can no longer discipline the offending firm‘s price
increase; so one leads to collusion and the other to exclusion. 44
A) Tie-in arrangements
A tying arrangement is a transaction in which the title or use of one item, the
tying product, passes to the customer on condition that the customer takes a second item,
the tied product, from the seller or lessor.45 Tie-in arrangements means any agreement
requiring a purchaser of goods (called tying product), as a condition of such purchase, to
purchase some other goods (called tied product).46 This practice is often resorted to by
the enterprises to use the popularity of a product (tying product) to promote the sale of a
less popular product. In Microsoft one of the allegations was that Microsoft used its
dominance on personal computer operating systems (tying product) to push the sale of its
other products, specifically its internet browser and media players systems (tied
products). 47 In case of tie-in arrangements, competition with regard to the tied product
may be affected as the purchaser may be forced to purchase the tied product at prices
43 Biro Z and Fletcher ‘The EC green paper on Vertical Restraints: An Economic Comment’ (1998) 19 ECLR 129. 44 R Pitofsky, Vertical Restrains and Vertical aspects of mergers – A US Perspective, Fortham Corp L Inst (1998) p.111. 45 Marcus Mattson, Tying Arrangements-An Update, available @http://lawreview.byu.edu/archives /1982 /4/ mat.pdf,accessed on 02-08-2013 46 Supra note 41, Section 3 (4), Explanation (a). 47 Unites States v. Microsoft Corporation, 258 F. 3d (DC Cir, 2001)
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other than those at which it is available in a competitive market or he may be forced to
purchase a product that he does not require. They (tying arrangements) deny competitors
free access to the market for the tied product, not because the party imposing the tying
requirements has a better product or a lower price but because of his power or leverage in
another market. At the same time, buyers are forced to forgo their free choice between
competing products. Early in the development of the antitrust laws, the U.S. Supreme
Court declared that conditioning the sale of one product on the customer’s agreement to
purchase another (“tying” or “tie-in sales”) was inherently anticompetitive and lacked
any redeeming virtue.48 In this case the U.S. Supreme Court asserted that tying
agreements serve no purpose beyond the suppression of competition.
B) Exclusive supply agreement
This category includes any agreement restricting in any manner, the purchase
from acquiring or otherwise dealing in any good other than those of the seller or any
other person.49 Exclusive dealing arrangements may serve useful economic function
without harm to competition and even encourage competition or they can cause
substantial harm to competition depending upon many facts and circumstances. Such
agreements directly affect supplies from one group to another or give preferential terms
or confine dealing with the exclusive group of firms which may reduce the competitive
capacity in the market for the participating groups. Exclusive supply or dealing
agreements may be anti-competitive if they block or create barriers to entry by not
permitting other manufacturers to enter the market. The prices paid by consumers may
also rise. Such agreements may thus lead to anti-competitive effects. Exclusive dealing
48 Black v. Magnolia Liquor Co., 355 U.S. 24, 25 (1957) 49 Supra note 46, Section 3 (4), Explanation (b).
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agreements may foreclose the buyers from purchasing goods from the suppliers of their
choice and foreclose access to outlets for their product.
C) Exclusive distribution agreement
Any agreement or limit, restrict or otherwise withhold the output or supply of any
goods or allocate any area or market for the disposal or sale of goods may fall within the
category of exclusive distribution agreements. Withholding supply of goods may lead to
a rise in the prices of goods which would be unfavorable to consumers. Similarly,
allocation of areas for the disposal of good may affect intra-brand competition.
D) Refusal to deal
This includes agreements which restrict, or are likely to restrict, by any method
the persons or classes of persons or whom goods are sold or from whom goods are
bought.50 Refusal to deal may arise if the purchaser is a bad credit risk, does not carry
sufficient inventory or provide adequate advertising, display etc.51 If manufacturers
supply only to large buyers and ignore small buyers, this is an instance of refusal to
deal.52
E) Resale price maintenance
Resale Price Maintenance (RPM) is a form of price fixing. Whenever, a
manufacturer sets the price at which a retail shop, which he does not own must resell his
products to the public or at which a wholesale business he does not own must resell the
product to the retailer the practice is known as resale price maintenance.53 Resale price
maintenance includes any agreement to sell goods on condition that the prices to be
50 Ibid., Explanation (d) to section3( 4) 51 World Bank/ OECD Glossary 52 In Tutikoran Alkali Chemincals, (1995)16 CLA 196 (MRTPC) 53 S.M Duggar, Guide to Competition Law, 5th edn., Vol.1, (Nagpur: LexisNexis Butterworths Wadhwa, 2010 ), p. 753.
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charged on the resale by the purchaser shall be the prices stipulated by the seller unless it
is clearly stated that prices lower than those prices may be charged.54 Explanation (e)
provides that resale price of maintenance includes an agreement to sell goods on
condition that the prices to be charged on the resale by the purchaser shall be the prices
stipulated by the seller unless it is clearly stated that prices lower than those prices may
be charged. Resale price maintenance can reduce intra-brand competition and increase
transparency of prices, which may facilitate collusion. Resale price maintenance is in
some countries treated under the per se rule e.g. in the US,
The Indian Competition Act inter alia prohibits anticompetitive agreements of the
kinds mentioned above. It is particularly severe on horizontal agreements, including
cartels. The penalty provided is ten percent of the turnover or three times the profit,
whichever is greater. There is a whistleblower type provision for lesser penalty on a party
to a cartel that comes clean with full and true disclosure that yields vital information, and
cooperates with the Competition Commission. The definition of cartel includes an
association that indulges in anticompetitive activity.
The monopoly provided by patents enables the patent holder to block or otherwise
discourage rival firms entering the market, or even in some cases to undertake research
and innovation. This may be justified if the patents are given correctly, and for the right
duration, and moreover if the IP holder does not abuse his right. The trend in some
developed countries in relaxing the criteria, standards or practice of granting patents, and
the practice of some companies owning patents in harassing rivals is increasing the anti-
competitive effects of IP. The monopoly rights granted to patent holders enables them to
restrict competition and charge monopoly prices. Proponents of IP point to the need for
54 Supra note 50 Section 3(4)
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innovators to recoup the cost of research, and thus a mark-up on normal profits is needed.
However, critics claim that in some cases the balance is tilted in favour of the patent
holders, who make excessive or even exorbitant profits by over-charging consumers
excessively high prices, even after taking account of the need to recoup research costs. In
order for policy makers to be able to judge whether the balance is struck, or how far it has
been missed, it is important to be able to obtain data on costs and prices from the
companies that hold the patents.
3.6.3 Intellectual Property Rights and abuse of dominance
While reasonable use of IPRs stand exempted from the rigorous of Section 3
related to anti-competitive agreements, no such derogation is available in case of abuse of
Intellectual Property Rights by right holders, in respect of specified abusive acts.
Intellectual Property Rights involve grant of exclusive rights to the right holders to
exploit the results of their innovation so as to provide incentive to innovate. Competition
Act, 2002 exempts the reasonable use of such rights by right holders from the provisions
of Sec. 3 related to agreements. However, the actions by enterprises that shall be treated
as abuse (specified under Section 4 (2)) shall stand applicable equally to IPR holders
provided such rights are considered by the Commission to render the holder a dominant
player in the relevant market.
3.7 Conclusion
From the foregoing discussion it is clear that Intellectual Property Law and
competition law are both necessary for the efficient operation of the marketplace.
Intellectual property laws provide property rights comparable to those of other kinds of
private property, thereby providing incentives for owners to invest in creating and
developing intellectual property and encouraging the efficient use and dissemination of
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the property within the marketplace. Similarly, competition law is intended to enhance
consumer welfare by promoting competitive markets and consumer choice. Intellectual
property laws are also intended to enhance consumer welfare, as businesses are
encouraged to innovate and invest in new technologies leading to improved products and
lower prices. Brands enable consumers to choose the products they value, which
encourages competition among brand owners. The promotion of a competitive
marketplace through the application of competition law is thus consistent with the
objectives underlying intellectual property law. Accordingly, competition and intellectual
property law are closely linked, as intellectual property law rewards innovation by
granting exclusive rights, the competition law ensures that companies do not restrict
freedom to compete or exploit market power with anticompetitive consequences.
However, from the traditional point of view, the situation may be different for those
companies whose intellectual property assets give them a strong position in a given
market to the extent enabling them to restrict the competition in that market. But it is now
accepted that, since they do not necessarily, or even very often, create legal or economic
monopolies, intellectual property laws do not necessarily clash with competition laws
because the goods and services produced using intellectual property compete in the
marketplace with other closely-substitutable goods and services. There are several
measures that a legal system can follow to give priority to competition principles in
relation to intellectual property. Every use of intellectual property may not require
interference from competition authorities. A legal monopoly does not necessarily lead to
an economic monopoly. The mere ownership of IP does not necessarily lead to dominant
position in the market. Mere exercise of IPR does not amount to abuse of the dominant
position. Further, monopoly power is not per se illegal. The goal of competition law is
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not to prohibit monopoly; but to prohibit anti-competitive conduct.55 The competition law
and regime in India is capable of accepting the achievement of an economic monopoly by
means of research and development and consequent IPRs as valid and legitimate conduct.
Competition law in India has certainly given a more favoured position to IPRs because of
their contribution to innovation and therefore to competition. However there are certain
situations where the exercise of a certain IPRs lawful under the IP regime may be
unlawful under the competition regime. In such cases, no immunity is granted by the
competition law. Competition law reserves the right to intervene in such circumstances. It
is erroneous to assume that IP has superior value, simply because of the special legal
protection offered to it, by most legal systems. Special protection is attributed to its
vulnerability arising from the lack of sufficient protection in civil and penal laws of the
country than to its superior value. In India there is need to balance the protection of rights
of the holders of intellectual property with the prevention of abuse of market power.
Though there is legal mechanism for this purpose the same needs to be dynamic and
vibrant because of the monopolistic competition in goods and service markets. Balance
may be struck by differentiating between the existence of a right and its exercise. During
the exercise of a right, if an abusive practice is in evidence, which is detrimental to
competition, it must be assailed under competition law. For this reason only IPRs have
been protected under the Indian competition law to the extent that they are reasonable.
Unreasonable conditions contained in an agreement will not be protected there under.
Similarly when an enterprise enjoys a dominant position and if its behavior is attracted by
55 Mihir Naniwadekar, “Intellectual Property Rights and Competition Law: Friends or Foes?”, 01-09-2009, available at http://spicyipindia.blogspot.com/2009/09/intellectual-property-rights-and.html,accessed on 12-01-2014.
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the law it enjoys no immunity for its IPRs. In the light of these observations the
researcher makes the following suggestions.
1) Avoiding granting of IP on incorrect criteria -The wrong granting of IP results in
unnecessary monopoly rights and thus widens the extent of anti-competitive
behaviour and market distortions.
2) Providing for and making use of exceptions, exemptions and limitations - There
should be policy space, especially for developing countries to have adequate
provisions for exceptions, exemptions and limitations to IP in accordance with
development needs and requirements, and the rights to access of essential goods and
services. The existing exemptions need to be replaced by new ones.
3) There is a need to evolve an integrated approach in the working of Competition
Authorities, Consumer courts and IP Courts and Authorities to achieve the overall
objective of socio-economic development based on the principles of justice.