Expanding the Umbrella of IPR Exemptions: A Critical Comment on Draft Competition Amendment Bill, 2020

[By Ashna Chhabra and Anuja Chaudhury]

The authors are students at ILS Law College, Pune

Introduction

The Ministry of Corporate Affairs published the Draft Competition Amendment Bill, 2020[i] on 12th February 2020 based on the recommendations of the Competition Law Review Committee (CLRC). One of the proposed changes is the insertion of S.4A which extends the Intellectual Property Rights (‘IPR’) exemption to abusive practices by dominant enterprises under Section 4 of the Competition Act, 2002 (‘The Act’). Earlier, this exemption was restricted only to the anti-competitive agreements under Section 3(5) of the Act.

The earlier provision granted a protection from Section 3 to agreements entered into by any person for restraining any infringement or imposing any reasonable conditions, imperative for the protection of IPRs. This provision conferred a protection to IP holders, specifically in licensing agreements; acting as a shield to uphold the proprietary rights of the holders and simultaneously promote inventions. It further provides that Section 3 will not act as a bar to the right of a person to undertake export of goods from India to a certain extent.   The newly inserted S.4A aims to extend the same exemption to abusive conduct by dominant entities done to protect their IPR. This article aims to analyse the proposed amendment extending the IPR exemption to dominant entities and to identify the prospective enforcement concerns arising from the same.

Balancing ‘Rights’ under IP & ‘Abuse’ under Competition Law

The regimes of IPR and competition law have always been considered antithetical to one another. While the former confers exclusive monopoly rights, the latter checks upon the unreasonable exercise and abuse of those rights. At the same time, their complementary objectives cannot be overlooked, since competition law and IP, in synergy, promote efficient competition and innovation. The extension of the IPR exemption to abuse of dominance (‘AOD’) cases will tip the equibalance between the two laws in the favour of the IPR regime. This will eventually induce an exponential rise in cases where dominant enterprises (such as patent or copyright holding entities) will attempt to objectively justify their abusive behaviour (such as imposing restrictive licensing or franchise clauses) under the guise of protecting their IPRs.

As early as 1988, the European Union (‘EU’) Commission, in the case of AB Volvo v. Erik Veng (UK) Ltd.[ii] decided that even an exercise of an IPR right by an enterprise will be considered abusive in the following circumstances:

  1. Existence of no other substitute for the product which has a specific, constant, and regular potential demand on the part of the consumers;
  2. Refusal to supply the information leading to the prevention of the creation of a new product for which there is potential consumer demand;
  3. No objective justification for such refusal;
  4. Reservation of the secondary/downstream market to themselves by excluding all the competition in the market.

Although the proposed provision contemplates the above scenarios by not providing a blanket exemption, it runs the risk of becoming a template defence used by the entities to escape liability under Section 4 of the Act.[iii] It would result in enterprises in monopolistic markets indulging in practices such as the creation of a market-standard based on IPR licensing, excessive pricing, refusal to deal, refusal to license, or dominating the downstream market by refusing necessary information for entry, under the garb of ‘protection of IPR’. This necessitates the striking a fine balance between private proprietary rights and promotion of economic growth and competition.

Peeking into the future: Prospective enforcement issues in AOD cases

The extension of the IP defence to AOD cases is sure to raise several pertinent concerns and enforcement issues.

Firstly, there remains ambiguity regarding the determination of the ‘relevant market’ which forms the very foundation of Section 4. In 2014, CCI in the Super Cassettes case,[iv] concluded the relevant product market by considering the SSNIP test instead of holding the entire IPR as the relevant market. However, for the purpose of Section 4A, in determining the establishment of a dominant position, there is a requirement of due consideration of whether the ‘relevant geographic market’ would be commensurate to the extent of the territorial protection granted to the IPR or the extent of usage of that IPR in the market. The clarification of the same will warrant an addition to the factors required to be satisfied for determining the ‘relevant market’ under Section 19(5) and (6), for example, if the relevant market will include products made from license or technology transfer of the IPR.

Secondly, The threshold for proving AAEC is more flexible and has a broader scope under the relative ‘rule of reason’ approach adopted by CCI in AOD cases due to the presence of various objective justifications for the abusive practices. The extension of the exemption to Section 4 will provide an additional scope, broader to satisfy the ‘objective justifications’ for the abusive conduct by a dominant enterprise.

Thirdly, the CCI has failed to provide an appropriate and succinct definition of what constitutes ‘reasonable conditions’ under Section 3(5). In 2017, CCI in the K Sera Sera case,[vi] concluded that exclusive agreements with distributors to prevent agreements with repeated IPR infringers constitute a ‘reasonable condition’. In 2015, CCI in the Shamsher Kataria case,[vii] provided two requirements to be satisfied for any entity to claim exemption under Section 3(5) namely:

  1. Whether the right which is put forward is correctly characterized as protecting an intellectual property; and
  2. Whether the requirements of the law granting the IPRs are being satisfied.

While clarifying the first criteria, the CCI stated that the concept of protection of an IPR is qualified to be ‘necessary’ where, in the absence of the restrictive conditions; the IPR holder is unable to protect his IPR. However, the extension of the same to AOD cases will require a more variable and clear definition of what constitutes ‘reasonable conditions’ as the possibility of misuse of the provision is higher. The Bill also lacks an adequate mechanism to address the issues which can arise from the non-compulsion of provision Fair, Reasonable & Non-Discriminatory (FRAND)terms to a subsequent licensee by a Standard Essential Patent holder, which will be swept under the blanket of ‘reasonable conditions’ under Section 4.

The position regarding exemption granted to IPR while assessing antitrust concerns is well developed in both the US & EU. In the US, there has been a shift from the conventional view of considering IPR solely as a tool to create exclusive monopolies to it becoming an aid in reducing anti-competitive practices. The acts of the IPR holders negatively affecting fair competition are well within the scrutiny of the US antitrust laws. However, the position is vice versa in the EU, where the inherent conflict between the laws is well recognized and the judicial approach has been stringent specifically in the case of IP licensing agreements, the scrutiny of which is subject to Block Exemptions provided under the regime. In the US, as per the guidelines,[viii] a restraint in the licensing agreements will not be subjected to antitrust intervention if they fall within the ‘Safety Zone.’

The way forward

The Draft Bill has failed to consider several contemporary challenges to the competition regime, such as, the formulation of a mechanism to address the concerns arising from the digital economy. In the light of the same, the extension of IPR exemption to AOD cases will open a new can of worms, especially in the field of technology transfer agreements. The EU Commission has been very proactive in issuing Guidelines[ix] for the application of exemptions under Article 101(3) to technology transfer agreements for the protection of IPR. CCI can walk in the same footsteps of its EU counterpart in clarifying its stance in providing the same for the Indian competition law regime. The provision of excessive IPR protection to a dominant entity will ultimately result in the entity monopolising not only its relevant market, but also holding a strong control over the downstream market. The Draft Bill will require a stronger framework if it seeks to extend the said IPR exemption without undermining the objectives of competition law.

Endnotes:

[i] Ministry of Corporate Affairs, Draft Competition Amendment Bill. 2020, available at http://www.mca.gov.in/Ministry/pdf/ReportCLRC_14082019.pdf.

[ii] Case 238/87, [1988] ECR 6211, Judgment dated Oct. 5, 1988, available at https://eur-lex.europa.eu/resource.html?uri=cellar:24c33700-2092-4e4b-abc6-ed97a2b159ce.0002.03/DOC_1&format=PDF.

[iii] Draft Competition (Amendment) Bill Proposes Extension of Protection to IPR Holders in Abuse of Dominance Cases, Spicy IP, (Mar. 3, 2020), available at https://spicyip.com/2020/03/draft-competition-act-amendment-bill-proposes-extension-of-protection-to-ipr-holders-in-abuse-of-dominance-cases.html.

[iv] CCI Case No. 40/2011, Order dated Oct. 1, 2014, available at https://www.cci.gov.in/sites/default/files/C-2011-40_0.pdf.

[v] CCI, Provisions relating to Cartel, Advocacy Series 2, available at https://www.cci.gov.in/sites/default/files/advocacy_booklet_document/cartel%20book.pdf.

[vi] CCI Case No. 97/2016, Order dated Jun. 21, 2017, available at https://www.cci.gov.in/sites/default/files/97%20of%202016.pdf.

[vii] CCI Case No. 03/2011, Order dated July 27, 2015, available at  https://www.cci.gov.in/sites/default/files/03201127.pdf.

[viii] US Department of Justice & Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property, (Jan. 12, 2017), available at      https://www.ftc.gov/system/files/documents/public_statements/1049793/ip_guidelines_2017.pdf.

[ix] Commission Regulation (EU) No. 316/2014, Application of Article 101(3) of the Treaty on the Functioning of the EU to categories of Technology Transfer Agreements, (Mar. 21, 2014), available at https://eur-lex.europa.eu/legal-content/EN/TXT/PDF/?uri=CELEX:32014R0316&from=EN.

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