[By Nipun Kumar]
The author is a student at the ILS Law College, Pune.
Competition law and Intellectual Property Rights (hereinafter “IPR”) are two policies that have a common objective of ‘consumer welfare’ and ‘efficient allocation of resources’. Modern understanding of these two disciplines is that both the laws work in conformity to each other in order to ‘bring new and better technologies, products, and services to the consumers at lower prices’.
However, a conflict appears to arise between the two policies given their contradictory methods of achieving the common objective. IPR grants a degree of exclusivity by limiting access, whereas competition policy seeks to promote competition and facilitate access to the market. The Raghvan Committee in its report on competition law had opined that there exists a dichotomy between IPR and competition policy where the former ‘endangers competition while the latter engenders competition’. Owing to the fact that intellectual property rights confer exclusive rights upon their owners on one hand, whereas competition law strives at keeping the markets open on the other, it is easy to assume that there is an inherent tension between these two areas of law and policy.[i] This conflict, sometimes, takes a toll on healthy competition in the market which eventually defeats the objective of either of the laws. This article discusses the various instances of conflict between the two policies and how IPR is used as a shield to stifle competition in the market.
Intellectual property owners provide licenses to generic manufacturers in the market so that they can exploit the intellectual property and pay a royalty to the license providers. This licensing can be misused in various ways by the intellectual property owners, which has the potential to restrict competition in the market. Some of them are discussed below:
Some patents require such high level of investment that it becomes significantly risky for a licensee establishment to use the patent for business unless the licensee is given immunity from any competition arising out of the use of that patent. To overcome such competition, the licensor grants an exclusive right to manufacture and sell goods in a particular territory and agrees to avoid granting similar rights to another in that territory.[ii] Such licenses make sure that there is only one entity in a territory authorised to use the patent, thereby providing such entity with a territorial exclusivity. These licenses have the potential to raise competition concerns because these are aimed at eliminating competition by restricting the use of patents by other firms, which prima facie qualifies as an anti-competitive act. In the case of Nungesser v. Commission (Maize Seeds case), the Court of Justice of the European Union (hereinafter “the Court”) has given a robust interpretation of territorial exclusivity where it identified two types of exclusive licenses: ‘open exclusive license’ and ‘exclusive license’. In an open exclusive license, the exclusivity of the license relates solely to the contractual relationship between the owner of the right and the licensee, where the licensor agrees neither to license anyone else in the licensee’s territory nor to compete there itself. An exclusive license, on the contrary, aims at providing the licensee with absolute territorial protection so that all competition from the third parties, such as parallel importers and licenses for other territories, is eliminated. The Court concluded that the grant of an open exclusive license, that is to say, a license which does not affect the position of third parties as mentioned above is not anti-competitive. As regards the exclusive licensing, the Court reiterated its stance in Consten and Grundig v. Commission and held that absolute territorial protection granted to the licensee in order to enable parallel imports to be controlled and prevented results in the artificial maintenance of separate national markets, stands in contravention with the competition policy. The Maize Seeds case laid down that territorial exclusivity may not always be anti-competitive and it depends on whether the license is having any detrimental effect on competition in the market.
After the case of Nungesser, the Court has adopted a somewhat liberal view regarding territorial exclusivity by holding that such licenses are not anti-competitive. In Coditel v. CinéVog Films, the Court has even stressed on the importance of the territorial exclusivity where it acknowledged that in certain cases the licensee may need absolute territorial protection. In Pronuptia de Paris v. Schillgalis, the Court held that where the licensee’s business name or symbol of the franchise is not well known, the grant of exclusive territorial protection may not infringe the competition policy. It can be concluded that territorial exclusivity may tend to raise competition issues in a market which has to be decided on factual points in a case; the only test is whether the license, by effect or by object, causes an appreciable adverse effect on the competition.
The European Commission’s (hereinafter “the commission”) Technology Transfer Guidelines defines technology pools as arrangements whereby two or more parties assemble a package of technology which is licensed not only to contributors to the pool but also to third parties. Technology pools may be both pro-competitive as well as anti-competitive. Such pools are beneficial to competition because they allow for a one-stop licensing for the technologies required in the market, which reduces the transaction cost significantly whereas they may be detrimental to the competition when they establish a de facto industry standard which tends to reduce innovation by foreclosing alternative technologies from entering the market.
The commission has determined the effects of pools in the case of substitute and complementary technologies. In the markets where the technologies pooled are substitutes, the royalties paid will be higher which may amount to price-fixing between the competitors. This makes pools of substitute technologies restrictive of competition, given that price-fixing is prima facie anti-competitive. In the case of complementary technologies, pooling amounts to lower royalties, and therefore, such pools are not restrictive of competition. The competition is affected in case of complementary technology pools when the licensee is forced to subscribe to a non-essential technology to receive a license of essential technology. This forcible add-on subscription is an anti-competitive practice called ‘bundling’.
Pay-for-delay agreements, which are prevalent in the drug manufacturing industry, are a form of ‘patent dispute settlement’, whereby in exchange for monetary compensation, a generic manufacturer ‘acknowledges’ the patent of the originator pharmaceutical company and agrees to refrain from selling its generic drug for a defined period of time. Such agreements are effectively used to stifle competition by stopping generic drug manufacturers from bringing lower-cost alternatives. The European Court of Justice, in the UKParoxetine case, has held that pay-for-delay agreements, ‘by object’ or ‘by effect’, may constitute an infringement on the prohibition of anti-competitive agreements and may also qualify as an abuse of dominance.
Apart from the issues discussed above, in many cases, the contractual agreements in the licenses may raise competition issues when licensees are made to comply with unreasonable demands. The licensor may demand exorbitant royalties in advance which may qualify as abuse of dominance. The licensor may tie the licenses even after the expiry of the patent. There are agreements in which the use the patented product may be limited for a particular purpose only which may lead to the partitioning of markets. The licensor may insist upon a no-challenge clause whereby the licensee agrees not to challenge the validity of the intellectual property right in question. The agreements may contain a non-competition clause where the licensee is forbidden to use in own or rival technology. Such above-mentioned contractual agreements, which have been discussed in European Commission’s Technology Transfer Guidelines, have high potential to restrict competition and thus, require to be looked upon on a case-to-case basis by the adjudicating authority.
The Way Forward
What needs to be understood is that competition is hampered when there is unreasonable use of rights guaranteed under IPR. To prevent this, there is a need of a robust law and a competent adjudicating authority which prevents IP holders from disrupting competition in the name of exercising their rights. In India, the Competition Commission of India (hereinafter “CCI”) is the adjudicatory body of competition laws as conferred by the Competition Act, 2002 (hereinafter “the Act”). However, questions have been raised on the jurisdiction of CCI in matters where IPR was found to restrict competition. In Telefonaktiebolaget L.M. Ericsson (PUBL) v. Competition Commission of India &Anr. as well as in Monsanto Holdings Pvt. Ltd. &Ors. v. Competition Commission of India &Ors. case, the main question of law raised before the court was that whether the Commission has the jurisdiction to decide on matters relating to the exercise of rights under the Patents Act, 1970. It is important to note that, the purpose of having an independent adjudicatory body is defeated when its jurisdiction is challenged on the very same law on which such body is meant to adjudicate. Therefore, it is expedient that the jurisdiction of the CCI be defined in such a way that no challenges to its jurisdiction lie in matters relating to competition law. Apart from this, the Competition Law Review Committee has recommended protecting IPR holders from cases of abuse of dominance by the insertion of Section 4A to the Act. This step may grant Intellectual Property holders unreasonable immunity from antitrust scrutiny which may put markets at risk of losing a healthy competition.
To achieve the objectives of Competition Law and IPR, the two areas of law will have to work in tandem with one another. This will be achieved only when there is a fair system of checks and balances and a robust antitrust regime that would keep the law devoid of any loopholes.
[i]Richard Whish & David Bailey, Competition Law769 (7th ed. 2012).
[ii]Richard Whish & David Bailey, Competition Law 771 (7th ed. 2012).