Thursday, 22 September 2011

Intellectual Property Rights and Competition Law

The relationship between IP rights and competition has been a subject matter of debate in many countries and has undergone changes from time to time. Major changes have taken place since the WTO came into existence; some countries promulgated new laws and some made changes in their existing laws. The question which very often occupies the minds of people is - “Are IP rights anti-competitive by its very design?” The answer to this question is not a universal truth and therefore, varies from country to country and real life situations attracting attention to this question.

IP laws are intended, to start with, to encourage innovation leading to economic growth. As the IP reaches the market place, usually in a complex form, the issue of competition comes into play. Hence an IP right in its basic form is not anti-competitive. It is not necessary at all that IP rights would always lead to a situation creating a competitive or non-competitive environment. If one were to come to a conclusion that IPR are anti-competitive with out examining the context, one would tend to erode the incentive to innovate. IP system rests on the idea of long term incentives for innovation and this basic theme cannot be lost sight of. IPR do not necessarily generate the ability to raise prices in the market. It is common knowledge that different patented drugs are available in the market for the same medical indications but they compete with each other on price. The development of IP for new technological solutions does not eliminate the capability to use the older solutions and it does not even cause the older solutions to be withdrawn from the market. On the contrary it increases competition. However, if consumers on their own reject the older solutions a need to understand the causes of rejection exists.

In the case of Illinois Tool Works Inc vs Independent Ink Inc, the US Supreme Court held in March 2006 that IP rights cannot be presumed to create market power. In other words IPR cannot be equated with market power per se. This jurisprudence is different from what was generally accepted in USA in the pre 1995 period. It is to be understood that competition laws are normally concerned with activity that creates new choices and IP laws allow creation of new choices. What is important to consider is whether the effect of IPR in specific situations should attract the provisions of competition laws or not. It would be advisable to carry out an effect based analysis to determine the anti-competitive impact of IPR.

The Indian Competition Act 2002 as amended in 2007 addresses the topic of IPR and its relationship with the Act. The Competition Commission of India has issued the Advocacy Booklet on IPR under the Competition Act highlighting basic features and guidelines for better understanding. However, many conditions and practices which may lead to anti-competitive practices are covered neither in the Act nor in the Advocacy Booklet. The focus is mainly on the licensing of IPR. Following practices are likely to be considered anti competitive where the competition laws may become operative.

1. Patent pooling is a restrictive practice. This happens when the firms in a manufacturing industry decide to pool their patents and agree not to grant licences 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. In particular, if all the technology is locked in a few hands by a pooling agreement, it will be difficult for outsiders to compete.

2. Tie-in arrangement is yet another such restrictive practice. A licensee may be required to acquire particular goods (unpatented materials, e.g., raw materials) 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. 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.

4. 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 IPR in question.

6. 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. 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 anti-competitive 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.

13. Indemnification of the licensor to meet expenses and action in infringement proceedings is likely to be regarded as anti-competitive.

14. Undue restriction on licensee’s business could be anti-competitive. 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 imposed on the licensee to employ or use staff designated by the licensor is likely to be regarded as anti-competitive.

Penalty provisions

The Commission is empowered to inquire into any unreasonable conditions attached to IPR agreements and can impose penalty upon each of such right holder or enterprises which are parties to such agreements or abuse, which shall be not more than ten per cent of the average turnover for the last three preceding financial years. In case an enterprise is a `company’, its directors/officials who are guilty, are liable to be proceeded against and punished. (Source: Advocacy Booklet Intellectual Property Rights under the Competition Act 2002, published by Competition Commission of India)

© R Saha

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