The interface between IPRs and competition law


Published on

The interface between IPRs and competition law

Published in: Education
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide

The interface between IPRs and competition law

  1. 1. THE INTERFACE BETWEEN IPRs AND COMPETITION: INDIAN SCENARIO ( : औ ) DISSERTATION Submitted toDirectorate of Distance Education (DDE), Kurukshetra University, Kurukshetra, Haryana in partial fulfilment of the requirements for the degree of LL.M. (Master of Laws) By PANKAJ KUMAR Session: 2010-12 DDE Ref. No.: 45420 Registration No.: 10-DE-823 Email id: Contact no. +91 9312322988 Supervised by Dr. Sushila Assistant-Professor (Law), National Law University (NLU), New Delhi-110078
  2. 2. CERTIFICATE BY THE CANDIDATEI hereby declare that the work reported in this dissertation entitled “THE INTERFACEBETWEEN IPRS AND COMPETITION: INDIAN SCENARIO” has been carried out by myselfMr. Pankaj Kumar for the partial fulfilment of the requirements for the degree of LL.M. (Masterof Laws) from Directorate of Distance Education (DDE), Kurukshetra University, Kurukshetra,Haryana, India.I further declare that I have done an independent and original work of required standard underthe supervision of Dr. Sushila, Assistant-Professor (Law), National Law University, New Delhi-110078 and it has not been submitted elsewhere for award of any other degree.Date: 31/03/2012Place: New Delhi PANKAJ KUMAR Session: 2010-12 DDE Ref. No.: 45420 Registration No.: 10-DE-823
  3. 3. ACKNOWLEDGEMENTSI am overwhelmed with pleasure and pride to express my feelings and a sense ofindebtness in gesture of acknowledgement to some people for their valuableguidance and wise direction during the course of my LL.M.I express my deep sense of gratitude to my supervisor Dr. Sushila, Assistant-Professor (Law), National Law University, New Delhi-110014 for her helpful andinspiring guidance, persistent encouragements and meticulous effort during thestudy.With deep sense of indebtness, I take this opportunity to express my sincere andheart-full thanks to Dr. K.D. Singh Deputy Director (Law), Competition Commissionof India (CCI), Mr. Anil Bhardwaj, Secretory General, Federation of Indian Micro andSmall & Medium Enterprises (FISME) for their helpful and inspiring guidance,persistent encouragements and constructive criticism and advise throughout thestudy.I would like to express my sincere thanks to all my colleagues at FISME for theencouragement and the support during the study.Last but not the least, I would like to thank my parents, other family members andfriends who helped me in order to finish the study. Pankaj Kumar
  4. 4. PREFACEThe relationship between intellectual property rights and competition issues hasattracted growing attention. Though IP law issues intellectual assets to the exclusivecontrol of right owners, competition law strive to avoid market barriers and benefitconsumers by encouraging competition among suppliers of goods, services andtechnologies. Such challenges are particularly complex in developing countries, themajority of which have little or no tradition in the application of competition law andpolicies. In fact, in most of these countries intellectual property rights have beenexpanded and strengthened in the absence of an operative body of competition law,in contrast to developed countries where the introduction of higher levels of IPprotection has taken place in normative contexts that provide strong defencesagainst anti-competitive practices.The concept of Intellectual property rights as developed in India cannot be divorcedfrom the developments in the international arena as well as in the nation-to-nationrelations. The impact of the law relating to unfair and restrictive trade practices asaffecting the regime of IPR on the economic front is emphasized in this study. Inparticular, greater attention would be given here to the interface between IPRs andcompetition in Indian scenario.The present study discusses the relation between IPRs, monopoly and competitionand the public interest and the shifting of the balance towards the IP right holdersbefore examining the conditions and circumstances of exiting scenario. Thearrangement of the study is as, Importance and Relevance of the study are given inchapter (i). Chapter (ii) discusses objectives of the study. Hypothesis of the studyis given in chapter (iii). Chapter (iv) discusses Research Methodology. Review ofexisting statutory Law and Case-Laws are given in chapter (v). Chapter (vi)discusses conceptual framework covering important terms and their meaning etc.Analysis and interpretations given in chapter (vii). Chapter (viii) discusses brieffindings and suggestions. List of cases given in chapter (ix). Chapter (x) mentionsAnnexures: List of Tables graphs etc. Chapter (xi) mentions Bibliography andAppendices etc.
  5. 5. INDEX P. No.Letter for the approval of Topic from Course CoordinatorCertificate from the SupervisorCertificate of declaration by the candidateAcknowledgementPrefaceContents -Chapter (i) Importance and Relevance of the study ……………………………….. 1Chapter (ii) Objectives of the study ……………………………………………….. 13Chapter (iii) Hypothesis of the study ……………………………………………… 14Chapter (iv) Research Methodology ………………………………………………. 16Chapter (v) Conceptual framework covering important terms and their meaning … 57Chapter (vi) Review of existing statutory Law and Case-Law ……………………… 40Chapter (vii) Analysis and interpretations ………………………………………….. 107Chapter (viii) Findings and suggestions ……………………………………………. 112Annexures:Annexure I: Genesis of Competition Policy in India ……………………………….. 116Annexure II: Illustrative List of Parameters for Undertaking CompetitionAssessment …………………………………………………………………………. 122Annexure III: List of cases ………………………………………………………….. 126Bibliography and web-links ………………………………………………………… 127
  6. 6. CHAPTER (I) IMPORTANCE AND RELEVANCE OF THE STUDYINTRODUCTIONThe study explores a number of issues where not much work has yet been done indeveloping countries but that could be of relevance in tackling the interface betweenIP and competition policies. Notably, the study deals with some competition lawissues specifically relating to IPRs. It thus discusses the extent to which the refusalto license IPRs such as patent to a third party may be deemed anti-competitive. Thestudy considers, further, anti-competitive situations arising from the acquisition andenforcement of IPRs. The use of compulsory licenses to remedy anti-competitivepractices is also examined together with a number of state interventions thatdetermine key aspects of their competition policies.“People of the same trade seldom meet together, even for merriment anddiversion, but the conversation ends in conspiracy against the public or in somecontrivance to raise prices”1When there is perfect competition in the market, the consumer is sovereign, as hiswelfare is maximised. However, monopoly is bad for the consumer and theeconomy. The monopolist controls the market by various way including increaseprices, reduce volumes etc.In the present age of globalization, India has responded positively by opening upits economy, removing controls and resorting to liberalization. In quest ofincreasing the efficiency of the nation’s economy, the Government of Indiaacknowledged the Liberalization Privatization Globalization era. As a result Indianmarket faces competition from within and outside the country. This lead to the needof a strong legislation to dispense justice in commercial matters and theCompetition Act, 2002 was passed. Healthy and fair competition has proven to bean effective mechanism which enhances economic efficiency. Therefore thepurpose of implementing the competition law was to curb monopolies and1 Adam Smith, The Wealth of Nations (1776) 1
  7. 7. encourage competition in Indian market. This study is a review into the advocacyissues in the field of intellectual property rights and competition law in general andmore particularly, the interface establishing the balance between these two law andpolicyIn a market economy, competition is essential to curb market distortions, induceefficiency in the use of resources, prevent monopoly or oligopoly, maintain pricesat fair levels or as low as possible, prevent excessive or monopoly profits andpromote consumer interests and welfare.IPR is privilege granted in recognition of the need of the holder to recoup costsincurred in the research and innovation process, so as to maintain incentives forfurther innovation. Thus an IP entails an exclusive right for a limited time, enablingthe holder to charge a higher price than the marginal cost of production. Suchhigher price generally reduces access of consumers to the product, and access ofother producers to production inputs and methods.The monopoly granted by IPRs prevents or deters competition from rivals that cansell at lower prices. These are costs that are seen to be short-term (since theexclusive right is of a limited duration), but which are supposed to be outweighedby the long-term benefits brought about by the innovation which IPRs encourage.2There is thus a balancing required between the monopoly privilege granted to theIP holder and the public interest (including consumer welfare, the competition fromother producers, and national development prospects). The appropriate balancerequires the right policies that enable that IP be appropriately given for correctreasons and to the correct parties, and that they be of an appropriate period, andthat flexibilities and exemptions and exclusions are provided to safeguard vitalpublic interests.If the balance is tilted excessively to the IP holder, then one consequence is thatthe IP facilitates a stream of monopoly profits beyond what is justified for2 INTELLECTUAL PROPERTY, COMPETITION AND DEVELOPMENT by Martin Khor, Third World Network 2
  8. 8. recovering the costs of innovation, and society bears the costs unreasonably.These may include prevention of access to goods and services (includingessentials such as medicines, food and information, and important inputs forproduction), curbing of industrial development, an overall reduction in competitionand its benefits for resource allocation, and monopolization in products, sectors orthe economy as a whole.It is thus important, especially for developing countries, that the standards of IP beappropriate, that there be adequate exclusions and flexibilities, and that theframework enables IP to be awarded appropriately for the right inventions and tothe right parties, and that there be sufficient provisions policies and legal provisionsthat counter the abuse of IP privileges when they occur.In economic competition, the winner should be the enterprise providing the mostuseful and effective product or service on the most economical and (to theconsumer) satisfying terms. This result can only be achieved, however, if allparticipants play according to a certain set of basic rules. Violations of the basicrules of economic competition can take various forms, ranging from illegal butharmless acts (which can be committed by the most honest and carefulentrepreneur) to malicious fouls, intended to harm competitors or misleadconsumers. Experience has shown that there is little hope of fairness incompetition being achieved solely by the free play of market forces. In theory,consumers, in their role as referees of economic play, could deter dishonestentrepreneurs by disregarding their goods or services and favouring those ofhonest competitors. Reality, however, is different.As an economic situation becomes more complex, consumers become less able toact as referees. Often they are not even in a position to detect by themselves actsof unfair competition, let alone react accordingly. Indeed it is the consumer who—along with the honest competitor—has to be protected against unfair competition.3In certain jurisdictions, the intellectual property laws, unfair competition laws andanti- trust (competition) laws have developed in such a way that they complementto each other with making an appropriate balance. The balance is necessary3 WIPO Summer School Reading Material 3
  9. 9. because “on the one hand, exclusive rights granted under IP laws by definitionexclude competition in a particular setting and allow excluding third parties fromdirectly competing with the IP right holder; on the other hand, competition lawseeks to facilitate direct competition and tends to limit the use of exclusive rights.” 4A number of regulations linked to the acquisition and exercise of intellectualproperty rights, such as those dealing with the marketing approval ofpharmaceuticals and agrochemicals directly influence market entry andcontestability. Such regulations integrate what may be called a country’s“competition policy”. Given the lack of legislation, weak implementation or absenceof policies to deal with the IP-competition relationship in developing countries, acompetition policy approach may be particularly useful to ensure a pro-competitiveexercise of intellectual property rights (IPRs).Developing countries can follow their own approach to competition law and IPRssince there are no international rules (with the exception of Article 40 of theAgreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) thatconstrain the capacity of such countries to discipline IP-related anti-competitivebehaviour. In the absence of international rules on the matter, countries may havedifferent views about what constitutes undesirable anti-competitive effects as aresult of the exclusivity granted under IPRs.Although competition law has usually dealt with markets for goods, markets fortechnologies exist separately from those for products or services and may also besubject to competition law. Competition law may, in particular, address situations inwhich IP is used to charge excessive prices for or prevent access to protectedtechnologies. Competition provides a strong incentive for developing newtechnologies in certain fields. In cases where IPRs are granted, governments canadopt measures to mitigate the monopolisation of technologies and promotecompetition. Thus, although Article 31(b) of the TRIPS Agreement only refers tothe refusal of a voluntary licence as a condition for the granting of a compulsory4 Teaching of Intellectual Property; Chapter 6 Teaching intellectual property, unfair competition and anti-trust law by Thomas Cottier and ChristopheGermann, Cambridge University Press 2008 4
  10. 10. licence, the unilateral refusal to license a patent (generally known as “refusal todeal”) can be considered grounds for granting a compulsory licence and has beencontemplated in a number of national patent laws.The possibility of allowing third parties to use IPRs in cases of refusal to deal hasalso been considered in some countries under competition law in the context of the“essential facilities” doctrine. This doctrine applies when one firm, which controlsan essential facility, denies a second firm reasonable access to a product orservice that the second firm must obtain in order to compete with the first.While some US court decisions have suggested that information may constitute anessential facility, the extent of application of this doctrine to intellectual propertycases is uncertain. Under European Community law, an “essential facility” mayinclude an intellectual property right. An IPR holder is not entitled to excludecompetitors from the use of his/her rights when a licence is essential forcompetition, such as where the refusal to license prevents the introduction of anew product or allows the intellectual property holder to monopolise a secondarymarket. Developing countries may draw interesting lessons from the application ofthe concept of refusal to deal and the essential facilities doctrine in developedcountries. However, there are no rigid models and developing countries canelaborate their own approaches on the matter in order to respond to their publicinterests.The accumulation of patents in the form of “package patents” may have anti-competitive effects if used, for instance, to inappropriately extend market powerfrom legitimate patent claims to illegitimate patents, or to coerce a party intolicensing patents that it might not have otherwise done. “Patent thickets” may alsoraise competition law concerns, as co-operation among competitors in differentforms (including cross-licensing) may be necessary to navigate the patent thicket,ultimately limiting competition.While much of the literature on IPRs and competition law focuses on patents, anti-competitive behaviour may be based on or facilitated by other modalities of IPRs.Thus, copyrights have been involved in important competition law cases. Several 5
  11. 11. studies have shown that copyright creates monopoly power and that the majority ofmarkets on information goods follow a pathway of progressive concentration atboth the national and international levels. The anti-competitive effects of copyrightprotection of software, particularly of interfaces, have been central in severalcases, notably involving the dominant software provider, Microsoft. Competitionlaw concerns have also frequently arisen in relation to copyright collectingsocieties. A fundamental tension between the goals of trademark and competitionlaws has also been observed in some cases.Enforcement measures should allow the protection of the IPR holder’s legitimateinterests, but equally protect against abuses that may unjustifiably distortcompetition.Compulsory licences can be used, both in the context of IPRs and of competitionlaws, to remedy anti-competitive practices. Article 31(k) of the TRIPS Agreement,explicitly provides for the granting of such licences in the case of patents.Compulsory licences may be used in cases of cross licensing that unduly limitcompetition, particularly when they involve substitute technologies, that is,technologies that actually or potentially compete with each other, independently oftheir intrinsic characteristics.“Patent pools” represent another situation that may be subject to analysis from acompetition policy perspective. Such pools may be used for pro-competitivepurposes. However, they may facilitate tacit collusion in a multiplicity of marketsand allow the pool members to impose abusive terms on non-members wishing toget access to technologies.Finally, there are a number of areas in which IPRs play an important role andwhere actions taken by governments decisively shape competitive relations. Thisis, for instance, the case of regulations determining the requirements for marketingapproval of pharmaceutical and agrochemical products. The sui generis system of“data exclusivity” applied in some countries – and promoted through free tradeagreements – confers a temporary right to the exclusive use of such data by thefirst applicant (generally the company that developed a new product), thereby 6
  12. 12. excluding generic competition during the period of exclusivity. Restrictions tocompetition may also arise from the so-called “patent registration linkage” underwhich a national health authority cannot approve a medicine, or is obliged to takeother measures, when there are patents relating to the medicine and the applicanthas not obtained the patent owner’s consent. 7
  13. 13. Issues arises from the interface of IPR and competitionThere are many issues arises from the interface of Competition & IP laws and someof them are as follows: • What extent the court and the competition authority restrict the exercise of IPRs? • When is competition law actually applied to IPRs? • What extent can and should various IPRs Laws be reformed? • What regulatory relationship needs to be built between CCI and the Patent Office? • What conditionality in the licensing agreement needs to be examined and what could be India’s licensing policies with regard to Intellectual Property? • What should be CCI’s role when examining grant, if any, of product patents? • What competition concerns may indicate the probability of imposing compulsory licensing? • What regulatory relationship needs to be built between CCI and the Patent Office? • What conditionality in the licensing agreement needs to be examined and what could be India’s licensing policies with regard to Intellectual Property? • What should be CCI’s role when examining grant, if any, of product patents? • What competition concerns may indicate the probability of imposing compulsory licensing? • What is the relevant market in which the dominance/abuse is alleged? • Is the enterprise dominant in the relevant market? • What are the specific indicted practices and do these amount to abuse? • Exclusionary terms in the licensing of IPRs, specifically the inclusion in licensing contracts of restrictive clauses such as territorial restraints, exclusive dealing arrangements, tying or grant-back requirements; • Use of IPRs to reinforce or extend the abuse of dominant position on the market, unlawfully; • IPRs as an element of mergers and cooperative arrangements; and • Refusal to deal. 8
  14. 14. BACKGROUNDInteractions between trade and competition could not be more intimate than theyare today, when countries the world over are getting severely affected by thevolatility of trade in primary commodities. The major commodity spike of 2007-08sent alarm bells ringing when the prices of many primary goods doubled from whatthey had been not so long ago. Much of this fluctuation may be explained throughthe simple economics of demand and supply, while managing supply side failuresis critical to restore some sense in the market. One such management issue is thatof the inability of trading nations to deal with rampant anticompetitive practices,especially when the importing countries pay heavily for anticompetitive practicesexempted by exporting countries competition laws. 5Technology transfer agreements are necessary to fulfil technological needs thatare impossible to meet with local technical capabilities. Traditional devices oflicence transfer often fall within the purview of antitrust scrutiny and are deemedanti-competitive practices in general trade, as in the case of territorial restrictions inlicensing. Antitrust laws, although fit to evaluate general trade agreements, oftenfail to address intricate problems involving IPR and therefore, lack the tools toadequately solve them. The blanket protection approach to IP as provided bySection 3(5) of the Indian Competition Act is equally ineffective due to lack of amechanism to deal with IP-related unfair trade practices. The TRIPS under Article40, permits member states to prevent abuse of IP through anti-trust legislations.India has permitted cross licensing under its patent laws but has failed to preventits anti-competitive fallout in technology licensing. Therefore, a need for a balance between the two conflicting interests ofcompetition policy and the protection of technological know-how arises. It furtherpurports to set forth an adaptation of guidelines for India, keeping in mind the anti-trust laws of other jurisdictions.65 TRADE AND COMPETITION IN THE PRIMARY GOODS SECTOR: "GLOBAL PROBLEMS & SOLUTIONS", AU: Frederic Jenny & Pradeep S Mehta;The Financial Express, January 13, 20126 JOURNAL OF INTELLECTUAL PROPERTY RIGHTS | 16 (3): 258-266 MAY 2011The Competition-IP Dichotomy: Emerging Challenges in Technology Transfer Licenses; Kutty, AA | Chakravarty, S; Kutty 9
  15. 15. The issues relate to interactions between IPRs and competition law are all themore important with the coming into force of several provisions of the CompetitionAct, 2002. The possibility of tensions between IP and competition law seems tohave been present in the mind of the legislature, when it made some IP-specificexceptions in Section 3(5) of the Act. Among the important questions which arelikely to arise are (i) the treatment of exclusivity agreements and (ii) the likelihoodof the abuse of intellectual property being categorized as an abuse of dominantposition.A more general question might arise first – are competition law and intellectualproperty rights necessarily at odds with each other?“… intellectual property rights do not ipso facto confer monopoly power. While theydo permit product differentiation, and sometimes give the owner power over price,there is a vast difference between an exclusive right and the sort of economicmonopoly that is the concern of anti-trust law…”Furthermore, the goal of competition law is not to prohibit monopoly. Instead, thegoal is to prohibit anti-competitive conduct – a company that achieves a monopolywithout entering into anti-competitive conduct will not violate the principles ofcompetition law at all. In sum, the argument is that there is no tension in the goalsbeing sought by intellectual property rights and competition law (there mighthowever be some tension in the means through which the goals are sought to beachieved). The goals in both cases are the same – “wealth maximization”.7India, embarked on a new trajectory of economic liberalization in 1991, whena host of controls on trade and industry were removed. The various reformsinitiated recognised the need for removing various fetters on trade and industrywith a view to unleashing the energy and dynamism of competition in themarket. In his Budget Speech, Dr Manmohan Singh, the then Finance Minister7 Intellectual Property Rights and Competition Law: Friends or Foes?, Mihir Naniwadekar 10
  16. 16. underlined, “no power on Earth can stop an idea whose time has come” and that“It is essential to increase the degree of competition between firms in thedomestic market so that there are adequate incentives for raising productivity,improving efficiency and reducing costs” Since then, a host of new policy andregulatory reforms across various sectors have been introduced by theGovernment.After Independence, India pursued a strategy of planned economicdevelopment, with the objective of developing a broad industrial base to achievespeedy economic self-reliance and promoting social justice. The industrial policyassigned commanding heights of the economy to the public sector. The Stateexercised control over the direction, pattern and quantum of investments throughthe Industries (Development & Regulation) Act, 1951 and the Monopolies andRestrictive Trade Practices Act, 1969 (MRTP Act). A major part of the financialsector was also kept under Government control while a number of products werealso subjected to price and distribution controls coupled with extensivereservations and concessions in favour of small-scale industry. The trade policytoo affected competition by providing a high level of protection to domesticindustry. These restrictions, which were in consonance with the NationalStrategic Policies at that time and relevant in the context of limited resources andneed of checking monopolies and concentration of economic power, didnevertheless, impacted competition. However, gradually, and from 1980 onwards,incremental changes were brought in to usher in greater competition. TheIndustrial Policy Statement of 1980 introduced greater competition in the domesticmarket, technological up-gradation and modernisation. The major reforms initiatedfrom 1991 onwards were, however, on a much broader scale, sweep and scope,and provided a new paradigm shift to economic growth in India, releasing newentrepreneurial energy and dynamism in the Indian industry, diversification ofdomestic production and stimulating exports, adding to the GDP growth. The last two decades since 1991 have witnessed significant changes in terms of opening of markets, factor mobility and regulatory environment. The benefits have been substantial and manifested in various segments of economy, e.g. telecom, civil aviation, transport, manufacturing, etc. However, the 11
  17. 17. progress has been somewhat uneven, and so also the trickle- down effects onthe common man. Underlying this success is a structural shift in Indias growthtrajectory. Further, like many other similar economies under transition, therehave been residual restraints and anti-competitive traits in several areas ofeconomy. While the process of reforms is a continuing one, the pace anddirection necessitates the introduction of an overarching National CompetitionPolicy to realize the fuller growth potential of the economy. 12
  18. 18. CHAPTER (II) OBJECTIVES OF THE STUDY1. Understanding the interface – The interface between IPRs and Competition is required to understand in Indian scenario2. Examine market practice – The market practice need to examine regarding competition and intellectual property3. Status report - a status report regarding product patent and competition need to be prepared4. Policy guideline - a policy guideline for licensing (compulsory licenses) where it might lead to anti-competitive practices need to be prepared5. Study the concern laws - competition law concerns stemming from acquisition of intellectual property need to be studied6. Merger & Acquisition - issues of acquisition of intellectual property though merger & acquisition need to be examined7. Authority restriction - to what extent the court and the competition authority restrict the exercise of Intellectual Property Rights need to understand8. Application of Competition Law top IPRs - to what extent the competition law actually applied to Intellectual Property Right need to understand9. Laws need to be reformed – to what extent can and should various Intellectual Property Rights Laws be reformed need to discuss10. Development of jurisprudence - the development of jurisprudence in India in the field of protecting of IPRs and competition law need to be observed and discuss11. Impact of the Laws - the impact of patent law and competition policy and law in India need to be observed and discuss12. Awareness of the law and policy - Generate and increase understanding of the relationship between intellectual property (IP) and competition law and policy13. Prevent abuse - Understanding how to prevent abuse of IP using anti-trust legislations14. Highlight the balance - Highlight the need for a balance between the two conflicting interests of competition policy (IP-related unfair trade practices) and the protection of technological know-how (Technology transfer) 13
  19. 19. CHAPTER (III) HYPOTHESIS OF THE STUDYConflicting objectivesIPRs and competition are normally regarded as areas with conflicting objectives.The reason is that IPRs, by designating boundaries within which competitors mayexercise monopolies over their innovation, they appear to be against the principlesof static market access and level playing fields sought by competition rules, inparticular the restrictions on horizontal and vertical restraints, or on the abuse ofdominant positions.Intellectual Property Rights and Competition Law have been described as anunhappy marriage. The former may be seen to promote monopolies whilst the latteris designed is oppose them. In other words, on one hand, IP laws work towardscreating monopolistic rights whereas competition law battles it. In view of this thereseems to be a conflict between the objectives of both laws.There are two opposing views on the interface between a competition law and IPR(Intellectual Property Rights) laws. The first contents that there is a tension betweencompetition and intellectual property, arguing that competition law seeks toeliminate monopolies and encourage competition, while IPR laws reward creatorsand inventors with a limited monopoly. According to the proponents of this view, themain function of IPR laws is to properly assign and defend property rights on assetsthat have economic value. On the other hand, the main goal of competition lawshould be to minimise the adverse consequences of monopoly power arising fromIPRs.The second view contends that competition law continues to be a vital means ofensuring continued innovation and economic growth. The aims and objectives ofIPRs and competition laws are complementary, as both aims to encourageinnovation, competition and enhance consumer welfare. It is vitally important topreserve competition in innovation because competition ensures the best outcomefor consumers. 14
  20. 20. Competition authorities are normally concerned with anti-competitive practices suchas abuse of dominant position whatever be the source of such practices, rather thanwith the abuse of IPRs. The Competition Act 2002 specifically refers to IPR laws.Section 3(5) of the Act states that agreements entered into for imposing reasonableconditions or restraining infringements of IPRs conferred under respective IPRslaws would not be actionable under the Competition Act 2002. The Competition Act2002 applies to IPRs in relation to abuse of dominant position and combinations.Therefore, abuse of dominance due to an IPR is liable for action under the IndianCompetition Act just as IPR-related dealings in combinations leading to an anti-competitive effect.Thus, the issues involved are technical and multifarious and need to be dealt with indiverse ways.As there are opposing views on the interface between a competition law and IP lawsand it has argued that competition laws encourage competition and prohibitmonopolies while IP laws reward innovators with a limited monopoly.ObservationIt has been observed that –• Marketing and distribution related business alliances with others• Use of multiple channels for marketing, though considerably through open market• No competition from imports for majority• Sourcing IP through in-house R&D by many• R&D suffers from low success rate and long gestation lag• Increasing technology acquisition/licensing• Majority of the IPs are product related 15
  21. 21. CHAPTER (IV) RESEARCH METHODOLOGYThe main significance and objective behind the IP laws is defend ones IPRs byissuing some limited monopoly rights for a limited terms in order to promote thefurther investment in research & development. On the other hand, the mainobjective of competition law is to minimize the adverse consequences of monopolypower including one arising from IPRs. To address various said issues concerningthe subject, various online documents other than few books need to be referred.The situation of developing countries and the development contextThe models and practices that serve as the basis for harmonization are generallytilted in favour of IP holders, with serious implications also for competition. Whenthey are transferred to developing countries, so too are the imbalances. However,the effects on developing countries are even more serious, as there are systemicreasons why upward harmonization towards developed countries’ IP standards isinappropriate and damaging for most developing countries.The overwhelming share of patents in developing countries is held by foreigners,and thus most of the commercial benefits of IP accrue to these foreign institutions.There are large and growing patent rents transferred from developing to developedcountries. Since the patents are owned by foreigners, local researchers andenterprises are blocked or restricted in their use of the patented materials. Localindustries will also find it difficult or impossible to produce similar products as thosepatented.In terms of effect on competition, the situation confers monopoly rights onforeigners, and local enterprises are placed in a situation in which they face high oreven insurmountable obstacles to compete. The kind of reverse engineeringundertaken by today’s now-developed countries during their development phase,or by industrially successful developing countries such as South Korea, when theydid not have to adhere to the TRIPS Agreement’s high IP standards, will beextremely difficult or impossible to undertake today. 16
  22. 22. Recent studies show the high extent of costs incurred by developing countries. Theformer chief of trade policy research8 estimates that the obligations on developingcountries to implement TRIPS will result in increased payments by them of US$60billion a year. It has estimated that the net annual increase in patent rents resultingfrom TRIPS for the top six developed countries in this field will be US$41 billion(with the top beneficiaries being the US with $19 billion, Germany $6.8 billion,Japan $5.7 billion, France $3.3 billion, UK $3 billion and Switzerland $2 billion).Developing countries that will incur major annual net losses include South Korea($15.3 billion), China ($5.1 billion), Mexico ($2.6 billion), India ($903 million) andBrazil ($530 million).9It has argued that the World Bank’s patent rents estimates, already high enough,significantly understate the actual costs to developing countries, as these onlymeasure the direct outflow of patent rents from these countries. In addition thereare economic distortions as the IP protection causes goods to sell at prices farabove their marginal costs, thus giving rise to “deadweight costs”. Citing otherstudies, they estimate the deadweight costs to be twice the size of the estimatedpatent rents.10In addition, there are costs for administering and enforcing IP laws and policies,requiring law reform, enforcement agencies and legal expertise. World Bankproject experience indicates that it will cost a developing country $150 million to getup to speed on three new WTO areas (IPRs, SPS and customs valuation). Henotes that this amount is more than a full year’s development budget in manyLDCs.11Many analysts believe that the developing countries received a bad deal inaccepting TRIPS in the Uruguay Round. “Through TRIPS developing countriestook on as legal obligation a cost of $60 billion per year, but there is no legalobligation in the agreement on any Member to provide anything in exchange”.8 the World Bank, Michael Finger (2002)9 A report by the World Bank (2002)10 Weisbrot and Baker (2002)11 Finger (2002) 17
  23. 23. Finger adds that the Uruguay Round “grand bargain” was that developing countrieswould take on obligations in the new areas and in exchange developed countrieswould provide better access to their markets, particularly on agricultural productsand on textiles and clothing.12It has concludes that compared with the outcome of the market accessnegotiations, the TRIPS amounts (i.e. net rents) are big money. The US obtained13 times more benefit from annual patent rents arising from TRIPS than fromliberalization of industrial tariffs with Germany, France and UK gaining 3.6 timesmore. Conversely, the loss from TRIPS obligation is 18 times greater for Koreathan gains from Uruguay Round tariff liberalization, and the costs outweigh benefits7 times for Mexico and 4.7 times for China.Well known trade economists who advocate free trade have also written harshly onthe imbalances of TRIPS and the adverse effects on competition caused by theupward harmonization of IP standards induced by TRIPS. The economicsprofessor at Columbia University, in a letter to Financial Times argued that theWTO must be about mutual gains in trade whereas IP protection is a tax on poorcountries’ use of knowledge, constituting a wealth transfer to the rich countries.“We were turning the WTO, thanks to powerful lobbies, into a royalty-collectingagency by pretending, through continuous propaganda that our media bought into,that somehow the question was ‘trade related’.” He advocated that the TRIPSAgreement be removed from the WTO.13The economics professor at Yale University also advocates taking TRIPS out ofWTO altogether or at least renegotiating some of its provisions. The arguments putforward as benefits to developing countries of high IP standards are that this wouldencourage local innovation, and foreign enterprises would be more willing totransfer technology and to invest.14“These a priori arguments are based on the premises that first IPR protection of the12 Finger 2002: p.1113 Jagdish Bhagwati (2001)14 T.N. Srinivasan (2000) 18
  24. 24. type imposed by TRIPS is needed to encourage innovation and second that foreignenterprises place a significant weight on the strength of IPR protection regime. Thetheoretical justification for and even more importantly the empirical evidence insupport of both these premises is not at all strong….It would appear that patentprotection as a spur to innovation does not appear to be powerful in the real world.And the cost to the general public of restricting access to new technology throughpatenting may be high.”15In relation to balance of gains and losses and to the effect on competition, it can bestated, “Most of the gainers from TRIPS are in rich developed countries and only afew, if any, in poor countries. This being the case, even if gains outweigh losses,international transfers would be needed to compensate losers. No such transfersfrom gainers to losers are envisaged as part of TRIPS. Besides, TRIPS, unliketariff reductions, involves the creation or strengthening of the monopoly position ofdeveloped country producers in the markets of poor countries. Thus, TRIPScreates a distortion of monopoly in developing countries, the rents from whichaccrue to the rich. Besides, any acceleration of innovative activity, which is the onlyrationale for granting monopoly rights, if it comes about at all, will take place mostlyin rich countries. Whether some of the benefits from any acceleration of innovationin the rest of the world will accrue to poor countries is arguable. In any case thebenefits, if any, are uncertain and in the future, but the costs to developingcountries are concrete and at the present.”16Competition and Patents -There is a close link between patent rights and competition, which, in simple terms,can be characterized by two factors: on the one hand, patent laws aim to preventthe copying or imitation of patented goods, and thus complement competitionpolicies in that they contribute to fair market behaviour. On the other hand,competition laws may limit patent rights in that patent holders may be barred fromabusing their rights by applying monopolistic practices. In sum, experience showsthat too high or too low protection of both patents and competition may lead to15 T.N. Srinivasan (2000)16 T.N. Srinivasan (2000) 19
  25. 25. trade distortions. A balance has thus to be found between competition policy andpatent rights, and this balance must achieve the goal of preventing abuses ofpatent rights, without annulling the reward provided for by the patent system whenappropriately used.The search for this balance between patents and competition policy objectives isreflected both within the patent system as well as in respect of its relationship withcompetition law.Within the patent system, the core principles of the system have been framedprecisely with a view to ensure that the system simultaneously fosters innovationand remains consistent with fair market rules. Therefore, safeguards andboundaries have been built into the patent system, among which are the fact thatmost patent systems protect only inventions, not discoveries, the limitation ofpatent rights as to their contents and their duration, and the conditions ofpatentability that have been framed precisely in a way that should allow the systemto generate patents only for those inventions which are most likely to serve thepublic interest, but should prevent patents for those inventions that would appearnot to benefit society.On the other hand, competition law has as its objective to prevent undesiredmarket behaviour and, in particular, abuses of a market position. In relation topatent rights, such behaviour would cover activities going beyond the objectivesand boundaries set by the patent system. Such situations may occur, for example,where an exclusive license totally excludes other competitors from market entry,through restrictive selling practices or where patent rights are used to createhorizontal agreements for fixing price levels. Against this backdrop, competitionpolicies and laws can be an important instrument to regulate potential abuses ofpatent rights and to complement patent inherent boundaries.17Competition issues and MSMEs -Competition Policy relates to introduction and fostering of competition principles inexecutive policies of government on one hand, and to provide legal recourse17 WIPO web resources on competition and patents 20
  26. 26. against public or private behaviour, that results into stifling of competition in aneconomy, on the other. The phenomenon of Competition Policy is new one in India.While a not-so effective mechanism of MRTP did exist for curbing monopolies inprivate markets, there is no precedence of institutional mechanism for restrainingexecutive policies against anti-competitive behaviour.A functional and effective Competition Commission mechanism is needed urgentlyby MSMEs to ensure that they are not victimized by Monopolies and Cartels and arenot thrown out from public procurement through ‘crowding out’ and pooling.MSMEs are already suffering from the instances of monopolies, cartels and abuseof dominance in Iron and Steel, Copper, Aluminium and plastic raw material in India.Public procurement and Government buying also suffer from ad-hoc policies whichaim to crowd out MSMEs. A recent decision of the Government not to buymedicines from companies having a turn-over less than Rs. 30 crore is a case inpoint. Such instances are increasingly coming to light in power sector also in boththe centre and the states.Indications on the ground show that developing countries are more prone to cartels,because they often lack effective competition regimes.In India, cartels have been alleged in various sectors viz. cement, steel, tyres,transport (trucking), rubber, power cables etc. and also a number of overseas carteli.e. soda ash, bulk vitamins, petrol etc. Very recently the real estate developersbody National Real Estate Development Council has approached the CompetitionCommission of India (CCI) seeking intervention against alleged cement cartelisationhitting real estate developers. One has to wait and watch how the same is handledby CCI.Shifting of balance of IP, Monopoly and competition-There are benefits to be derived from an appropriately designed and implementedIP policy geared to the public interest and to development needs, that takesaccount of the factors requiring balancing, and that attains the right balance.However, when the policy is inappropriately designed, or when the proper balanceis not struck, there can be adverse effects of IP on competition, the public welfare 21
  27. 27. and development requirements.Due to the TRIPS Agreement, several flexibilities that countries had in their IPpolicies have been narrowed. For example, TRIPS mandates that nationaltreatment be provided for patent applications; patents have to be given for bothproducts and processes, and there cannot be different treatment on a sectoralbasis. This has affected many developing countries that had previously excludedfrom patentability certain sectors (such as medicines, food and chemicals) orcertain categories (especially product patents in medicines).TRIPS set minimum standards for a wide range of IP that are mandatory toimplement. Many analysts have concluded that TRIPS has very significantly tiltedthe balance in favour of IPR holders, most of who are in developed countries, vis-à-vis consumers and local producers in developing countries and vis-à-visdevelopment interests.The results are that:(i) The new orientation of the patent office combined with the court’s legalinterpretations make it much easier to get patents. Patents on inventions that aretrivially obvious, such as the process of making a particular type of sandwich, or amethod for swinging on a swing, are being given.(ii) Patents have become weapons for firms to harass its competitors.(iii) Patents have enabled companies to win huge damages awards and put rivalsout of business.(iv) Patent approvals are extended to new areas including purported discoveriesthat are actually familiar, such as patents on previously well-known option pricingformulas.18 While some innovators who obtain the patents are rewarded, theactivities of many others who are competitors are inhibited or even stopped,including their potential innovation activities.IP policy and practice in developed countries have been exported to the rest of theworld through international harmonization programmes and treaties. The TRIPS is18 Jaffe and Lerner 2004: pp.2-3 22
  28. 28. the best example of these. The agreement was mainly prompted by and evendesigned by representatives of certain industries in developed countries, whichsucceeded in getting their governments to successfully advocate their cause in theUruguay Round, overcoming the initial strong resistance of many developingcountries.19WIPO has also been an active forum for IP harmonization, for example through its1996 Copyright Treaty. The present negotiations for possible new treaties relatingto patents and to broadcasting are other examples. In fact, WIPO has become amore active forum for negotiations for new treaties aimed at harmonization of IPsystems and rules than the WTO.If current patent harmonization negotiations proceed along the lines advocated bythe developed countries in the substantive patent law treaty process, there is astrong possibility that the results of recent developments in the major countries(such as the relaxing of criteria of patentability and the much easier granting ofpatents) will be disseminated to the rest of the world. There is thus a danger thatwhat many analysts consider a dysfunctional system will be disseminated todeveloping countries.Bilateral and regional agreements that involve developed countries with developingcountries are other channels through which new aspects of IP are beingtransferred to developing countries. Many of these arrangements have TRIPS-plusprovisions, requiring the parties to undertake obligations that narrow their policyspace to choose between options. For example, they may contain conditions forcompulsory licensing that are more restrictive than permitted under TRIPS, or thatrequire parties to commit to a provision on data exclusivity preventing the use oftest data in the drug approval process relating to generic drugs that is not requiredby TRIPS.19 Raghavan 1990, Drahos 2003 and Sell 2003 23
  29. 29. STUDY ON HOW PATENTS RIGHTS ARE ABUSED AND THEIR IMPACT ON SME’S & OTHER DEVELOPING COUNTRIESPatents are privileges granted by the governments to the applicant (innovator) inhope on promoting innovation and creation of new technologies. Though, todaycompanies are taking advantage of their monopolistic rights after acquiring patents.More & more organisations are plugging into strategic patenting of inventions whichcan be harmful to the society and public in large both consumers and the MSMEs.Further, this has been a growing concern on the increasing costs of patentedmedicines, food & other basic goods.This study does not criticize IPRs or patents but gives an insight on the ways inwhich patent rights are abused. Further this study reveals the impacts, due to suchabuse of patents rights, on the SMEs & the developing countries.EXAMPLES OF EFFECTS OF IPRs ON COMPETITION AND WELFAREThe upward harmonization of IP standards has shifted the balance adversely forthe public interest and for development needs in developing countries. Recentdevelopments in developed countries have also tilted the balance much moretowards the IP holders. There have been adverse effects on competition as well asconsumer access. Below are examples.(a) Effects on competition and market structure -The monopoly provided by patents enables the patent holder to block or otherwisediscourage rival firms entering the market, or even in some cases to undertakeresearch 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 orpractice of granting patents, and the practice of some companies owning patents inharassing rivals is increasing the anti-competitive effects of IP. The number ofpatents tripled from 1983 to 2002 (from 62,000 to 177,000), accompanied by aproliferation of patent awards of dubious merit, for example “inventions” that arenot new or are trivially obvious.2020 Jaffe and Lerner (2004) 24
  30. 30. There has also been a corresponding explosion in patent lawsuits. One recenttrend is that an established firm with many patents demands rivals to take outlicences to its patents and many of the rivals choose to settle rather than fight(even if they do not believe they infringe) as they do not have the means to fightexpensive cases. Many large companies engage in this patent enforcementactivities as a line of business; for example, Texas Instruments is netting almost $1billion annually from patent licences and court settlements due to an aggressiveenforcement policy, and in some years this source of revenue has exceeded netincome from product sales. Besides paying royalties, the small firms may reducetheir R and D investment, shying away from innovations in areas where big firmshave patents. Thus, the effect is the suppression of innovation by younger andsmaller firms, and the reduction of competition in the market.A second trend is the emergence of individual inventor who holds up establishedfirms. The individuals have been granted patents of dubious validity, with overlybroad claims. The established firms often choose to settle rather than face theuncertainty of a court case.(b) Effects on competition, prices and access to essential goodsThe monopoly rights granted to patent holders enables them to restrict competitionand charge monopoly prices. Proponents of IP point to the need for innovators torecoup 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 thepatent holders, who make excessive or even exorbitant profits by over-chargingconsumers excessively high prices, even after taking account of the need torecoup research costs. In order for policy makers to be able to judge whether thebalance is struck, or how far it has been missed, it is important to be able to obtaindata on costs and prices from the companies that hold the patents.In medicines, the effect of patent monopolies on prices is demonstrated by datathat compare prices of patented/branded and generic products; the prices of thesame product sold in different countries; and the prices of raw materials used in 25
  31. 31. producing medicines in the open competitive market and in transfer-pricingpractices of TNCs. The following are some conclusions.(i) Prices of branded or patented products are often far higher than prices ofgenerics. A comparison of HIV/AIDS medicines in 2001 show that the US price of3TC (lamivudine) by Glaxo was US$3,271 per patient per year while the Indiangeneric producer Cipla’s price was $190. For viramune (nevirapine), the brandedproduct was sold in the US for $3,508 while the Cipla generic price was $340.21(ii) When generic competition is introduced, prices of the patented product will fall.For example, the drug simvastatine was sold in branded version in Malaysia(where there was no generic competitor) for $1050 per 100 units; in India the samebrand was sold for $18 as there was a generic competitor which was sold for $11.22In Brazil, when the government started producing generic versions of AIDS drugs,the prices of equivalent branded products dropped by 79%.23(iii) When a drug company sells the same product in different countries, itdifferentiates the prices according to “what the market can bear”. Where alternativeor generic medicines are available, a branded product is usually priced lower; thesame brand will sell at higher price levels in countries where there is nocompetition. The same brand zantac was sold cheaply in India ($2 for 100 tablets)because it faced generics competition. It was sold at $3 in Nepal, $9 inBangladesh, $30 in Vietnam, $37 in Thailand, $55 in Malaysia, $61 in Sri Lanka,$63 in Philippines and $183 in Mongolia. It was also sold at $23 in Australia, $77in Canada, $196 in Chile, $132 in El Salvador, $150 in South Africa and $97 inTanzania.24(iv) TNCs practice transfer pricing in the trade of raw materials used in the drugs,raising the cost of medicines in developing countries. A study in Pakistan foundthat TNCs exported raw materials to their subsidiaries in Pakistan at much higher21 Kavaljit 200122 K. Balasubramaniam 200223 Medicins sans Frontieres 200124 Health Action International 1998 26
  32. 32. prices than the prices of the same raw materials if purchased from the openinternational market at competitive rates. In the case of a drug produced by aGerman company, the price for raw materials charged to the company’s subsidiaryin Pakistan was $11,092 per kg whereas the competitive international price was$320, a price difference of 3,360%. An Italian company charged its Pakistansubsidiary for raw materials at a price 7,044% more than the international marketprice.25(v) Some surveys show that drug companies can charge more in developingcountries than in developed countries for the same branded products. Forexample, in 1998, retail prices of 10 out of 13 commonly used drugs were higher inTanzania than in Canada; the average retail prices of 20 commonly used drugs in10 countries of Central and South America were all higher than the average retailprices of the same drugs in 12 OCED countries.26(c) Patenting of life forms -An example of abuse of the patent system is in the patenting of biologicalresources and the misappropriation of these resources and associated traditionalknowledge. The patenting of these resources can lead to monopolization of theseresources by corporations mainly of developed countries, thereby affecting thecompetitiveness of developing countries.TRIPS thus oblige WTO members to grant patents for micro-organisms and non-biological and micro-biological processes for the production of plants and animals.There is no reason why these have been singled out for patentability, whereasmembers are given the discretion to prohibit patents on plants and animals, and onbiological processes.(d) Agriculture, biological resources and traditional knowledgeBefore TRIPS, developing countries were able to deal with agriculture, food andgenetic resources in their own way. Several countries excluded agriculture and25 Health Action International 199426 Health Action International 1998 27
  33. 33. food from IP protection. However, TRIPS Article 27.3(b) provides for protection ofplant varieties by a patent, a sui generis system or a combination of both.In some of those countries where there are patents on plant varieties, farmers arebeing prosecuted for alleged violation of IPRs. These developments could bereproduced in developing countries in the future.A report27 how American farmers have been impacted by litigation arising from theuse of patented genetically engineered crops produced by Monsanto. The reportnotes that, to date, Monsanto has filed lawsuits against 147 American farmers andthe company has a staff of 75 devoted solely to investigating and prosecutingfarmers. The report expresses concern that in its quest to be the source for staplecrop seeds in the US and around the world, the company will overturn centuries-old farming practices through lawsuits. The largest recorded judgment that wasfound thus far in favour of Monsanto as a result of a farmer lawsuit isUS$3,052,800. Farmers have paid an average of US$412,259 for cases withrecorded judgments. Many farmers have to pay additional court and attorney feesas well as costs of the company.The study found that farmers even have been sued after their fields werecontaminated by pollen or seed from someone elses genetically engineered crop;when seed from a previous years crop has sprouted, or "volunteered," in fieldsplanted with non-genetically engineered varieties the following year; and when theynever signed Monsantos Technology Agreement but still planted the patented cropseed. In all of these cases, because of the way patent law has been applied,farmers are technically liable. It does not appear to matter if the use was unwittingor if a contract was never signed.According to a press report28 Tennessee farmer named Kem Ralph spent fouryears in jail for saving and replanting Monsantos Roundup Ready soy seed in1998 and he also had to pay the company 1.8 million dollars in penalties. The27 Center of Food Safety (2005), USA28 Inter Press Service 14 January 2004) 28
  34. 34. report says that even if a farmer decides to stop using Monsanto seeds, the GEplants self-seed and some will spring up of their own accord the following year.These unwanted "volunteers" can keep popping up for five or more years after afarmer stops using the patented seeds. Under U.S. patent law, a farmer commitsan offense even if they unknowingly plant Monsantos seeds without purchasingthem from the company. Other countries have similar laws.The reports above show a trend in developed countries that may be replicated inother countries, including the developing countries, should these countries alsoadopt particular systems of plant varieties protection.Developing countries that do not want to allow patents for plant varieties may wishto introduce their own version of sui generis protection, which provides for therights of farmers. However, there may be pressures placed on them to accept acertain definition and model of a “sui generis system” for plant varieties protection.These pressures may be partly caused by the lack of clarification as to theflexibility that Members, especially developing country Members, may have ininstituting their own sui generic system of protection.(e) Patents and the transfer and use of technology -It has been argued that higher standards of IP can lead to transfer of technology asforeign firms would be encouraged to invest in developing countries and make useof their technologies. However, there is also a counter-argument that foreign firmsthat have obtained patents in developing countries are able to make inroads andprofits in these countries without having to produce the patented products there, asthey can import the products and sell them at monopoly prices.On the other hand, there are several ways in which a strong IPR regime can hinderaccess of developing countries to technology.29 Obstacles to technology transfermake it difficult for developing countries and their firms to upgrade productivitywhich is necessary for them to compete successfully. They thus impedecompetition.29 Khor 2002: pp.87-101 29
  35. 35. Firstly, a strict IPR regime can discourage research and innovation by locals in adeveloping country. Where most patents in the country are held by foreigninventors or corporations, local R&D can be stifled since the monopoly rightsconferred by patents could restrict the research by local researchers. Strict IPRprotection, by its apparent bias, may actually slow the pace of innovation indeveloping countries, and increase the knowledge gap between industrial anddeveloping countries. In such situations, the IPR system favours those who areproducers of proprietary knowledge, vesting them with greater bargaining powersover the users.30 The report31 also provides analysis and examples of how thepatent system might inhibit research and innovation."The proposed changes to the IPR policies of developing countries have raised anumber of important issues. One of the most important of these is the likely impactof these changes on a developing countrys ability to undertake research anddevelopment in agriculture. We are particularly concerned about the impact of astrong IPR system on research aimed at the development of new plant varietiesand genetically engineered plants."32The research in this area is dominated by firms in developed countries, while publicsector research institutions (both international and national) are very weak. Theadoption of an IPR system which includes patents for biotechnology basedtechniques and products will be extremely detrimental to local research.As study of cotton and rice research in India has shown, most of the importanttechniques and genes used in the development of genetically engineered plantsare already owned by firms in developed countries. As these patent rights are notapplicable in developing countries, local researchers are able to undertakeresearch on local problems. However, once these rights become applicable indeveloping countries, research and its commercialisation will face serious problems.30 Oh 200031 CIPR report (2002: pp.126-130)32 Dr Gahuur Alam (1999) 30
  36. 36. Secondly, a strict IPR regime makes it difficult for local firms or individualresearchers from developing or making use of patented technology.Thirdly, should a local firm wish to "legally" make use of patented technology; itwould usually have to pay significant amounts in royalty or licence fees. As pointedout earlier, TRIPS increases the leverage of technology-suppliers to charge ahigher price for their technology. Many firms in developing countries may notafford the cost. Even if they could, the additional high cost could make theirproducts unviable. Moreover, there could be a large drain on a developingcountrys foreign exchange from having to pay foreign IPR holders for the use oftheir technology. Many developing countries with serious debt problems will beunable to afford to pay the cost of using the technologies.Fourthly, even if a local firm is willing to pay the commercial rate for the use ofpatented technology, the patent holder can withhold permission to the firm, orimpose onerous conditions, thus making it impossible or extremely difficult for thetechnology to be used by the firm. Patent holders can refuse to grant permission tocompanies in the South to use the technologies, even if they are willing to paymarket prices; or else the technologies may be made available at high prices (dueto the monopoly enjoyed by the patent holders). Companies in the South may notafford to pay at such prices, and if they do their competitiveness could be affected.POLICIES AND METHODS TO PRIORITISE COMPETITION PRINCIPLES INRELATION TO IPThere are several measures that countries can take to give higher priority tocompetition principles in relation to intellectual property. Below is a discussion onsome of them.(a) Limit the granting of IP according to correct criteriaThe wrong granting of IP extends monopoly rights needlessly or to the wrongparties, and thus widens the extent of anti-competitive behaviour and marketdistortions. Perhaps the most important measure to promote competition principlesvis-à-vis IP is that governments institute policies that enable or ensure the 31
  37. 37. appropriate granting of IPRs and that the proper conditions are set (for examplewith regard to duration of patent, copyright, etc). The nature of appropriateness ofthe grant should be in accordance with the need to attain the right balancebetween the need for incentives for the right holder, and society’s need for accessand use of the inventions.A useful set of guidelines is provided in report33 which states that the underlyingprinciple in developing country legislation should be to aim for strict standards ofpatentability and narrow scope of allowed claims, with the objective of:  limiting the scope of subject matter than can be patented;  applying standards such that only patents which meet the requirements for patentability are granted and that the breadth of each patent is commensurate with the inventive contribution and the disclosure made;  facilitating competition by restricting the ability of the patentees to prohibit others from building on or designing around patented inventions;  providing extensive safeguards to ensure that patent rights are not exploited inappropriately; and  Considering the suitability of other forms of protection to encourage local innovation.The report also provides details on the implementation of each of the objectives.The duration to be given to patents, copyright and other IP should be appropriate inthat it be sufficient to enable the innovator to recover the costs of research andinnovation but not so much as to enable excessive profits. Prices can be regulatedto ensure that the right of consumers to access to essential goods and services isrespected.(b) Providing for and making use of exceptions, exemptions and limitations -There should be policy space, especially for developing countries to have adequateprovisions for exceptions, exemptions and limitations to IP in accordance withdevelopment needs and requirements, and the rights to access of essential goods andservices.33 CIPR (2002: p.49, p.114) 32
  38. 38. Where such exceptions and limitations exist or are allowed in international lawssuch as TRIPS, developing countries should make use of them. This would reducethe extent of monopoly and increase the extent and scope of competition in theeconomy, as well as catering to the fulfilment of rights and access to essentialgoods and services.Organisations like WTO, WIPO and other UN agencies should provide technicalassistance to developing countries on how to make use of the exceptions,exceptions and limitations allowed by international laws, by incorporating them indomestic law and thereafter in practice.Existing international laws should be examined for whether the exceptions,exemptions and limitations are adequate in providing the necessary balance, andto allow the fulfilment of rights and access to essential goods and services. Thereview should then result in the appropriate clarifications and amendments.Negotiations for new IP-related treaties or new provisions or amendments toexisting treaties should fully take these factors into account. Bilateral and regionaltrade/economic arrangements should not have TRIPS-plus provisions.(c) The proper design and implementation of flexibilities -Besides exceptions, international frameworks should also contain adequateflexibilities especially for (but not limited to) developing countries to enable or evenencourage them to take measures that may be required to offset IPRs that aregranted. Such measures are meant to uphold the principles of competition andmeeting the need of access to essential goods and services.Among these safeguard measures are compulsory licensing, parallel importationand government and non-commercial use. Technical assistance should beprovided in (i) raising the knowledge of developing countries and their institutionsabout their existence, rationale and use, (ii) instituting them in national law and (iii)implementing these measures.The existing international treaties should also be examined for their adequacy in 33
  39. 39. providing for these safeguard measures, and clarifications or amendments made tostrengthen these where needed. Negotiations for new treaties should fully take intoaccount the need for adequate safeguards. Bilateral and regional trade andeconomic arrangements should not contain provisions that restrict the flexibilitiesthat are allowed by international treaties such as TRIPS.At the national level, governments should review existing legislation to fullyincorporate the flexibilities that are allowed, and then institute policies andmechanisms to implement them.(d) Competition principles and legal provisions in laws relating to IP and beyondPro-competition principles and measures that exist in IP-related internationaltreaties should be fully recognized and appreciated and technical assistanceshould be provided to developing countries to enable them to be aware of theseand to incorporate them where possible in national legislation, policy and practice.For example, Article 8.2 of TRIPS under general principles states that appropriatemeasures (consistent with the agreement’s provisions) may be needed to preventabuse of IPRs by right holders or the resort to practices which unreasonablyrestrain trade or adversely affect technology transfer. While licensing is a legitimateactivity of IPR holders and in most cases can be seen as pro-competitive inlegitimizing access to technology to third parties, these activities may also be “anti-competitive where they are a mere sham for a cartel arrangement, where theyrestrict competition between technologies that are economic substitutes for oneanother or where they exclude new technologies from the market.”34Section 8 of TRIPS on “Control of anti-competitive practices in contractuallicenses” has an Article 40 that recognizes that some licensing practices orconditions pertaining to IPRs which restrain competition may have adverse effectson trade and impede technology transfer and dissemination. Article 40.2 says thatnothing in the agreement shall prevent members from specifying in their legislation34 Roffe (1998) 34
  40. 40. licensing practices or conditions that abuse IPRs, having adverse effect oncompetition, and a member may adopt appropriate measures to prevent or controlsuch practices, including exclusive grant-back conditions, conditions preventingchallenges to validity and coercive package licensing, in light of relevant laws andregulations of that member. Article 40.3 also provides for consultations andcooperation among members (including through supply of non-confidentialinformation) to deal with IPR owners that are undertaking anti-competitive practicesin violation of a requesting member’s laws.Several developed countries have laws or regulations that hold certain anti-competitive practices as per se unlawful.35 The US Antitrust Guidelines for theLicensing and Acquisition of IPRs 1995 states that among the restraints that havebeen held per se unlawful (by courts in the past) are bare price-fixing, outputrestraints and market division among horizontal competitors, as well as certaingroup boycotts and resale price maintenance. To determine whether a particularrestraint in a licensing arrangement is given per se or rule of reason treatment, theagencies will assess whether the restraint will contribute to an efficiency-enhancingintegration of economic activity.The EC in its Technology Transfer Block Exemption Regulation in general has 8categories on its blacklist including restrictions relating to price or output,competing markets, exports to territories within the common market, customerallocations, R&D activities or full grant-backs of licence improvements.36Some Commonwealth countries, following the UK, have a provision in their patentlaws that certain anti-competitive practices in patent licences are automaticallydeemed to be null and void. For example, Australia’s Patents Act 1990 hold invalidany conditions that restrict the licensee from purchasing or using a product orprocess supplied by the licensor’s competitors or that requires the licensee toacquire a product not protected by the patent from the licensor; in addition theAustralian Trade Practices Act 1974 specifically prohibits 5 activities: anti-35 Watal 2001: pp.304-30936 EC, Technology Transfer Block Exemption Regulation, 240/96, (effective 1996) 35
  41. 41. competitive agreements (including price fixing and exclusionary provision), misuseof market power, exclusive dealing, resale price maintenance, mergers andacquisitions with a substantial lessening of competition.According to the above regulations, the mentioned features in contractual IPlicences are anti-competitive per se and thus deemed unlawful in general; thus itwould not require a case-by-case examination to determine whether the mentionedactivities are anti-competitive.Following the example of developed countries, developing countries should specifyanti-competitive conditions in IPR licences to be per se null and void. As seenfrom the above examples, there is leeway for countries to determine what licensingconditions can be considered to have anti-competitive effects per se and thisflexibility should be retained. However, as pointed out37 in many cases it is not therestrictive nature of IPR licences that are a cause of concern but the outrightrefusal to transfer technology without other cross licensing arrangements, to whichdeveloping country enterprises may have no access. Also, the question as towhether refusal to deal or license a patent by the right holder can be considered apatent misuse, has to be clarified. It has provides a useful account of the evolutionof international negotiations in and outside the TRIPS Agreement, on restrictivepractices, and their implications for interpreting and implementing TRIPS.38There are other provisions in TRIPS that deal with competition issues. Forexample, Article 31 on the use of patents without authorization of the right holder,has a sub-paragraph (k) relating to anti-competitive practices. If a compulsorylicence is granted to remedy a practice determined after judicial or administrative tobe anti-competitive, the obligations in subpara (b) (that before a compulsorylicence can be given, efforts have to be made to obtain a voluntary licence) and insubpara (f) (that a compulsory licence has to predominantly for the supply of thedomestic market) are waived. Moreover “the need to correct anti-competitivepractices may be taken into account in determining the amount of remuneration in37 Watal (2002: p307)38 Roffe (1998) 36
  42. 42. such cases” and authorities can refuse termination of authorization if and whenconditions which led to such authorization are likely to recur. Developing countriesshould include this pro-competitive safeguard provision and measure in theirnational legislation and policy.Generally, it would be important for developing countries to incorporate the pro-competition principles and elements in their national laws and regulations relatingto IP. Moreover, they should establish provisions within national competition lawand regulations that prohibit anti-competitive practices in IP-related licences, asreferred to above.The process of economic reform in India started in earnest in 1991, when theregime of license and control began to be dismantled. Sometime after this processbegan, but rather lately, the Government turned its attention to having a genuinecompetition law. In a free economy, there could be market failures, and enterprisescould form cartels or abuse their dominance. Adam Smith (to quote his words)wrote of the ‘wretched spirit of monopoly’ in which ‘the oppression of the poor mustestablish the monopoly of the rich’.Thus liberalization is incomplete unless it is complemented by a competition watchdog that can discipline players that seek to undermine the market for individualadvantage. This wisdom has in fact compelled almost 100 countries to rewrite orfreshly enact a competition law, and set up a modern competition authority.The Indian Government set up of a high level committee to study the matter; afterconsidering its report and the suggestions from trade, industry and others, a newCompetition Act was enacted in January, 2003. This Act is a modern piece ofcompetition legislation moulded on the pattern of similar laws in the world. It coversthe usual three fields: 1. anti-competitive agreements, 2. abuse of dominance, and 3. regulation of mergers and acquisitions.In addition, it mandates undertaking competition advocacy. 37
  43. 43. The Competition Act marks a conscious departure from the previous Monopoliesand Restrictive Trade Practices Act (MRTP Act). The MRTP Commissionrepresented the regime of license and control, and it became an anachronism inthe new economic order. According to the Preamble, the Competition Act is forestablishing a Commission which is to prevent anti-competitive practices, promotecompetition, protect the interests of consumers and ensure freedom of trade; theAct specifically makes these the duties of the Commission. This is very differentfrom the purpose of the MRTP Act which was to control monopolies, defined interms of size; the Competition Act punishes behaviour, not mere size. There areother critical differences between the new Act and the MRTP Act; for example theCompetition Act clearly defines and penalizes cartels, regarded as the mostpernicious form of competition violation; the Commission can impose heavypenalties; it has extra-territorial jurisdiction and can additionally enter intoarrangements with overseas competition authorities; it incorporates a leniencyprogramme, and so on. Overall, the two bodies and the two laws are poles apart intheir philosophy, tenor and thrust.India is the only major economy in the world without a fully functional competitionauthority, which is an unfortunate fact. Meanwhile, the Indian economy and itsconsumers are losing out, and the gainers are those who may be happily profitingat public and national expense. It must be the common hope of all who areconcerned about the health of the Indian economy that this exercise will end thelegal uncertainty and will enable the Competition Commission to start its regulatoryand adjudicatory work in full measure, sooner rather than later.39The creation of “packages” of patents by a company around a given technology orproduct has become increasingly common. In the pharmaceutical field, forinstance, ten or more patents are often acquired around the same activeingredient, even after it has already fallen into the public domain. The accumulationof patents may be the result of different patent strategies. As examined40, packagepatents may be used:39 Speech of Mr Vinod Dhall, Member, Competition Commission of India, CUTS InternationalConference on “Moving the Competition Policy Agenda in India”, 31 January-1 February, 200540 Rubinfeld and Maness (2005), 38
  44. 44. - to inappropriately extend market power from legitimate patents claims toillegitimate patents;- to coerce a party into licensing patents that it might have chosen to avoid ordesign around (especially when the licence fee is not dependent on the number ofpatents);- to reduce a competitor’s incentive to challenge individual patents since as “thecost of challenging patents increases with the number of patents included in thebundle, a firm may have an incentive to include weak patents in the package”;- to misuse patents if the bundle is used “to extend a firm’s monopoly power fromthe “space” covered by a strong patent to the space encompassed by strong andweak patents together”Compulsory Licences to Remedy Anti-Competitive Practices –Compulsory licences can be used, both in the context of IPRs and of competitionlaws, to remedy anti-competitive practices. Article 31(k) of the TRIPS Agreement,explicitly provides for the granting of such licences. Unlike other compulsorylicences allowable under the Agreement and following the previous US practice, inthe case of anti-competitive practices:(a) there is no need to previously negotiate a voluntary licence with the patentowner;(b) the need to correct anti-competitive practices may be taken into account indetermining the amount of remuneration;(c) the compulsory licensee is not subject to the limitation imposed by Article 31;(d) the licence shall be predominantly for the supply of the domestic market of themember granting it. 39
  45. 45. Chapter (V) Conceptual framework covering important terms andtheir meaning etcThe concept of unfair competition is very wide since any conduct objectivelycontrary to good faith is deemed to be unfair. The law includes amongst such formsof conduct Laws of confusion and deception, gifts which lock consumers intocontractual obligations or which create confusion as to price, and Laws ofdenigration, comparison, imitation, exploitation of another’s reputation, breaches ofconfidentiality, incitement to breach of contract, infringement of laws ondiscrimination and dumping.Competition laws all over the world are primarily concerned with the acquisitionand/or exercise of market power and its abuse. The term “market power” isvariously known as “dominant position”, “monopoly power” and / or “substantialmarket power”. 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. By responding to demand for goods and services with lower prices and higher quality, competing businesses are pressured to reduce costs, innovate in processes and products, invest in technology and better managerial practices and increase productivity. This process leads to achievement of static, dynamic as also resource/allocative efficiencies, sustainable economic growth, development, and poverty alleviation. Competition is not an end unto itself, rather a means to achieve economic efficiency and welfare objectives. Importantly, competition is not automatic, and requires be promoting, protecting and nurturing through appropriate regulatory frameworks, by minimising market restrictions and distortions, and provision of related productive inputs such as infrastructure services, finance, human capital etc. However, a Competition Policy has to be evolved to imbibe the principles of competition in various endeavours of the Government, of course in 40
  46. 46. alignment with the national strategic objectives, alongwith social, environmental, public safety, and other considerations. The expression “Competition Policy” means government measures, policies, statutes, and regulations including a competition law, aimed at promoting competitive market structure and behaviour of entities in an economy41. Competition Law is but a sub-set of the Competition Policy. The Raghavan Committee had observed that “Competition law must emerge out of a national competition Policy, which must be evolved to serve the basic goals of economic reforms by building a competitive market economy.”The World Trade Organisation (WTO) defines competition policy as: “the fullrange of measures that may be used to promote competitive market structuresand behaviour, including but not limited to a comprehensive competition lawdealing with anti-competitive practices of enterprises”. World Bank also provides adefinition of competition policy as: “government measures that directly affect thebehaviour of enterprises and the structure of industry. An appropriate competitionpolicy includes both: (a) policies that enhance competition in local and nationalmarkets, and (b) competition law, also referred to as antitrust or antimonopoly law.” Competition Policy is a broader term which includes all government policies and laws whereas competition law is specific statute with a pre- defined mandate to adjudicate on violation(s) of the law. In the case of India, the Competition Act, 2002 deals with anti-competitive agreements such as price fixing, bid rigging, joint boycotts, etc; abusive practices undertaken by dominant entities such as predatory pricing, abusive conditions of supply, etc, and regulation of combinations. It would be seen that a competition law is a regulatory instrument to check the prevalence of anti-competitive practices whereas a competition policy is a proactive and positive effort to build a competition culture in an economy.41 Several agencies such as the World Trade Organisation (WTO), the World Bank, UNCTAD etc have attempted to define the terms competition policy.WTO (1999), “The Fundamental Principles of Competition Policy: Background Note by the Secretariat” Working Group on the Interaction between Tradeand Competition Policy WT/WGTCP/W/127 41
  47. 47. The Act defines the expression “dominant position (dominance)” in terms of aposition of strength enjoyed by an enterprise, in the relevant market in India, whichenables it to:  operate independently of the competitive forces prevailing in the relevant market ; or  affect its competitors or consumers or the relevant market in its favour.It is the ability of the enterprise to behave/act independently of the market forcesthat determines its dominant position. In a perfectly competitive market noenterprise has control over the market, especially in the determination of price of theproduct. However, perfect market conditions are more of an economic “ideal” thanreality. Keeping this in view, the Act specifies a number of factors that should betaken into account while determining whether an enterprise is dominant or not.Dominance has been traditionally defined in terms of market share of the enterpriseor group of enterprises concerned. However, a number of other factors play a role indetermining the influence of an enterprise or a group of enterprises in the market.Factors to determine dominant position:  market share,  the size and resources of the enterprise;  size and importance of competitors;  economic power of the enterprise;  vertical integration;  dependence of consumers on the enterprise;  extent of entry and exit barriers in the market;  countervailing buying power;  market structure and size of the market;  source of dominant position viz. whether obtained due to statute etc.;  social costs and obligations and contribution of enterprise enjoying dominant position to economic development.The Commission is also authorized to take into account any other factor which itmay consider relevant for the determination of dominance. 42
  48. 48. ABUSE OF DOMINANCEDominance is not considered bad per se but its abuse is. Abuse is stated to occurwhen an enterprise or a group of enterprises uses its dominant position in therelevant market in an exclusionary or/and an exploitative manner.The Act gives an exhaustive list of practices that shall constitute abuse of dominantposition and, therefore, are prohibited. Such practices shall constitute abuse onlywhen adopted by an enterprise enjoying dominant position in the relevant market inIndia.Abuse of dominance is judged in terms of the specified types of acts committed by adominant enterprise alone or in concert. Such acts are prohibited under the law. Anyabuse of the type specified in the Act by a dominant firm shall stand prohibited.Section 4 (2) of the Act specifies the following practices by a dominant enterprisesor group of enterprises as abuses:(i) directly or indirectly imposing unfair or discriminatory condition in purchase orsale of goods or service;(ii) directly or indirectly imposing unfair or discriminatory price in purchase or sale(including predatory price) of goods or service;(iii) limiting or restricting production of goods or provision of services or market;(iv) limiting or restricting technical or scientific development relating to goods orservices to the prejudice of consumers;(v) denying market access in any manner;(vi) making conclusion of contracts subject to acceptance by other parties ofsupplementary obligations which, by their nature or according to commercial usage,have no connection with the subject of such contracts;(vii) using its dominant position in one relevant market to enter into, or protect, otherrelevant market. 43