The author of this post is Rahul Bajaj, our first SpicyIP Fellow for 2016-17.
In what will come as a huge relief to agricultural biotechnology companies, the Karnataka High Court has stayed the Central Government’s order dated March 8th, 2016, which slashed the royalty fee that agriculture biotechnology companies like Monsanto charge for the genetic modification of cotton seeds by a whopping 74%.
As we’ve noted on this blog before, the Ministry of Agriculture issued a price control order on the 7th of December, 2015, which envisaged the imposition of a maximum sale price on the sale of Bt cotton as well as the fixation of trait value that biotechnology companies charge for the purpose of genetically modifying the cotton seeds that are produced by Indian seed manufacturers.
Pursuant to Clause 5.1 of this Order, the Ministry on March 8th fixed the maximum sale price of a 450 gram packet of the BG-I variety of Bt Cotton at Rs. 635 and Rs. 800 for the BG-II variety. More importantly, the Order completely foreclosed the possibility of any trait value being charge for the BG-I variety and fixed the trait value for the BG-II variety at Rs. 49 per packet.
As a result, the Association of Biotechnology-Led Enterprises (“ABLE”), an industry representative of agricultural biotechnology companies, filed a petition in the Karnataka High Court, contending that the fixation of trait value was legally untenable. More specifically, ABLE contended that Section 3 of the Essential Commodities Act, upon which the price control order is founded, does not empower the government to fix the price of discrete components of an essential commodity such as license fee that comprise the final sale price; the Government can only fix the maximum sale price of the commodity itself.
Agreeing with the petitioner’s contention, the Court, while referring to the grant of stay on the fixation of trait value by a single judge of the Andhra Pradesh High Court, held: “Though a detailed consideration on that aspect of the matter would be required, prima facie it is seen that the trait value is not one of the components to be included for fixing the price.”
Noting that such a restriction would unduly impede the contractual freedom of seed manufacturers and biotechnology companies, the Court held: “it (fixation of trait value) would be a matter between the first petitioner its members including the second petitioner and their manufacturers based on the agreements entered into amongst themselves.” At the same time, the Court also made it clear that the Order cannot be construed in a manner that would render its laudable object redundant and held that the maximum sale price fixed by the Order would continue to remain in force.
While the wider ramifications of this prima facie determination by the Karnataka High Court on the several legal battles that this issue has spawned remain to be seen, there are at least 3 immediate effects that it is likely to have.
First, this order is likely to play a significant role in allaying the well-founded fears of biotechnology companies about the Indian Government’s misuse of its wide powers to prevent the full exploitation of patented technology through the adoption of clandestine modalities. Indeed, at a time when Monsanto has publicly declared that it is re-evaluating its India business on account of the Government’s arbitrary and potentially destructive interventions, this order is likely to weather the storm to a considerable degree.
Second, this order lends further credence to the argument that has been repeatedly made by critics of the Price Control Order to the effect that The Essential Commodities Act cannot, by any stretch of imagination, be so construed as to vest in the government the power to regulate the licensing fee charged by patentees, in the existence of compulsory licensing provisions in the Patents Act for ensuring affordable access to patented technology and the Competition Act for preventing the arbitrary fixation of licensing fee by monopolists.
Finally, this order will hopefully make the Government recognize the importance of following a transparent, consultative and fair approach for regulating the licensing of patented technology, even if such regulation is for the noblest of objects.
By staying the arbitrary reduction of trait value of the BG-I variety from Rs. 123 to 0 per packet and of BG-II from 183 to 49, the Court has sent a powerful signal. Now the onus is on the Government to act on it while being cognizant, not just of the interests of India’s 8 million impoverished cotton farmers, but also of private companies without whose ingenuity and constant innovation the Government’s dream of doubling farmers’ income in 5 years will remain just that.
Quite interesting to see the views on Compulsory Licensing/ Government interference differs depending on the product. When it comes to Big Pharma, we all rail up against the Govt. allegedly privately assuring USIBC to not issue compulsory licenses under s.84, but when it comes to an equally important, if not more so, governmental measure of cutting down the royalty rates charged by these hugely powerful ( And in the case of Monsanto, malevolent) Bio-tech companies, we are ready to defer to their better judgement? While I understand the need for transparency, isn’t the end goal quite productive? Also I don’t think your article quite established the nexus between not slashing royalty rates greatly, and doubling of farmers’ income. What is the correlation?
Hi Harshvardhan,
Thank you very much for your thoughtful comment.
First, I think you are conflating two distinct issues. On the issue of the Government’s private assurance on compulsory licensing, the criticism is founded upon the fact that the Government is surreptitiously giving away a right to access medicines at affordable prices that is vested in the citizens of India by the Patents Act. To my mind, it can be nobody’s argument that generic manufacturers of medicines should always be granted compulsory licenses without the appropriate authority applying its mind to whether the grant of such a license would be apposite in a given case.
The argument is that the system for making such determinations should be fair, transparent and predictable, and anything that undermines the fairness of the process should be criticized.
Similarly, while I would not go so far as to describe Monsanto in the manner in which you have described it, I certainly agree that the government is obligated to take appropriate measures to make cotton seeds available at affordable prices to farmers. However, again, such measures cannot be taken in an arbitrary and opaque manner as has been done in this case. So, in sum, the criticism in both cases is founded upon the idea that every stakeholder must feel that the system is fair and transparent and the government cannot surreptitiously change the rules of the game as they have done in both these cases.
Second, the nexus is not between the non-slashing of royalties and doubling farmers’ income; the nexus is between creating a regulatory environment that fosters research and development and the fruits of such research and development helping the government achieve the objective of doubling farmers’ income. By slashing royalties in an arbitrary manner, the government is sending out a wrong signal to companies like Monsanto whose innovations have helped farmers function in a far more robust and cost-effective manner. In other words, if there was no Monsanto, there would be no Bt cotton. If there was no Bt cotton, the crops of farmers would continue getting destroyed on a large scale because of the bollworm. If the crops of farmers continued getting destroyed, how would they be able to earn more income?