A group of automobile manufacturers were recently fined a total sum of Rs. 25.45 billion for the practices that they adopted in the sale of their spare parts (read the 215 page order of the Commission here). The worst affected in the group was Tata Motors with a penalty of about Rs. 13.4 billion with Maruti Suzuki coming in next with a penalty of Rs. 4 billion. The grievance of the informant was that the spare parts for the cars that these automobile manufacturers were not available in the open market and were only sold at exorbitant prices at the outlets of these manufacturers making it extremely difficult for consumers to carry out repairs on their vehicle. From a competition perspective, this order appears to be fairly well reasoned by the Commission and is in keeping with the recent trend of high value fines being doled out by the Commission, like the Rs. 6 billion penalty against DLF. In this post, I will attempt to highlight the IPR issues involved in the order (read IndCorpLaw’s analysis on the Competition bit here). Long post to follow (read from page 185 onwards of the order)
The manufacturers had set up the defence that S.3(5) of the Competition Act allows them to lay down reasonable conditions as are necessary for the protection of rights conferred by the various IP statutes, and that these measures did in fact constitute a reasonable condition that were necessary for the protection of the various IP Rights. They contended that they had rights granted to them by virtue of the patents that subsisted in the spare parts, their designs and the copyright over the drawings that produced those designs.
The Commission in an interesting analysis breaks down the section into its composite elements and observes that in order for an informant to avail of the defence under S.3(5):
- the IPR under the statutes mentioned therein must be conferred or might be conferred upon the Opposite Party (OP) in the near future; and
- the conditions for the protection must be reasonable and must be necessary for the protection of the IPR.
With regards to the Patent protection for their spare parts and the corresponding exemption under S.3(5) of the Competition Act, the Commission observes that the documentation provided by the OPs does not demonstrate that they had patents granted (or to be granted) in India corresponding to the spare parts. They also observed that the Technology Transfer Agreements (TTA) by which these companies operated in India, do not actually confer the IPR to these companies in India, and the nature of IPR being territorial, implies that they do not have these rights in India at all and therefore fail the first requirement under S.3(5). The Commission insists that these foreign registered IPR must be registered in India or their registration must be imminent in order to attract the exemption under S.3(5).
The order goes on to make a much welcomed observation subsequently in its order, which I am going to reproduce here verbatim for its full effect, “….the Commission is not the competent authority to decide, for example if a patent/trademark that is validly registered under the applicable laws of another country fulfils the legal and technical requirement or is capable of being registered under the Indian IPR statutes, specified under section 3(5) of the Competition Act. Such a mandate would lie with the IPR enforcement agencies of India.”
The Commission then began to address the more complex issue of IP that does not require registration for protection like copyright. The manufacturers argued that the copyright in the drawings used to produce the designs for the spare parts and the technical manuals vested in them and that since there was no registration requirement, could be exercised by them. The Commission skirts the analysis of whether the copyright does exist (although it did quote the DG’s opinion that by virtue of S.15, the copyright does not exist; I would point the DG’s attention to Microfibres v. Giridhar though, that might disagree; the Commission also ignored the aspect about the manuals) and instead proceeds to a curious analysis of whether the measures imposed were reasonable or not.
Here, I say the analysis is curious because in the opinion of the Commission, the sale of finished products does not in any way compromise the IPR in the products. In so noting, in my opinion the Commission is somewhat restricting the application of S.3(5) to those instances where there is trade in the IPR itself as opposed to trade in the finished products (this is the only situation that I can conceive of, readers are welcome to point out other scenarios in the comments). It states that, “So the question that one should ask is: can the IPR holder be able to protect his IPR, even if such restriction was not present” and answers this by observing that, “All such products are finished products and selling them in the open market does not necessarily compromise the IPR such products.” The Commission extends a similar interpretation to the diagnostic tools used and observes that their IPR is also not compromised by the sale of their finished products. I believe here that the Commission didn’t notice that there exists a large grey market of counterfeit and fake parts of substandard quality. While it is possible to argue that the sale of spare parts in the open market would drastically reduce their price, and therefore would reduce the demand for these grey market products, however, considering it is the sale of these parts to workshops and garages that would then resell it to customers, the potential to pick apart a spare part and create a more “genuine” spare part is immense. A close example is chargers and accessories of mobile phones that are sold in the open market. The price differential between original, boxed chargers and a counterfeit one (or an engineered one) maybe quite small indeed, to the tune of Rs. 100 sometimes, but a large section of society, either in ignorance or intentionally opt for these counterfeit ones. While I’m not advocating the sale of these parts in restricted and extremely expensive outlets, a complete disregard for these conditions, is perhaps unfair. Some leeway should perhaps be granted to the manufacturers to contain this. The Commission also spoke no further about the technical manuals and the like, over which the manufacturers had claimed a copyright.
There were some fears that were conveyed to us by e-mail, as to how this opinion opened the floodgates for valuation of IPR by the Commission. Here the Commission is undertaking an analysis under S.4(2)(a)(ii) of the Competition Act, under which the imposition of an unfair price by a dominant player in the market would constitute abuse of dominance (see pages 157-167 of the order). I believe that these fears are slightly misplaced with this decision, because unlike in certain orders like the Intex or Micromax SEP investigation orders, they do not consider the underlying IPR itself but the price of finished products. This is very much within the jurisdiction of the CCI because in implying that the Commission cannot venture into a price analysis when IPR is involved forecloses their opportunity to undertake any form of price analysis, because every product is made up of some form of IPR or the other. This would entirely be depriving the jurisdiction of the Commission under S.4(2)(a)(ii). Perhaps, if the Commission had attempted to value the IPR itself, maybe these fears would have some cause. Readers are welcome to offer some more perspective on whether these concerns are in fact well founded.
In conclusion, I think this order provides some much needed clarity to the law surrounding S.3(5) of the Competition Act and should be a welcome decision. Meanwhile, some automobile manufacturers have been granted a stay on their order by some High Courts (read here and here) and are considering a Compat appeal.