We’re pleased to bring to you an insightful guest post by Dr. Vikas Kathuria on the new section 4A proposed by the Draft Competition (Amendment) Bill, 2020, which would extend the IP related exception to abuse of dominance cases also. Dr. Kathuria is a Senior Research Fellow at the Max Planck Institute for Innovation and Competition, Munich and was formerly a faculty member at School of Law, Benett University. He has many publications to his credit and he is a regular contributor to policy discussions at the interface of IP and competition law.
The Ministry of Corporate Affairs has invited public comments on the draft Bill and we would encourage our readers to submit their comments before the specified deadline i.e. March 6, 2020 as some of the provisions, including Section 4A, may have serious consequences on competition in India.
The Proposed Section 4A of the Competition Act: Protection to Holders of Intellectual Property Rights
Dr. Vikas Kathuria
Last month, the Ministry of Corporate affairs came up with the draft Competition (Amendment) Bill, 2020, pursuant to the recommendations of Competition Law Review Committee. Among several other new provisions, the Bill proposes a new Section 4A that reads as follows.
“Nothing contained in section 3 or section 4 shall restrict the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred under…(a) the Copyright Act, 1957 (14 of 1957);
(b) the Patents Act, 1970 (39 of 1970);…”
Section 4A is not a brand new addition as such, as it extends the similar provision to Abuse of Dominance (AoD) cases that was hitherto applicable to anti-competitive agreements in the form of Section 3(5) as a ‘balancing’ provision. A closer look at the existing Section 3(5) or at the newly proposed Section 4A clarifies that it is not a blanket exemption to IP rights from the application of competition law as such, rather it is a declaration to affirm the right of an IP holder to safeguard her intellectual property. This seemingly benign declaration, however, may create new problems in the AoD cases related to intellectual property.
The Relationship between IP and Competition Law
The protection of IP rights is the domain of IP statutes. Competition law is concerned with the ex post exercise of this right that may be detrimental to consumers welfare. The Court of Justice of the European Union (CJEU) has made it clear that competition law is applicable against IP rights only in ‘exceptional circumstances’ (see here and here), and not with the ‘normal exercise’ of IP rights. For instance, if a refusal to license deters follow-on innovation, competition law may step in through the provision of compulsory licensing. This way IP law and competition law have a complementary function— competition law may curtail the exercise of exclusivity provided by IP laws if the same is detrimental to innovation. Once again, if an IP right leads to exploitatively high prices, competition law may step in to deter loss to consumer welfare. This is because in such a case the IP right-holder stretches the legal exclusivity beyond incentivizing innovation to reaping supranormal rents. Thus, competition law acts as a second layer of regulation over and above the inherent mechanism in the IP law to ensure competition. The patent exception cases and copyright fair use are examples of IP-inherent competition provisions.
Does the Existing Section 3(5) Serve Any Purpose, If at All?
An IP holder requires some degree of protection and autonomy in a licensing agreement. Thus, it seems that Section 3(5) serves as an assurance to the IP owners against the arbitrary use of competition law in any licensing agreement. In one particular cases, K Sera Sera Digital Cinemas Limited v. Pen India Ltd. and Others, where the allegation was that the licensor engaged in a selective distribution agreement, the CCI relied upon Section 3(5), to justify the right of a copyright holder to deny distribution of its product to those who had a history of infringing IP. A closer look at the factual matrix makes it clear that the right-holder could not have been asked to license its product to the delinquent firm even without having recourse to Section 3(5). In a selective distribution agreement, an upstream firm can devise the objective criteria to choose its downstream partners. It is an objectively valid criterion to not license its product to firms that have a reputation of infringing licensor’s IP. In such cases, there is no harm to consumer welfare.
Aside from the cases of outright denial to license IP, even for the assessment of the reasonableness of conditions imposed on licensees, the competitive assessment does not have to necessarily reach out to section 3(5). For instance, in a franchise agreement, a franchisor may require a franchisee to buy the machines and other components, used for the production of a particular product, from the franchisor itself to maintain the quality and protect the trademark. This restraint can very easily be accommodated while assessing Appreciable Adverse Effect on Competition (AAEC) as per the conditions set out in Section 19(3). In particular, such a condition leads to “improvements in production or distribution of goods or provision of services” in the language of Section 19(3)(e). Therefore, in my view, Section 3(5) serves no meaningful purpose at all.
Problems in Abuse of Dominance Cases
While Section 3(5) may not have caused any troubles so far, the extension of a similar provision will lead to enforcement problems. The CCI has followed a rule of reason approach to AoD cases, and unlike Section 19(3) for anti-competitive agreements, Section 4 gives a broader scope to the CCI to assess the anti-competitive effects of an impugned practice. Section 4 allows a party to plead any reasons that may jeopardize his IP right. Thus, any form of ‘balancing’ can be done at the stage of Section 4 itself. Effectively, Section 4A will bifurcate the analysis of AoD assessment between Section 4 and Section 4A. In almost all cases, the dominant firm will resort to Section 4A to justify denial of an IP right or imposition of an unreasonable condition.
For example consider essential facilities cases, where a dominant firm’s IP right has been determined to be an essential facility. A mandatory sharing of that right, in principle, is an infringement of the legal monopoly. Therefore, in such cases, a dominant firm will invariably resort to Section 4A.
Problems seem even bigger for the Standard Essential Patent (SEP) licensing cases. In SEP licensing cases, a patentee can approach a court asking for an injunction to arm-twist a willing licensee to accept unfavorable terms—a hold-up situation and thus also abuse of dominance. In order to strike a balance between the right of a patentee and the right of a licensee, courts have drawn a chronology of acts that the parties must engage in (in the Indian context, see here). If this framework is not adhered to by the defendant (implementer), it can be termed as an ‘unwilling licensee’, resulting in an injunction. Conversely, if the patentee does not adhere to these steps and proceeds with injunction proceedings, its behaviour can be an abuse of dominant position. The proposed Section 4A destroys this rather hard-earned balance and allows the patentee to circumvent the sequence and reach the court for an injunction, facilitating hold-up.
I have shown through limited examples how replicating Section 3(5) for AoD cases will lead to enforcement problems. There can be several other instances where Section 4A will not only distort the analysis but will also lead to enforcement delays. Ironically, CCI is a relatively young regulator tasked to ensure optimal competition in a significantly lucrative market. The effort, therefore, should rather be to simplify the analysis to ensure speedy yet effective enforcement.
It is noteworthy that the EU does not have any similar ‘balancing’ provision with respect to either anti-competitive agreements or abuse of dominance. The absence of such riders has given the European Commission enough scope to develop its analysis and ensure consumer welfare in novel cases involving intellectual property. It is by now known that law should leave sufficient scope to catch novel delinquent behavior made possible by the changes in business models and technology. For all these reasons, Section 4A should be dropped from the proposed Amendment Bill.