Hollow Victory? Delhi High Court Says Patents Act Supersedes Competition Act, with Shaky Reasons

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[Long Post ahead]

Who wins in a conflict between the Competition Act and the Patents Act? That’s been the central bone of contention in two big disputes for almost a decade now. In both disputes, Justice Vibhu Bakhru of the Delhi High Court (DHC) had ordered that the Competition Commission of India (CCI) can intervene in patent licensing disputes under Sections 3 and 4 of the Competition Act – first in 2016 (Ericsson v. CCI) and then again in 2020 (Monsanto v. CCI). However, this has been overturned in a recent order passed collectively in an appeal against 4 orders (two impugning the 2016 order, one against the Monsanto order and another appeal against this order (pdf)  and a writ petition) by a division bench of the DHC in Telefonaktiebolaget LM Ericsson (PUBL) v. Competition Commission of India and Anr. The order states that the Patents Act supersedes the Competition Act insofar as allegations of unreasonable conditions in license agreements, abuse of one’s status as a patentee, the necessary inquiry into these allegations and eventually the relief that can be granted.

Though some predicted the earlier 2016 interpretation would give some comfort to the license seekers in their negotiations, others pointed out the risks of having conflicting opinions from different bodies on the same legal issues. Setting aside the 2016 and 2020 orders, the Court has now clarified that Chapter XVI of the Patents Act (Working of Patents, Compulsory Licences and Revocation) is a “complete code” with regard to patents and anti-competitive practices. The present post will discuss how the Court has drastically stepped away from the earlier decisions and what impact the order can have going forward.

Understanding the Scheme of the Acts

Generally, when faced with conflicting laws, Courts resort to the maxim generalia specialibus non derogant (General law will not override special law). However, what about when both the laws are special, like in the present case? Will the subsequent statute override the earlier one (lex posterior derogat priori)? Taking guidance from earlier case law (Ashoka Marketing Ltd. v. PNB , Gobind Sugar Mills Ltd. v. State of Bihar and CTO, Rajasthan v. Binani Cements) the Court said there are three points to be considered- first, the subject matter in the question; second, the intendment of the statute; and third, whether the scheme and relevant provisions have any indications whereby the legislature must feel one should override the other.

However, instead of discussing these one by one, the Court focused on the second and third factors and went directly to assess the nature and rationale for the powers of both the authorities. 

But before getting into the specifics of the order, let’s take a quick recap of the nature of these legislations. The Competition Act promotes competition in the market by restricting anti-competitive agreements and abuse of market position whereas, the Patents Act promotes innovation by incentivising the inventor with an exclusivity for a specific term, which is subjected to certain qualifiers. Clearly, both the Competition Act and the Patents Act are special Acts, governing specific but intertwining subject matters.

Perhaps considering this intertwining, the Competition Act has carved out an exception for the rights under the Patent Act Section 3(5)(i)(b) by clarifying that the right of a person to restrain infringement or impose reasonable conditions necessary to protect rights under Patent Act will not be regarded as an anti-competitive agreement. However, Section 4, which prohibits abuse of dominant position, does not have such an exemption clause. The CCI  keeps a check on these activities and conducts an inquiry under Section 19 and 26, pursuant to the allegations of an informer. 

Within the Patents Act, Section 83 (b), (c) and (f) contains the general principles which prohibit abuse of patent rights in an anti-competitive manner and in case a patentee is unable to satisfy the “reasonable requirement of the public”, which includes refusal to grant license on reasonable terms to the prejudice of trade and/or industry, Section 84 empowers the Controller to issue a compulsory license pursuant to an application for the same. All the provisions above pertaining to compulsory licensing and revocation fall under Chapter XVI of the Act. Additionally, Section 140 makes it unlawful to insert restrictive conditions within a contract pertaining to the sale of a patented article or in a license to manufacture a patented article or to work any patented process.

Competition Act: Not So Special After All? 

So if there is an inconsistency between the Patents Act and Competition Act on these intertwined matters, which law shall prevail? Section 60 of the Competition Act states that the Act shall have overriding effect i.e. the provisions will have effect notwithstanding any inconsistencies that other laws might have. But then Section 62 clarifies that the provisions of the Act (which was passed in 2002) are to be seen in addition to and not in derogation of the other laws. Supplementing this with the fact that Chapter XVI of the Patent Act, which was introduced via the 2003 amendment, is a subsequent law. Thereby, applying lex posterior derogat priori the provisions of Chapter XVI of the Patents Act will prevail in case of conflict. 

This was also the understanding of the Court in both the 2016 and the present orders. However, in the 2016 order, the Court held that there is no repugnancy or conflict between the two Acts as one of them defines certain rights (Patent Act) and the other prevents abuse of rights (Competition Act). Disagreeing on this, the Division Bench held that there is an overlap between the two laws and held that in terms of anti-competitive agreements and abuse of dominant position, the Competition Act is the general legislation, whereas the Patent Act is a special statute as with regard to anti-competitive agreements and abuse of dominant position by a patentee in the exercise of their rights under the Patents Act. The Court reasoned that by amending the Patents Act and inserting Section 84(6)(iv) in 2003, (which is subsequent to the Competition Act, 2002) the legislature has empowered the Controller to inquire into unreasonable conditions in licensing agreements and abuse of dominant position. Reading this with the exclusion under Section 3(5) of the Competition Act and the Controller’s obligation to consider the abuse of patent rights under Section 83(f) of the Patent Act, the Court held that the provisions of Chapter XVI of the Patent Act is a complete code in itself.

Does the Controller Have the Same Powers as That of the CCI?

This brings up the question of whether comparing the powers and functions of the CCI and that of the Controller under Chapter XVI is a like to like comparison or not.

The division bench held that the factors considered by the CCI against the allegation of anticompetitive agreements and the abuse of dominant positions are “not very different” from the factors considered by the Controller while assessing the application for a compulsory license. The Court further held that the inquiry conducted by the CCI is “nearly identical” to the inquiry by the Controller under Chapter XVI.  For a clearer understanding let’s look at these provisions below :-

Competition ActPatents Act
Section 19 (3)- The CCI here looks at factors to determine if an agreement impacts competition u/s 3. These factors are :- 1) assessment of any barriers to the new competitors; 2) whether the agreement drives existing competition out of the market; 3) whether it forecloses the competition by hindering entry to the market;4) the benefits accrued to the consumers; 5) improvements in the production or distribution of the goods or services, and;   6) promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services.Under Section 84 (6) of the Patents Act, the Controller takes into account the : -1) Nature of the invention, time that has been elapsed and the effort to make the invention work; 2) ability of the applicant to work the invention to public advantage; 3) Capacity of the applicant to provide the capital
Section 19(4) The CCI here looks at factors to determine if an enterprise enjoys dominant position u/s 4. These factors are :-1) Market share and the size of the enterprise; 2) Size and importance of the competitor 3) Economic power of the enterprise over the competitor4) Vertical integration of the enterprise5) Dependence of the consumer over the enterprise6) Whether monopoly is granted by the virtue of being a government company, specific statute or PSU7) Entry Barriers like regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers8) Countervailing buying power9) Market structure and size 10) Social obligations and social costs11) Relative advantage,by way of the contribution to the economic development12) Any other relevant factor

Section 84 (7) of the Patent Act prescribes that reasonable requirement of the public are not deemed to be satisfied when :- 1) By the reason of refusal to license a patent, existing trade or industry or establishment of new trade or industry is prejudiced; The demand for patented goods has not been met adequately; market for export of the patented article is not supplied or developed; establishment or development of commercial activities is prejudiced. 2) If because of the terms imposed by the patentee, manufacture, sale or use of article outside the patent is prejudiced3) If the patentee imposes a condition to provide exclusive grant back, prevention to challenges to the validity of patent or coercive package licensing 4) If the patented invention is not being worked in India on a commercial scale5) if the working of the patented invention in the territory of India on a commercial scale is being prevented or hindered by the importation from abroad
Section 89 explains the general purposes for granting compulsory license, wherein the controller shall exercise the power under 84 to ensure that :- 1) that patented inventions are worked on a commercial scale in the territory of India to their fullest extent; 2) Interest of a person developing an invention is not unfairly prejudiced. 

It is apparent that the purpose of the inquiry by the Controller is to ensure that the patent is available to the public and in doing so the interest of the patentee has to be taken care of. On the flip side the investigation by the CCI need not cater to such sensitivities of the enterprises and even has the power to cancel the impugned agreement and impose fine. Furthermore, to seek a compulsory license under Section 84, an application for a compulsory license can be filed only after 3 years from the date of the grant of the patent.

These factors were specifically noted in the 2016 finding of the Single Judge while noting how the functioning of these two bodies were different. However, the division bench order does not elaborate on the crucial question of how it was able to reach its understanding. This clarification becomes imperative considering that disputes before the CCI on patent matters are not merely about the subject patent(s) but are about maintaining fair competition in the market, which thus requires the CCI to consider a plethora of other factors while issuing its finding/ recommendation.

Are the Orders Passed by the Controller ‘in Rem’ in Nature?

Another finding of the Court where the absence of a clear reasoning is apparent is the finding on in rem  (against the world at large)  vs. in personam (against the specific person) nature of the proceedings by CCI and the Controller. The inquiry and consequent order passed by the CCI is in rem in nature, the order passed by the Controller u/s 84 are in personam in nature. While there are other provisions within Chapter XVI of the Patents Act- (for example Section 92) whereby the license issued is in rem in nature, the conditions for these licenses do not stipulate a “prejudice to commercial activities in India” type condition. This point was raised by the CCI before the bench, to which the Court refused to entertain, citing legislative intent apparent from the subsequent nature of the 2003  Patent Act amendment. However, I am unsure if the legislative intent of having a Competition Act like arrangement can be implied when there is hardly any mention of the statute or its nature in the relevant parliamentary debates. (See here). In fact, this aspect of the ruling has been criticized by Subodh Deo, in this nuanced piece by Sukanya Sarkar for ManagingIP, where he said that the Court went into a literal interpretation without considering the intention of the legislators. 

Is Getting a Compulsory License the Only Way Out Now?  

Considering that the proceedings before the CCI are often lengthy, so much so, that many times parties prefer settling their dispute before the CCI’s finding (as highlighted in Sukanya’s piece above), the order is surely a sigh of relief for the patentees. 

Looking at the vigor with which the Court trusted the independence of Chapter XVI to handle antitrust issues, seeking a compulsory license from the Controller, seems to be the only option left before any aggrieved party. An alternative, as suggested by Sandeep Rathod in the above piece by Sukanya, is that the informant will now have to take an extra effort by separating patent issues from other ones, over which the CCI still has jurisdiction. 

But isn’t there a provision whereby any statutory authority can seek a recommendation of the CCI in case the former’s findings may be contrary to the Competition Act (Section 21)? 

On this the finding of the present order is vulnerable to misinterpretation. Discussing the 2016 order’s finding on Section 21A (which states that CCI must refer to other Statutory Body incase a finding issued by CCI but implemented by the statutory body will be contrary to the Competition Act) and 21, the Court notes that since the Patent Act overrides the Competition Act, Section 21A cannot be used for exercising powers which the Controller would otherwise have. However, the Court then observed that Competition Act’s “sections 21 and 21A are intended to deal with situations where the powers of the Commission are not excluded by other statutes.” which is clearly not the case. Leaving Section 21A aside, Section 21 is a provision that prescribes for “reference by” a Statutory Authority to the CCI on issues that may contradict the provisions of the Competition Act. The provision stipulates that such a reference may be made suo moto by the Statutory Authority, and once the recommendation is received from the CCI, such an authority considers them first and then issues a speaking order on the issues referred. However, by the above finding, the Controller can no longer make such a recommendation and has to issue a finding on antitrust matters by itself. 

This can also impact the legitimacy of the sectoral regulator argument as suggested in the Supreme Court’s decision CCI v. Bharti Airtel, where the Court had held that after a jurisdiction fact is established by the Sectoral Regulator, CCI can intervene. But here the Court seems to have deemed both bodies capable of handling antitrust matters. 

I am not sure if an appeal has been filed against this order (and perhaps one of our more informed readers can drop a comment on that) but it feels like the order stands on a very slippery ground right now and can help with some clarification.    

Thanks to Swaraj for his inputs on the post. 

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