Consentia on Multidisciplinary Research

Paradoxical Relationship: Intellectual Property Rights and the Competition Policy

Intellectual property can be best termed to be the creative work of the human intellect and its extrapolations. The driving force for its protection is to promote the progress of science and technology, arts, literature and other creative works and to encourage and reward creativity. Nations give statutory expression to the economic rights of creators in their creation and to the rights of the public in accessing those creations. The contribution of intellectual property is sine qua non for the industrial and economic development of a nation. It is pertinent to argue that the prosperity achieved by the developed nations is, to a large extent, the result of exploitation of their intellectual property. Intellectual Property Right allows people to assert ownership rights on the outcomes of their creativity and innovative activity in the same way that they can own physical property[1].

Competition Policy on the other hand, is regulatory in nature, it aims at creating a market place filled with healthy competition, it aims at ensuring a really free and competitive market and to assure consumers low prices and high quality that flows from the effective competition. In order to achieve the abovementioned, it is necessary to curb abuse of market power. The process of competition has to be supported by regulations which preclude any attempt at subversion of free trade and competition. Competition cannot be left unfettered in the belief that it will drive out unfair trade practices. By enactment of a competition policy, the government takes the responsibility for assuring competition among private firms without otherwise interfering in their price and output decisions.

The premise of intellectual property rights is that recognizing and rewarding the innovators and creators of intellectual work, augurs well for industrial and technical progress as it spurs invention and innovation. It also infuses efficiency and stimulates competition in new products, new markets and new technologies which is the life-breath of market driven economies; the consequential positive impact of which is felt by consumers as well.

On the other hand, competition law and policy also has a vital role to play in market based economies, as it ushers an environment of free and fair play of market forces. It carves space for new entrants in the market by putting fetters on monopolistic anti-competitive behaviour of dominant enterprises and by checking collusive tendencies. It functions on the touchstone of consumer welfare and economic efficiency.

Intellectual property rights create monopolies, while a competition law battles monopolies. The convergence of these two domains opens up scope for redefining the way things work in the present market place in a developing economy such as India. These two domains complement each other when examined through their convergence, but at the same point this convergence needs to be monitored and regulated so as to prevent abuse of such market place position and ensure free markets.

Therefore, a common thread runs through Competition policy and Intellectual Property Law as they intersect at the point of fostering innovation, efficiency, consumer welfare and economic growth. Yet, an inevitable chasm exists in the sphere of “monopoly rights” which is the essence of IPRs. Concomitantly, the abusive exercise of these very monopoly rights is antilogous with the immutable tenets of competition policy. The monopoly rights as granted by IPRs could lead to substantial market power (though not necessarily) which may be used to annihilate competition in the market by “exclusionary conduct” (refusal to deal) by dominant enterprises. Likewise, anti-competitive behaviour could be in the form of “collusive activities” of a combination of IPR holders. IPRs also afford an opportunity to the right holders to manoeuvre the prices in a manner which enable them not only to recoup the R&D costs but also reap unprecedented profits. These are but only a few examples of how IPR propelled market power could trample competition.

An indisputable function of law is to strike an efficacious balance between the conflicting interests and to reconcile the evident anomalies in the socio-economic system. This is precisely what Competition Law and Policy in various jurisdictions strives for. The constant and inevitable tension between IPRs and competition policy is sought to be resolved in various major jurisdictions with the aid of flexibilities in law, guidelines and through judicial interpretations. This paper delves into the methods and the approach adopted by countries like USA, Canada, Australia, Japan and the European Union in order to understand how the legal procedures bridge the gap between the two divergent areas of law. An understanding of the nuances of law and its applicability in various countries shall facilitate an analysis of the ‘lessons that can be derived’ for India as a vibrant and growing economic power[2].

The interaction between intellectual property rights (IPRs) and competition law is predominantly rated by the non-rivalrous and non-excludable nature of intellectual property, which causes the problem of “appropriability”[3].  The creation of this prima facie “inherent tension”[4] is due to IPR holders being granted statutory rights to essentially control access to the intellectual property and charging monopoly rents for the use of the IPRs—something apparently in conflict with competition law, which attempts to curtail such market power[5].

Historically, this conflict has been overplayed, right from the early days of the 20th century, when granting patents in particular brought about paranoia regarding monopolies[6] and patent licensing was heavily regulated[7].  However, following the expansion of IPRs to fill out the available market space and a gradual dissolution of the paranoia of automatically associating all IPRs with competition law violations (aided in no small part by the emergence of the law and economics analysis of competition law and IPRs spearheaded by the Chicago school[8]), this view has been tempered.

Convergence between Anti-Trust Law and IPR: The Position in the USA

The US constitutional mandate of “promoting the progress of Science and Useful Arts”[9], forms the foundation of copyright and patent laws. There has been a meticulous effort in the United States to stimulate artistic creativity and innovation, which is evident in the creative judicial exposition of Intellectual Property Laws. The courts have more often than not, manifested their desire for broad and expansive interpretation in the realm of IPRs, resulting in patents being granted to ‘computer software’,[10] ‘live, human made micro-organism’[11] and ‘business method’[12] as well and on the other hand laying an equal emphasis on anti-trust law which aims to create an environment of free and fair trade, while improving economic efficiency and consumer welfare.

The Anti-trust law in United States is primarily ingrained in the Sherman Act of 1890 and the Clayton Act of 1914. Section 1 of the Sherman Act prohibits ‘every contract, combination…or conspiracy, in restraint of trade or commerce’[13].  Under this provision some agreements in restraint of trade, such as price fixing cartels and market allocation agreements are treated as illegal per se. Most agreements, however, are judged under the rule of reason[14], which calls for evaluation of purpose, power and competitive effects[15].

Section 2 of the same Act prohibits conduct that ‘monopolizes, or attempts to monopolize any part of trade or commerce’. However, under this provision, claims of monopolization and attempts to monopolize are always judged under a fully driven rule of reason. Purpose is inferred from a limited set of conduct identified as predatory, including certain pricing below cost and unjustified refusals to deal[16].

Against the backdrop of anti-trust laws, there seems to be a constant struggle between individual’s inalienable right to property (including IPRs which confer the right of monopoly and exclusivity) and the general freedom of trade and commerce. The apparent tension between IPRs and anti-trust laws is subsumed under the modern approach of treating IPRs and Competition Policy as complementary to each other and the underlying theme is to strike an appropriate balance between the two. Perhaps the most profound impact has been that of “innovation” economics, which exhorted the anti-trust authorities to take a flexible and comprehensive view of both intellectual property and anti-trust law. If one perforates through the records of economic history in the United States, one may perceive that the dawn of twentieth century witnessed a perceptible shift from the sluggish economics of “price” competition to the economics of “innovation” competition, primarily under the influence of Joseph Schumpeter who asserted that ‘it is competition by innovation that truly improves social welfare’.

“The competition that counts is competition from the new commodity, the new technology, the new sources of supply, the new type of organization…competition which commands a decisive cost or quality advantage and which strikes not at the margin of the profits and the outputs of the existing firms but at their foundations and at their very lives.” He argued that to survive in capitalist competition, incumbents must withstand ‘a perennial gale of competition’ in the form of ‘the new consumer goods, the new methods of production or transportation, the new markets, the new forms of industrial organization.”

With the growing realization that competition which matters most is the competition on merits and that “innovation” is the key to sustained economic growth and consumer welfare, the anti-trust authorities began to highlight the analogy between competition policy and intellectual property rights rather than the potential tensions between the two. This is explicit in the anti-trust guidelines[17] jointly issued by the Department of Justice and Federal trade Commission which pretend that there is an inherent innovation nexus between IPRs and Competition Policy.

In the case of Eastman Kodak Co. v. Image Tech. Inc.[18], the Supreme Court emphasized that power gained through some natural or legal advantage such as patent, copyright or business acumen can give rise to liability if “a seller exploits his dominant position in one market to expand his empire into the next”. In this case, the plaintiff won its monopolization claim that Kodak’s practice of refusing to sell patented parts to independent service providers was an unreasonable restraint of trade that violated Sherman Act section 2. A perusal of the above decisions makes it amply clear that in US, apart from mere “ownership” of an IPR, some additional exclusionary conduct is essential for the grant of compulsory and involuntary license.

In the case of United States v Terminal Railroad Association[19], a group of railroads which jointly owned the only railroad switching yard across the Mississippi River at the important city of St. Louis prevented competing railroad services from offering transportation to and through that destination. The Supreme Court required the railroads group to give access to non-members; and concomitantly held that such conduct constituted both an illegal restraint of trade and an attempt to monopolize.

Lessons for the Developing Country: Indian Perspective

The requirements of “unfettered competition” and “innovation” are indispensable for attaining sustained economic growth. As we have already seen, the balancing of competition with innovation is an extremely difficult task since there is an apparent tension between the canons of IP law and Competition policy. While IP law aims at providing protection to the creators and innovators of intellectual work, by conferring exclusivity upon them; competition policy strikes at the ‘exclusivity’ which hampers free and fair trade.

This tension between IPRs and competition policy is sought to be resolved by the competition authorities in major jurisdictions such as US and EU. The law in these countries developed and matured over the years to accommodate the interests of both innovation and competition. However, competition law and policy is in its nascent stage in most of the developing countries and the interface between IP law and competition policy poses a challenge to these nations. There is also a realization among these countries that innovation is the key for the economy to reach an optimum stage of development. Therefore, the primary concern is the pro-competitive treatment and exercise of IPRs.

The Indian economy is active with a lot of energy and enthusiasm especially after the dawn economic reforms in 1991. The focus on liberalization, globalization and privatization made it expedient for the government to concentrate on the aspects of competition and innovation equally. Therefore, after 1991, law also kept pace with the shifting economic paradigms as was reflected by the amendments brought about in the MRTP Act. To face the newer challenges posed by a vibrant economy like ours, it was vital for us to evolve new strategies of growth while cherishing the ideals of economic democratization manifested in the constitution of India. The Competition Commission of India was established with the aim of fostering competition, preventing practices having an adverse effect on competition, protecting consumers’ interests and ensuring freedom of trade by various participants in the economy.

At the same time, India also tailored and accustomed its IP laws to be in consonance with the TRIPS agreement. One can easily infer that equal thrust on innovation and competition is a matter economic expediency for India. However, the battle between IPRs and competition cannot be resolved unless a clear cut policy approach is laid out.

The Competition Act 2003 explicitly carves out exceptions in favour of the exercise of intellectual property rights. Section 3 (5) of the act contains the following provisions:

Nothing contained in this section shall restrict –

(i) 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 upon him under –

(a) the Copyright Act, 1957

(b) the Patents Act, 1970

(c) the Trade and Merchandise Marks Act, 1958 or the Trade Marks Act, 1999

(d) the Geographic Indications of Goods (Registration and Protection) Act, 1999

(e) the Designs Act,2000

(f) the Semi-conductor Integrated Circuits Layout-Design Act, 2000

(ii) the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export.

Section 3 of the Indian Competition Act prohibits anti-competitive agreements between enterprises and lists out the conduct which is deemed to have an adverse impact on competition. Such conduct includes – determining purchase or sale prices, limiting production or supply, allocating geographic markets, bid rigging or collusive bidding etc. However, the exception as created by clause (5) of the section reflects the policy of striking a balance between the legitimate interests of IPR holders and competition in the market.

The advanced countries and major trading blocs like US and EU have resorted to tools such as compulsory licensing in order to mitigate the impending perils of abusive conduct of dominant enterprises. The applicability of such a provision in India cannot be precluded since the Indian Patent Act makes an explicit provision for compulsory licensing.

This would be more relevant in the realm of pharmaceuticals where competition in the generic drugs may be foreclosed by dominant undertakings. Compulsory licences can be used, both in the context of IPRs and of competition laws, 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[20]. It is pertinent to mention that the power to enact laws on compulsory patent licensing arises from several international agreements such as the World Intellectual Property Organization (WIPO) Paris Convention for the Protection of Industrial Property[21], the relevant provisions of which were incorporated into the World Trade Organization (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS)[22].

TRIPS provides a scope to the Member States to smoothen the creases created by potential conflict between competition policy and IP law. Articles 8, 31 and 40 deserve a special mention. Members may “adopt measures necessary to protect public health and nutrition and to promote the public interest in sectors of vital importance to their socio-economic and technological development.”[23] Further, TRIPS handles compulsory licenses as an exception to the agreement’s minimum requirement that all Member States afford a patentee a right of exclusivity during the complete patent term. TRIPS portend a set of circumstances that establish a floor at which any Member State is allowed to issue compulsory license. The compulsory licenses that are allowed fall into two categories—where there is an overriding public interest or where the patent rights are being used in an anticompetitive manner[24].

In the realm of national laws, following are the examples that specify when Compulsory licenses can be issued[25]:

  • Refusal to enter into a voluntary licensing agreement on reasonable commercial terms (e.g. in the German and Chinese patent laws);
  • Public interest (e.g. in the Swedish law);
  • Public health and nutrition (e.g. provisions in the French law)
  • National emergency or situation of extreme urgency;
  • Anti-competitive practices on the part of patent holders;
  • Dependent patents;
  • No or insufficient working of the invention in the national territory.

Thus, it is evident that compulsory licensing can potentially combat some of the most malicious circumstances including anti-competitive practices. For our purpose such activities as having a dampening effect on competition are the main focus of attention. India can undoubtedly tailor its laws to suit the peculiar requirements. The Competition Commission of India may use the potent tool of compulsory licensing to countervail the harmful effect of IPRs on competition. This approach must be subject to the TRIPS provisions which entail that the compulsory license should be issued on individual merits and the IPR holder must be appropriately remunerated etc.[26] Therefore India can fully use the flexibilities allowed by the TRIPS Agreement to determine the grounds for granting compulsory licences to remedy anti-competitive practices relating to IPRs[27].

Further, the doctrine of “essential facilities” can be made use in India to combat abusive conduct of dominant enterprises. Developing countries (like India) may draw interesting lessons from the application of the concept of refusal to deal and the essential facilities doctrine in developed countries. However, there are no rigid models and developing countries can elaborate their own approaches on the matter in order to respond to their public interests.[28]

In countries like US and EU the essential facilities doctrine has been used as a potential tool for granting of compulsory licences so as to allow third parties to have access to IP protected products and technologies. The plethora of case law that has developed in this area throws light on some of the conditions and circumstances under which the doctrine of essential facilities is applied to IPRs. The most frequently enunciated pre-requisites are – refusal to deal without any objective justification; exclusion of competition in secondary market by denying access to essential facilities which are deemed to be industry standards and are essential for producing new goods for which there is consumer demand; extending and perpetuating monopoly in other markets in ways different from normal development of monopoly power (example – unlawful tying). Under the India law, these could fall within the ambit of Section 4. The Competition Act, 2002 (S.4) prohibits the abuse of dominance by enterprises. Section 4(2) (c) articulates that abuse of dominant position consists in indulging in practice(s) resulting in denial of market access. Further, section 4(2) (e) elucidates that such abuse could also be in the form of using the dominant position in one relevant market to enter into, or protect, other relevant market. These provisions are very much in line with the principles adopted by EU and US courts in cases involving refusal to deal and essential facilities. However, India can evolve its own principles with regard to application of essential facilities doctrine without dampening the growth of innovation and enterprise. The specific area of concern could be the pharmaceutical industry and the refusal to grant third parties access to essential technology (such as to manufacture a medicine) may provide sufficient grounds[29]. From the developing countries’ perspective, it is important to note that South African Competition Commission held that pharmaceuticals firms (GlaxoSmithKline and Boehringer Ingelheim) were indulging in anti-competitive conduct by abusing their dominant positions in their respective anti-retroviral (ARV) markets, by denying a competitor access to an essential facility[30]. An inherent proclivity can be felt in terms of similar conditions prevailing in developing countries. Therefore, considering the expediencies in these countries, pharmaceutical products may well be treated as essential facilities. Likewise, developing countries like India could also adopt the EU approach wherein the law casts a general duty upon dominant firms to supply the essential facilities to competitors (unlike US). In some cases, even if the facilities are not “essential” the denial of access by a dominant firm is nonetheless scrutinized from the perspective of abusive conduct, considering its impact on competitors in secondary market. The essence lies in adopting the “rule of reason” approach with regard to cases involving “refusal to deal”, which would lend flexibility to the application of essential doctrine. Pertinently, in India, S.4 (2) (e) of the Competition Act is the vanguard for preventing abusive conduct by IP owners and ushering competition in secondary markets.

Apart from the above measures, it is indeed essential to maintain the level of granting patents in the context of novelty, non-obviousness and industrial applicability. The American practise of granting patents very liberally has ignited a profound debate as it has been contended by critics that frivolous and low quality patents end up creating monopoly in products or processes which are obvious. Thus, India can draw timely lessons from US in context of granting patents to only genuine inventions by strictly implementing the patentability criterion.

In our opinion a set of guidelines for the application of competition laws to intellectual property rights are an indispensable requirement for maintaining an efficacious balance between IPRs and competition policy. The guidelines may be in the form of broad policy objectives or they may be intricately detailed. The most suitable approach would be to synthesise the best features available in various jurisdictions in order to cater to the Indian requirements. Any other gaps may be filled by a case to case approach applying the rule of reason.

[1] Compendium of Patent Statistics, 2005, Issued by OECD.

[2] Competition Commission of India, Research Report, available at http://cci.gov.in/images/media/ResearchReports/req1_20081103135559.pdf, last accessed on March 5, 2014.

[3] K. Maskus, Competition Policy and Intellectual Property Rights In Developing Countries: Interests In Unilateral Initiatives And A WTO Agreement at p. 10, available at http://siteresources.worldbank.org/DEC/Resources/84797-1251813753820/6415739-1251814020192/maskus.pdf, last accessed on March 4, 2014.

[4] Ibid at p. 10.

[5] A. Ng, D. Liang and P. Waters, Intersect between Intellectual Property Law and Competition Law, available at http://www.chinalawinsight.com/2008/10/articles/corporate/antitrust-competition/intersect-between-intellectual-property-law-and-competition-law, last accessed on February 27, 2014.

[6]  See E Bement & Sons v. National Harrow Co. 186 US 70, 91 (1902) and US v. Masonite Corp 316 US 265,

280 (1942).

[7] See Motion Picture Patents Company v. Universal Film Manufacturing Company 243 US 502 (1917). See also H. Johannes, Technology Transfer under EEC Law—Europe between the Divergent Opinions of the Past and a New Administration: A Comparative Law Approach, Fordham Corporate Law Institute (1982), at p. 65.

[8]  See generally R. Bork, The Antitrust Paradox (1978) and R. Posner, Antitrust Law: An Economic Perspective (1976).

[9] Under Article I, section 8, clause 8 the Congress is granted power ‘to promote the progress of science and useful arts, by securing for limited times, to authors and inventors, the exclusive right to their respective writings and discoveries’.

[10] Diamond v Diehr 450 U.S. 175 (1981)

[11] Diamond v Chakravarty 447 U.S. 303 (1980)

[12] State Street Bank & Trust Co. v Signature Financial Group, Inc. 149 F.3d 1368 (Fed. Cir. 1998)

[13] Section 1, Sherman Act – “Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal.”

[14] The rule of reason, first enunciated in Standard Oil case (1911) implies that a fact based approach should be adopted for the purpose of evaluating the reasonableness of the alleged anti-competitive conduct. It is in the form of weighing the pros and cons of the purpose and eventual consequence of the conduct and if the pro-competitive effects outweigh the anti-competitive harm, then the conduct is deemed reasonable.

[15] Rudolf Peritz, pg 190, The Interface between Intellectual Property Rights and Competition Policy, edited by Steven Anderman (Cambridge University Press 2007).

[16] ibid

[17] United States: 1995 Antitrust Guidelines for the Licensing and Acquisition of Intellectual Property, available at http://www.usdoj.gov/atr/public/guidelines/0558.pdf, last accessed on February 21, 2014.

[18] 504 US 451, 482-3 (1992)

[19] 224 U.S. 383 (1912).

[20]  Carlos M. Correa, Intellectual property and Competition law – exploring some issues of relevance to developing countries, available at http://www.iprsonline.org/resources/docs/corea_Oct07.pdf, last accessed on March 2, 2014.

[21]  Paris Convention, Article 5, states that “[e]ach country of the Union shall have the right to take legislative measures providing for the grant of compulsory licenses to prevent the abuses which might result from the exercise of the exclusive rights conferred by the patent, for example, failure to work.”

[22] “Compulsory Licensing in the United States, China, Japan, Germany & India” Article by Raj S. Davé, Jon Wood, Susan K. Finston, Zhongyi Tao, Zheng Zha and others , available at http://www.ipo.org/AM/CM/ContentDisplay.cfm?ContentFileID=6484&FusePreview=Yes, last accessed on February 28, 2014.

[23] Article 8 of TRIPS.

[24] Article “Compulsory Licensing under TRIPS” by Christopher A. Cotropia available at http://www.cotropia.com/bio/Chapter26–Cotropia–PatentLawHandbook.pdf, last accessed on March 4, 2014.

[25]  www.kommers.se/…/Rapport%20The%20WTO%20decision%20on%20compulsory%20licensing, last accessed on March 4, 2014.

[26] Article 31of TRIPS lays out conditions to be met for compulsory licensing.

[27] Supra 22.

[28] ibid

[29] ibid

[30] ibid

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