Patents And Competition Policies: What Is The Degree Of Compatibility?

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INTRODUCTION

The basic objective of any competition policy is to ensure that there is legal entry/ exit of firms and smooth functioning of companies without the exercise of any malpractices. Some prominent anti-competitive practices are collusive bidding, abuse of dominant position, refusal to provide goods, exacting excessive prices for products etc. which adversely affect the competition in a particular market. There is a very close link between intellectual property rights and the competition laws or policies of a land. Where on one hand, intellectual property rights complement the competition policies by safeguarding the rights of the inventor in the market from exploitation by other competitors; on the other hand, the competition policies prevent any abuse of rights at the hand of the intellectual property owners.

PATENT AND COMPETITION LAW

On the face of it, the two arms of law that are closely related to forces in the market, patents and competition laws, seem to be in conflict with each other. It appears that one arm of law creates and protects monopoly power, while the other seeks to proscribe it.[1] However, this discernible conflict has been invalidated over the years as the sole purpose of both these systems of law is to promote innovation, industry and competition in a market for customer welfare.

Though Patents are necessary for furthering efficiency and development in a market, it also has great potential of having a negative effect on the competition and consumers in certain circumstances.  A Patent holder who exercises significant power in a market can tend to misuse it’s position and fortify it further in order to expand and conquer the entire market place, thus, affecting the free and fair competition in the market in an unpropitious way. Such a malevolent conduct can take the form of vexatious litigation, tie-in arrangements, restraints on challenging the validity of patent and vertical restrictions that adversely affect competition. As a result, a patent holder becomes like any other abusive firm in the market, engaging in anti-competitive practices, except that such a holder has an exclusive right over its invention which it can use to thwart competition in the market in contrast to the other companies which do not possess such a right. Several scholars have highlighted problems in the patent system itself, the primary problem being overprotection that may interfere with innovation rather than promoting it.[2]

The Anti-trust authorities are not concerned with the existence of patent rights per se, but only when the exercise of patent rights causes harm to competition.[3] The Competition Commission of India (CCI) was established in 2003 to ‘eliminate practices having adverse effect on competition, promote and sustain competition, protect the interests of consumers and ensure freedom of trade carried on by other participants, in markets in India’.[4]. It was in the case of Aamir Khan v. The Director General[5] that the jurisdiction of the Competition Commission of India (CCI) to deal with cases pertaining to competition law and intellectual property rights was firmly established.

Two main provisions around which the entire framework of the Competition Act revolves are section 3 and 4, which talk about prohibition of agreements that cause appreciable adverse effect on competition and the abuse of dominance by dominant undertaking, respectively. Section 3(5) of the Act explicitly provides for an exemption to Intellectual property rights from the operation of the Act, subject to reasonable restrictions.[6] However, any IPR holder, in an attempt to safeguard its rights, cannot impose any unreasonable conditions and restrictions which would then amount to a violation of The Competition Act. For instance, a patent licensor and licensee cannot enter into an agreement to restrict the production, supply, distribution of the product which would be in contravention of section 3(1) of the Act. Though section 3 provides an exemption to IP, there is no such provision in section 4. As a result, any act of a company in possession of a patent, which amounts to abuse of its privileged position or any condition imposed by such a company which is unreasonable, will in all possibilities be seen as a violation of section 4 of the Act. The reasonability of the conditions will differ from case to case depending on the surrounding circumstances, the position of power of the company, the necessity of the condition imposed and other relevant factors. It is of prime importance to understand that a company which has a patent right over its inventions will definitely have an edge over the other companies existing in the same field. However, until such an IP protected company abuses such an advantageous position, it will not be held liable.

It is only when a patent protection results in more than what is required to safeguard the invention, does it oppose the competition policy. This phenomenon is most common in the software industry, especially the standard essential patents (SEPs) which have emerged as a war zone between protection granted by patents and the competition law. A landmark case in this regard was Micromax Informatics Limited v Telefonakteibolaget LM Ericsson (Publ)[7]in which the relationship between the Patents Act and the Competition Act was discussed extensively.In this pertinent case, Ericsson claimed 1 billion from Micromax claiming infringement of 8 SEPs due to the refusal of Micromax to accept the fair, reasonable and non-discriminatory (FRAND) terms of the former’s technology usage. The parties entered into an interim arrangement, under which, Micromax paid royalties to the Applicant till the patent infringement suit was finally decided.  In the mean time, Micromax filed a complaint with the CCI alleging that Ericsson is abusing its dominant position by charging exorbitant rates of royalties from the former and by failing to provide its industry essential patents to handset makers under the FRAND terms. On investigation, CCI found Ericsson guilty of violation of section 4 of the Act against which, the defendant filed a writ petition in the Delhi HC. On 30th March 2016, the High Court of Delhi[8] concluded that in case of an irreconcilable conflict between the Competition Act and the Patents Act, the jurisdiction of CCI to entertain complaints for abuse of dominance in respect of patent rights cannot be ousted. It further rejected the contention of the petitioner that the dispute being the subject matter of a civil suit cannot be tried by the CCI.

The Patent Act itself contains provisions to ensure that the competition in the market is not disrupted. It has been drafted in a way to encourage innovations while simultaneously complying with the market rules for upholding competition. For instance, in order to ensure that the patentee does not misuse its right by refusing to grant licenses on reasonable terms, Section 84 of the Act, providing for “Compulsory licenses”, was created.

The interplay of patent rights and competition policies differ from country to country. In the USA, the patent holder’s right to exploit its patent to the fullest is recognized, constrained only by market demand. [9] In contrast to this, the competition authorities in the EU have a mandate to intervene when a firm abuses its dominance by engaging in excessive pricing in relation to its patent right. 

NEED

There are several aspects pertaining to the connection between patents and competition that require clarity. The first and foremost in this regard is the jurisdictional issue. In matters involving issues pertaining to both the Patents Act and Competition Act and where there is an overlap for such a matter to be decided by a civil court and CCI, it has to be ascertained whether the CCI should hear the case first or the civil court, in order to avoid multiplicity of proceedings. Further, the extent to which the CCI can intrude in the matters concerning patent rights also has to be fixed.  The intervention has to be based on the understanding of the intricacies of innovation, patents and competition and not merely on market effects and economic theory.  This is necessary to avoid unreasonable restrictions on the rights of a patentee, defeating the entire purpose of granting an intellectual property right, in the first place. In addition to this, as in section 3(5) of the Competition Act, an exception for IPR in section 4 also needs to be formulated to deter courts from drawing baseless conclusions that any company in possession of a patent is bound to abuse its privileged position. Apart from these, need of the hour is to strike a proper balance between the contracts concerning patents and their impact on competition. The large number of patent holders might result in the tragedy of anti-commons, chronic under-use of patented resources and in the creation of a monopoly.[10] It may also hinder innovation and the resultant benefits to consumers. Patent rights and Competition policies are not inherently in contradiction to each other instead they complement each other and all that is required is,the right amount of balance to be struck between the two.

In sum, experience shows that too high or too low protection of both patents and competition may lead to trade distortions. A balance has thus to be found between competition policy and patent rights, and this balance must achieve the goal of preventing abuses of patent rights, without annulling the reward provided for by the patent system when appropriately used.

Author:  Anwesha Singh, Legal Intern at Global Patent Filing. In case of any queries please contact/write back to us at support@globalpatentfiling.com.

References:

[1]United States v Westinghouse Electric Corp. 648 F.2d 642, 646 (9th Cir 1981).

[3]Case 262/81 Coditel v Ciné-Vog [1982] ECR 3381; Kolstad (n 9).

[4] The Competition Act, 2002; S.18

[5] 2010(112)Bom LR 3778

[6] The Competition Act, 2002; S.3(5)

[8]Telefonaktiebolaget LM Ericsson (Publ) vCompetition Commission of India & Anr.(Publ) (n 69) [135]