* Assistant Professor of Law and Co-Director of Centre for Innovation, Intellectual Property and Competition (CIIPC). NLU, Delhi, Email: yogesh.pai@nludelhi.ac.in.
Search for other works by this author on: Nitesh Daryanani Nitesh Daryanani Search for other works by this author on:Research Fellow at CIIPC, NLU, Delhi, Email: nitesh.daryanani@gmail.com.
Journal of Antitrust Enforcement, Volume 5, Issue 2, August 2017, Pages 299–327, https://doi.org/10.1093/jaenfo/jnx004
02 May 2017Yogesh Pai, Nitesh Daryanani, Patents and competition law in India: CCI’s reductionist approach in evaluating competitive harm, Journal of Antitrust Enforcement, Volume 5, Issue 2, August 2017, Pages 299–327, https://doi.org/10.1093/jaenfo/jnx004
Navbar Search Filter Mobile Enter search term Search Navbar Search Filter Enter search term SearchThe objective of this article is to examine the CCI's reasoning and approach in patent—related cases, in light of (i) the legislative framework governing competition and patent law in India, (ii) the economic theories that govern the intersection between competition law and patent law, and (iii) the manner in which competition agencies in comparative jurisdictions have dealt with similar agreements and conduct by patent holders. Section 1 of this article deals with an analysis of the distinction between sections 3 and 4 of the Competition Act 2002, in light of the CCI's tendency to conflate issues pertaining to abuse of dominance and evaluation of anti-competitive agreement involving patents. Section 2 deals with constraints on pricing imposed in several CCI rulings. Section 3 deals with non-price licensing restrictions as constituting abuse of dominance. The article concludes by cautioning that CCIs approach in dealing with patent licensing arrangements risks hurting the dynamic nature of competition fostered in highly innovative markets and highlights the urgent need to develop a principle-based approach by focusing on competitive harm in dealing with the conduct of patent holders.
Patents and antitrust law are two bodies of law that closely relate to the working of competitive forces in the market. At first glance, they appear to be in apparent conflict: because antitrust law is concerned with promoting competition while patent law grants inventors a limited period of exclusivity in exchange for disclosing their invention. It may appear that one body of law creates and protects monopoly power, while the other seeks to proscribe it. 1
But this apparent conflict has been debunked over the years. Firms that engage in innovation compete against each other to develop new products and new processes to manufacture existing products to secure the reward of exclusivity that is the essence of a patent. Both systems are intended to act complementarily, as both are aimed at encouraging innovation, industry, and competition. 2
In the European Union, this understanding is adopted by the European Commission in its Guidelines of the application of Article 101 of the Treaty of the Functioning of the European Union to technology transfer agreements. 3
In the USA, the Department of Justice and the Federal Trade Commission share a similar outlook that is reflected in a document titled Antitrust Enforcement and Intellectual Property Rights: Promoting Innovation and Competition. 4
In fact, this view goes back to the 1995 FTC–DOJ Antitrust Guidelines for the Licensing of IP, 5 which succinctly states certain fundamental principles that will guide the Agencies’ approach. These guidelines were recently updated in January 2017 to reflect ‘intervening changes in statutory and case law, as well as relevant enforcement and policy work, including the agencies’ 2010 Horizontal Merger Guidelines’. 6 It is useful to quote these principles verbatim:
(a) for the purpose of antitrust analysis, the Agencies apply the same analysis to conduct involving intellectual property as to conduct involving other forms of property, taking into account the specific characteristics of a particular property right; (b) the Agencies do not presume that intellectual property creates market power in the antitrust context; and (c) the Agencies recognize that intellectual property licensing allows firms to combine complementary factors of production and is generally procompetitive.
The application of these principles complement the acknowledgment that excessive antitrust intervention, curtailing the exercise of this right of exclusivity, may undermine the very incentive to innovate that is the underlying basis of the patent system. 7 An antitrust regime that is trigger happy and unaware of its bounds will result in a marketplace where firms prefer low-cost legal challenges to fight competitors rather than engaging in more expensive dynamic competition. 8
At the same time, while patents are necessary to further dynamic efficiency, the exercise of patent rights may have negative effects on competition. 9 A patent holder that commands substantial market power may tend towards adopting exploitative or exclusionary practices to fortify and/or expand its position in the market, which will adversely impact free and fair competition in the market. Such forms of conduct may not be a legitimate exercise of the patent rights, such as refusal to deal in certain circumstances, sham litigations, tying arrangements, restrictions on challenging the validity of a patent, and vertical restraints that adversely affect competition in the market. In fact, the abusive conduct of a patent holder is no different from any other firm that is operating in the market, except that the patent holder will attempt to use the exclusivity granted by the patent right as a means to restrict or thwart competition in the market or in allied markets. Therefore, giving patent holders a free reign could distort the competitive process of the market. 10
Several scholars have highlighted problems in the patent system itself, the primary problem being overprotection that may interfere with innovation, rather than promoting it. 11 In 2003, the Federal Trade Commission in the USA issued a report calling for significant changes to the patent system to ensure that it fostered, rather than hindering, innovation. 12 Landes and Posner argued that patent rights have greatly expanded because government actors and private firms unflinchingly believed that whatever the reigning free-market ideology said about private property must also be true about intellectual property. 13 Jaffe and Lerner argued that the patent system creates an ‘innovation tax’, because ‘patent trolls’ will impose a tax on true innovators and too many strong patent rights will make cumulative innovation harder. 14 In other words, where one innovation relied on many earlier innovations, strong intellectual property rights may impede innovation. 15 Bessen and Meurer presented evidence to show that the patent system has widely varying effects across various industries, 16 and that it serves to enhance social welfare by providing critical incentives only in the chemical and biomedical industries. 17 Bordrin Levine argue that there is no empirical proof to show a link between a stronger patent system and increased productivity, and that the only discernible effect is that strengthening of the patent system results in more patents. 18
Apart from the patent system’s relationship with innovation, scholars have also highlighted other potential problems like (i) patent thickets that slows innovation due to transaction and litigation costs, 19 (ii) patent holdup that holders of one or few patents in a complex product can extract an exorbitant licensing fee from downstream manufacturers, 20 (iii) royalty stacking that uncoordinated pricing by the holders of patented complementary inputs results in excessive prices 21 and (iv) the role of patent trolls in weakening innovation since ‘nuisance infringement litigation, however, can tax judicial resources and divert attention away from productive business behavior’. 22 In 2011, the US-FTC released a report highlighting how the notice function and remedies in patent law must align with competition. 23 On the contrary, several scholars have also cited evidence of faster innovation and falling prices to suggest that concerns of patent holdup and royalty stacking are not reflected in many industries like telecommunications. 24 Other scholars have termed the recent approach of FTC and DOJ an attack on symmetry principles based on which IP cases were required to be evaluated. 25
Keeping in mind both perspectives, it is vital that a balance is maintained between both systems of law to optimize the outcome of the competitive process. It is apparent that antitrust authorities are not concerned with the existence of patent rights per se, but only when the exercise of patent rights causes harm to competition. 26
In India, the competition law is enshrined in the Competition Act 2002, which replaced the erstwhile Monopolies and Restrictive Trade Practices Act 1969. The need for a new competition law was felt because the MRTP Act 1969 proved inadequate to deal with the growing challenges in a liberalized economy. Therefore, the Government set up a High Level Committee on Competition Policy and Law, which noted that:
An effective competition policy promotes the creation of a business environment which improves static and dynamic efficiencies and leads to efficient resource allocation, and in which the abuse of market power is prevented mainly through competition. Where this is not possible, it requires the creation of a suitable regulatory framework for achieving efficiency. In addition, competition law prevents artificial entry barriers and facilitates market access and complements other competition promoting activities. 27
Therefore, the Competition Commission of India (CCI) was established 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’. 28
Section 3 of the Competition Act 2002 prohibits agreements that cause or is likely to cause an appreciable adverse effect on competition within India, and section 4 prohibits unilateral conduct of a dominant undertaking that amounts to abuse of its dominance. Sections 5–6 deal with anticompetitive effect of combinations.
In the eight years since its constitution, the CCI has dealt with about 200 cases under sections 3 and 4, and has delivered some progressive decisions along the way. In deciding these cases, the CCI has more or less tended to apply the static analysis that focuses on price and output, relying upon economic markers like market share and market foreclosure. There is no doubt that static analysis is widely popular among economists and competition authorities because of its extensive analytical tools and detailed models.
But there is a dearth of guidance on the manner in which the Competition Act 2002 is to be interpreted and administered. Antitrust law is intricately linked with economics, and it is necessary to pay attention to the prevailing circumstances and the underlying economic problems it seeks to address. 29 ‘Legal standards are informed by economics," and "as economics evolves the law may evolve with it.’ 30
The EC in the European Union, and the FTC and DOJ in the USA frequently issue guidelines, studies, and reports that reflect their interpretation of the relevant legislations and their likely approach towards different types of agreements and forms of conduct, such as the EU Guidelines on Technology Transfer Agreements and the FTC–DOJ Guidelines on Licensing of IP mentioned above.
In India, the only comparable document is the Advocacy Booklet on IPRs published by the CCI. 31 However, rather than elaborating the CCI’s approach to different types of agreements and forms of conduct, the Booklet only illustrates different licensing terms that are restrictive or likely to be anticompetitive. The CCI also commissions market research and sectoral studies, but they do not provide authoritative guidance on the approach of the Commission. For example, a study on IP laws and competition law policy was commissioned to IIT Kharagpur in 2015, and the objective of the study was to study the jurisprudence in the field of IP and competition law in the pharmaceutical and chemical industries in India. But the stated summary results of this unpublished study are only that:
there is likely to be a trend to restrict production by exclusive license since the number of exclusive licenses granted by the patent holders has increased in the course of last two years. This also has an adverse impact on the price and ‘affordability’. It is suggested that a comprehensive policy on ‘compulsory license’ may be framed taking in view the gross abuse of dominant position by the ‘patent holder’ and ‘the licensee’. 32
Furthermore, the lack of guidance is reflected in the CCI’s tendency to intervene without any consistent basis or method, highlighting a number of key issues that need to be addressed in light of the teachings of innovation economics prevailing today. Any inconsistencies in the CCI’s approach can have major ramifications on the Indian economy. The CCI must recognize the fact that firms making investment decisions seek clear, predictable rules as to how the intellectual property and competition regimes will operate in tandem. 33 To minimize friction between competition law and patent rights, the contours of legitimate exercise of patent rights must be clear. This is necessary to ensure the promotion of progress, by enabling efficient investment in innovation. 34
Therefore, the objective of this article is to examine the CCI’s reasoning and approach in patent—related cases, in the light of (i) the legislative framework governing competition and patent law in India, (ii) the economic theories that govern the intersection between antitrust and patent law, and (iii) the manner in which competition agencies in comparative jurisdictions have dealt with similar agreements and conduct by a patent holder.
Section 1 of this article deals with an analysis of the distinction between sections 3 and 4 of the Competition Act 2002, in light of the CCI’s tendency to conflate issues pertaining to abuse of dominance and evaluation of anticompetitive agreement involving patents. section 2 deals with constraints on pricing imposed in several CCI rulings. Section 3 deals with non-price licensing restrictions as constituting abuse of dominance. The article ends with a conclusion that summarizes the analysis.
The framework of the Competition Act 2002 revolves around sections 3 and 4: the latter proscribes abusive unilateral conduct by a dominant undertaking, while the former is concerned with agreements that cause or are likely to cause an appreciable adverse effect on competition in India. Section 4 usually entails an analysis of the relevant market to determine whether the firm in question is dominant, and prohibits conduct by dominant firm that is exclusionary or exploitative. It creates a special responsibility on the dominant firm to not engage in conduct that is otherwise permissible for a firm that is not dominant. 35 On the contrary, section 3 provides a non-exhaustive list of agreements that are prohibited if it has an appreciable adverse effect on competition; its application requires an analysis of the factors enumerated under section 19(3) of the Competition Act 2002, which includes exclusionary effects such as creation of entry barriers, market foreclosure, etc.
However, the manner in which these two sections are applied by the CCI is highly uncertain. In Department of Agriculture, Cooperation & Farmers Welfare vM/s Mahyco Monsanto Biotech (India) Limited, 36 which is a case concerning Monsanto’s licensing of its Bt cotton technology, the CCI held that the ‘agreements entered into by Monsanto with the sub-licensees appeared to be causing appreciable adverse effect on competition in the Bt cotton technology market’ and the ‘termination conditions are found to be excessively harsh and do not appear to be reasonable as may be necessary for protecting any of the IPR rights, as envisaged under Section 3(5) of the Act’. 37 Instead of examining Monsanto’s conduct under the standards applicable to unilateral abuse of dominance under section 4 of the Competition Act 2002, the CCI has erred by examining these agreements under section 3 of the Competition Act 2002.
Section 3(1) of the Competition Act 2002, which is modelled on Article 101(1) of the TFEU, states that ‘no enterprise or association of enterprises or person or association of persons shall enter into any agreement … which causes or is likely to cause an appreciable adverse effect on competition within India’. An ‘agreement’ has been defined in the Act to include ‘any arrangement or understanding or action in concert …’. 38 Therefore, a combined reading of these provisions suggests that section 3 is only applicable when an agreement between two parties acting in concert causes or is likely to cause an appreciable adverse effect on competition within India.
To compare with EC jurisprudence, in Bayer AG/Adalat, 39 Bayer had begun reducing supplies to its wholesalers in France and Spain to prevent parallel exports to the UK and preserve its pricing strategy in the UK. The EC held that there existed an agreement between Bayer and its wholesalers in France and Spain that amounted to an agreement violating Article 85(1) of the EC Treaty (now Article 101(1) of the TFEU). The General Court reversed the Commission’s decision, holding that there was no agreement where one person tacitly acquiesces in practices and measures adopted by another, and the fact that the wholesalers maintained commercial relations with Bayer was not sufficient to hold that the wholesalers had agreed with Bayer to restrain exports. 40 On appeal, the ECJ upheld the General Court’s judgment, holding that:
The mere fact that the unilateral policy of quotas implemented by Bayer, combined with the national requirements on the wholesalers to offer a full product range, produces the same effect as an export ban does not mean … that there was an agreement prohibited by Article [101(1)] of the Treaty. 41
Antitrust law in the USA also requires an antitrust plaintiff to establish that both parties to an agreement share a common intent to harm or restrain competition, and must receive some benefit from the restraint. 42 In United States vParke, Davis & Co., 43 the Supreme Court held that there was no concerted action for section one purposes when individual dealers had acquiesced in a supplier’s pricing programme, but not acquiesced to restrain trade. In Monsanto vSpray-Rite Service, 44 the Supreme Court held that concerted action is ‘a conscious commitment to a common scheme designed to achieve an unlawful objective’, and unwilling compliance with a unilaterally imposed policy does not constitute concerted action.
The distinction between concerted action and unilateral conduct is relevant because the latter is given greater latitude, in apprehension of the fact that stringent antitrust scrutiny will hinder the competitive endeavors of a firm. 45 A buyer and seller are allowed to make a contract that restrains trade whereas competitors are not, because the former will only diminish competition among those who are parties to them, without restricting competition in the market as a whole. 46 The reason for this distinction between unilateral and concerted action in the eyes of antitrust law was lucidly explained by the Supreme Court of the USA in Copperweld Corp. vIndependence Tube Corp., 47 wherein it held that:
The reason Congress treated concerted behavior more strictly than unilateral behavior is readily appreciated. Concerted activity inherently is fraught with anticompetitive risk. It deprives the marketplace of the independent centers of decision making that competition assumes and demands. In any conspiracy, two or more entities that previously pursued their own interest separately are combining to act as one for the common benefit. This not only reduces the diverse directions in which economic power is aimed but suddenly increases the economic power moving in one particular direction.
Consequently, concerted action that is judged ‘unreasonable’ will violate section one of the Sherman Act, while section two of the Sherman Act proscribes unilateral conduct that creates, maintains, or threatens an actual monopoly through anticompetitive means.
Drawing from the above approach adopted in comparative jurisdictions, the application of section 3 of the Competition Act 2002 must be limited to agreements entered into between parties that are acting in concert, or when there exists ‘a concurrence of wills between at least two parties’. 48 This point is particularly relevant because of the CCI’s tendency to examine some allegations of unilateral conduct under both sections 3 and 4 of the Competition Act 2002. For example, refusal to deal and tying arrangements are typically examples of unilateral conduct that ought to be examined under section 4 of the Competition Act 2002, unless the refusal to deal or tying arrangement is jointly effected by two or more parties at any level of the production chain. Such conduct ought to be examined under section 3 if it can be established that there was a ‘concurrence of wills’ between the parties while imposing the tying arrangement or refusing to deal with other firms. Therefore, simple business relationships between a vendor and a buyer do not constitute agreements for the purpose of section 3 unless there is ‘concurrence of wills’ between the parties.
It is also worth mentioning that the legislative framework in the USA in this respect is slightly different. Section one of the Sherman Act requires two or more wrongdoers who have a mutual intent to appreciably restrain trade; if the distinction between concerted action and unilateral conduct is not maintained, then section one would subject all parties to the agreement to antitrust liability and treble damages irrespective of whether they have an intent to restrain trade. 49 Of course, this may not be a major concern in the context of the Indian Competition Act 2002, because unlike section one of the Sherman Act which states that ‘[e]very person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony,’ section 3(2) of the Competition Act 2002 only renders void the agreement that has an appreciable adverse effect on competition, and section 27 of the Act vests the CCI with the discretion to pass any order or impose any penalty that it deems fit. Therefore, it appears that the CCI has the discretion to hold a single party guilty of violating section 3, irrespective of the fact that the definition of an agreement requires concurrence of wills between two or more parties, and that appreciable adverse effect on competition (AAEC) must arise out of such agreement. However, this militates against the normative basis and object of section 3 of the Competition Act 2002.
Another difficulty that arises as a result of blurring the lines between section 3 and 4 is that the CCI tends to conflate the standards applicable for evaluating competitive harm under either section. This problem is apparent from the CCI’s approach in the automobile spare parts case, 50 where the CCI was looking into agreements entered into by automobile manufacturers with the original equipment suppliers (OESs) that restricted them from supplying spare parts directly in the Indian aftermarket, ‘where such parts are being manufactured by the OESs using the drawings/designs/specifications/knowledge/toolings/moulds/jigs/IPRs/trademarks etc of the OEMs’. The CCI examined these agreements and the automobile manufacturers’ conduct under both sections 3 and 4.
First, the CCI concluded that the automobile manufacturers had violated section 4(2)(c) of the Act by denying market access to independent workshops, excluding competitors by means other than legitimate competition. The CCI reasoned that they had strengthened their dominant position by becoming the only source of supply of these spare parts in the aftermarket, and the independent service providers are effectively restricted from competing with the authorized dealers of the automobile manufacturers. The CCI also evaluated these agreements under section 3, concluding that the restrictions placed on the OESs violate sections 3(4)(b), 51 3(4)(c), 52 and 3(4)(d) 53 read with section 3(1) of the Act because they adversely affect competition in the automobile sector, but the only basis for this finding was that (i) the choice between authorized dealer or independent retailer should be left to the consumer, and (ii) there is a requirement for the creation of a collaborative space between the independent repairers, OESs, and auto manufacturers so they can effectively counter the use of spurious spare parts and provide the consumer with competitive and efficient repair and maintenance options.
The CCI brushed these factors aside, on the ground that ‘access to spare parts and diagnostic tools cannot be restricted due to greater public good’ and ‘presence of spurious parts/health hazards should not be used as an argument to deny consumer choice’. 55 It also rejected the automobile manufacturers’ argument that measures for protecting its IP are exempt from antitrust scrutiny under section 3(5), holding that the automobile manufacturers had failed to provide sufficient evidence of the existence of any IP rights in the spare parts.
Another problem with the dual of conflation between section 3 and 4 is that, while examining the automobile manufacturers’ conduct under section 4, the CCI held that they could not rely on the defence that they were protecting their IP rights, because there is no equivalent to section 3(5) under section 4. The CCI reasoned that ‘if an enterprise is found to be dominant pursuant to explanation (a) to section 4(2) and indulges in practices that amount to denial of market access to customers in the relevant market; it is no defense to suggest that such exclusionary conduct is within the scope of intellectual property rights of the OEMs’. 56 This approach has been broadly confirmed in appeal by the Competition Appellate Tribunal (COMPAT) in December 2016 order. 57
This finding appears to be flawed, because it will lead to the absurd conclusion that IP rights are irrelevant in determining whether a firm has abused its dominance. In such cases, there will be a tendency to presume the existence of market power, and consequently, concluding that the patent holder has engaged in abusive conduct. The absurd consequence of the CCI’s approach is that every vertical restraint that is employed to complement the exercise of patent rights will be deemed violative of section 4 of the Competition Act 2002, irrespective of whether it serves to enhance efficiency in the market or to protect the patent rights.
In doing so, the CCI came dangerously close to employing a per se rule for vertical restraints employed by dominant undertakings, as is evident from its observations that ‘a non-dominant enterprise may enter into a vertical agreement which forecloses the market but enhance certain distribution efficiencies, and in such conditions the Commission on balancing the factors provided in section 19(3), may conclude that such agreement does not cause an AAEC in the market’ but:
where such agreements are entered into by a dominant entity, and where the restrictive clauses in such agreements are being used to create, maintain and reinforce the exclusionary abusive behavior on part of the dominant entity, then the Commission should give more priority to factors laid down under section 19(3)(a) to (c) than the pro-competitive factors stated under section 19(3)(d) to (f) of the Act, given the special responsibility of such firms not to impair genuine competition in the applicable market. 58
This approach runs counter to the leeway granted to dominant firms to conduct their business, as explained by the Court of First Instance in the Bayer case, that:
the right of a manufacturer faced with an event harmful to his interests, such as parallel imports, to adopt the solution which seems to him to be the best is qualified by the Treaty provisions on competition only to the extent that he must comply with the prohibitions referred to in Articles [101] and [102]. Accordingly, provided he does so without abusing a dominant position, and there is no concurrence of wills between him and his wholesalers, a manufacturer may adopt the supply policy which he considers necessary, even if, by the very nature of its aim, for example, to hinder parallel imports, the implementation of that policy may entail restriction on competition and affect trade between Member States. 59
Article 101(1) prohibits agreements ‘which have as their object or effect the prevention, restriction or distortion of competition’. The ECJ has held that this phrase must be construed disjunctively: an agreement that has as its object the restriction of competition violates Article 101(1) irrespective of its effects, but it is necessary to consider the effects of the agreement where the object of the agreement is unclear. 60
Some instances of such an agreement include horizontal price fixing and resale price maintenance. But in India, section 3 of the Competition Act 2002 makes no direct reference to the object of the agreement, and is only concerned with whether the agreement ‘causes or is likely to cause an appreciable adverse effect on competition within India’. This suggests a conscious departure by the legislature away from the form-based/per se approach, towards an economic analysis of the effects of the agreement on competition in the market.
In this regard, the Supreme Court of the USA held that section one of the Sherman Act does not apply to ‘every contract’, but is limited to those contracts that unreasonably restrain trade, because all contracts necessarily restrain trade on some level, 63 and applying section one’s prohibition on ‘every contract … in restraint of trade’ literally would have the effect of outlawing ‘the entire body of private contract law’. 64
Overlooking this perspective, the CCI has adopted a per se approach to the agreements entered into by the automobile manufacturers, and failed to evaluate the effect that these agreement would have on the market, that is, whether the agreements have an anticompetitive effect on the market and whether such agreements have pro-competitive justifications. The fact that these restrictions are driven by efficiency considerations rather than the desire to engage in exploitative conduct is apparent from the fact that exclusion is not necessary for a manufacturer to exploit its ‘locked-in’ consumer base; on the contrary, a manufacturer that controls its spare parts can benefit from the entry of more efficient service providers and capture profits by marking up the price of its spare parts. 65
In conclusion, this section of the article has clarified two points—(i) the distinction in the scope and operation of sections 3 and 4 of the Competition Act 2002, and (ii) the irrelevance of dominance in the analysis of agreements under section 3 of the Act.
In Monsanto, 66 the CCI’s primary prima facie finding was with respect to section 4 of the Competition Act 2002, holding that Monsanto was dominant in the market for ‘provision of Bt cotton technology in India’, and had abused its dominance by charging unfair trait value, because there was no objective justification for linking the trait value to the MRP of the seed packets.
The CCI arrived at a similar finding in the SEP disputes, 67 holding that Ericsson is dominant in the market for licensing of SEPs in GSM compliant mobile communication devices in India, and that Ericsson had abused its dominance by demanding royalty that had no linkage to the patented product, thereby engaging in discriminatory conduct that was contrary to its fair, reasonable, and non-discriminatory (FRAND) commitments.
In all these cases, the CCI has essentially held the opposite party guilty of exploitative pricing practices, overlooking the crucial fact that the right to exclude others from making, using, or selling the patented product necessarily includes the right to fix the price of the patented product. The purpose of the patent, and the bundle of rights granted under section 48 of the Patents Act 1970, is to monetize the rights through licensing. By granting the inventor the benefit of a property right, price acts as a signalling function: the patent system is able to guide the efficient production of new goods and services by harnessing market signals to provide the inventor with information about how to direct and allocate the resources to the production of new inventions. 68
If the patent holder’s ability to price the patent as high as the market will permit is defeated, then he can merely choose to exercise his right to refuse to license. In Telefonaktiebolaget LM Ericsson (Publ) vCompetition Commission of India & Anr., 69 the Delhi High Court held that:
A patent holder is granted a statutory right to prevent third parties from making, using, offering for sale, selling or importing the patented products and if the patent is a process then the patent holder would have the right to prevent the third parties from using or in any manner dealing with the said patent. The only manner in which a patent holder can exercise his rights is by refusing a license permitting a third party to exploit its patent and it would be quite legitimate for a patentee to seek injunctive relief to enforce such rights.
In such a situation, the patented technology will never reach the market, harming the objective of consumer welfare to a greater degree than mere high prices. To avoid this conundrum, antitrust authorities in the USA adopt the approach that licensing is generally pro-competitive. 70
Therefore, even though section 48 of the Patents Act 1970 does not specifically mention the right to price, this essential right can be inferred from the exclusionary right granted with respect to making, using, and selling the patented product. Support for this approach can also be found in the framework of the Patents Act 1970, where concerns that ‘the patented invention is not available to the public at a reasonably affordable price’ are dealt with under the compulsory licensing regime of section 84. In Telefonaktiebolaget LM Ericsson (Publ) vCompetition Commission of India & Anr., 71 the Delhi High Court held that:
[a] plain reading of various clauses of Sub-section 7 of Section 84 of the Patents Act also indicates that the Legislature was cognizant that in certain cases, patents rights may be misused - such as where the patentee refuses to grant licenses on reasonable terms to the prejudice of trade and/or industry - and, therefore, in conformity with the TRIPS Agreement, it enacted provisions for remedying the same by issuance of compulsory licenses.
This suggests that the interventions in price are the exception under section 84, supporting the proposition that pricing is the essential right that accrues to the patent holder.
No doubt, the Indian Government has the power to exercise price control in other spheres. The Essential Commodities Act 1955 vests the Government with the power to regulate the prices of a few specified classes of commodities. The only example of price regulation under this Act in relation to patents is the Government’s fixation of the trait value charged by Monsanto (royalty caps). Even the National Pharmaceutical Policy 2012 exempts patented drugs that have been made as a result of indigenous products or process from price control for a period of five years. 72 Both of these are instances of socialist legislations that are exceptions in a liberalized economy; they apply to a few specific products based on public interest, and not on the existence of competitive harm.
The CCI itself recognizes that intervention in pricing matters is difficult, as is evident from its observations in HT Media vSCIL, 73 wherein it stated that:
… determining whether a price is excessive is an uncertain and difficult task. The opposite party has submitted that cost analysis for setting the license fee is not possible as the cost of a sound recording is reflected in the acquisition price paid as ‘royalty’ to the owners, whereas if the sound recording is developed in-house, the cost is categorized as ‘recording expenses’. As against the said direct costs, the opposite party has various avenues for commercially exploiting the same and it is very difficult to apportion the cost of acquisition of sound recording to different revenue streams. Moreover, certain sound recording may be expensive to acquire but the music may turn out to be a flop, the reverse may also be true. Therefore, the value of a particular sound recording would depend upon its popularity and not its cost.
In the USA, the patent holder’s right to exploit its patent to the fullest is recognized, constrained only by market demand. 74 In United States vGeneral Electric, 75 the Supreme Court of the United States held that GE could license its patents to a competing manufacturer and set the price at which the light bulbs (end product) would be sold. The court held that the license could be granted ‘under the specifications of his patent for any royalty or upon any condition the performance of which is reasonably within the reward which the patentee by the grant of the patent is entitled to secure … One of the valuable elements of the exclusive right of a patentee is to acquire profit by the price at which the article is sold’. This nuanced understanding of the role of patents and the limits of competition policy was narrowed down in subsequent judgements, such as cases where the patent holder attempts to fix the price of the end product in cases where the patent covers a small part of a larger good. 76 But the facts in Monsanto’s case do not fall beyond the dictum in General Electric, as there is no cause for antitrust concerns to be raised unless Monsanto attempted to fix the final selling price of the seeds sold by the manufacturers.
Unlike the USA, competition authorities in the EU do have a mandate to intervene when a firm abuses its dominance by engaging in excessive pricing. Article 102(2)(a) of the TFEU explains that ‘directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions’ is an illustration of abuse. While excessive pricing has rarely been singlled out in practice as amounting to exploitative conduct, the emphasis on ‘fairness’ has been stated to be the result of Ordoliberal influence in Europe around the time of the Second World War, which stressed the need for an economic system that would limit the concentration of economic power to secure a free and fair political and social order. 77 In the context of the market, excessive pricing was regarded as unfair because it creates an inequitable distribution of wealth. 78 A similar provision exists in the Competition Act 2002, as section 4(2)(a)(ii) defines abuse as ‘directly or indirectly impos[ing] unfair or discriminatory … price in purchase or sale … of goods or services’. These provisions focus directly on harm to consumers, rather than harm to competition or competitive harm. 79
But determining whether a price is ‘unfair’ or ‘abusive’ is inherently difficult, particularly in patent matters. In dynamic industries, fixed costs are high and marginal costs are low; here, the competitive price is not determined by marginal costs, but by the customers’ willingness to pay so as to recover fixed costs. 80 In United Brands vCommission, 81 the ECJ held that a price is ‘excessive’ and amounts to abuse if ‘it has no reasonable relation to the economic value of the product supplied’, and noted that the economic value of the product could be determined with reference to the cost of production. 82
Therefore, condemning Monsanto’s pricing practices would, in all likelihood, require CCI to arrive at a determination of a reasonable trait value that is commensurate with the ‘economic value’ of the product supplied. The issue of whether the fixation of royalty as a percentage of the final sale price is an antitrust valuation will revolve around the findings of a fact-based enquiry. For instance, if the CCI chooses to adopt a cost-plus approach, a reasonable trait value requires an evaluation of the costs incurred by Monsanto on innovation among other things, which is a nefarious and virtually unattainable task because of the inherently unpredictable nature of innovation and the difficulty in assessing the risks involved in innovation. While this is only a prima facie finding at this stage, the CCI’s ability to arrive at an objective determination of a ‘reasonable’ value for Monsanto’s technology is questionable in the light of the function of the patent system, ie to align rewards with market rather than costs incurred in innovation.
In United Brands, 83 the court determined the economic value of bananas after calling for the particulars of all constituent elements of its production costs, and then evaluating whether the difference between cost and price was excessive. But the court also noted that it might be difficult to apportion costs to particular products, 84 when long-term investments are made, when risk factors must be assessed, when product costs of complex corporate structures with wide operations must be apportioned, or when intellectual property is involved. 85 Even assuming that costs can be determined, the ECJ provided no guidance on determining whether the quantum of profits is ‘fair’. 86
The United Brands decision is a rare case where the European Commission has intervened in matters of pricing, and there have been no instances of intervention in patent-related pricing issues. The European Commission appears to have adopted a conservative approach in dealing with exploitative pricing, 87 stating that:
its decision-making practice does not normally control or condemn the high level of practice as such. Rather it examines the behavior of the dominant company designed to preserve it dominance, usually directed against competitors or new entrants who would normally bring about effective competition and the price level associated with it. 88
This suggests that the Commission will focus on weeding out exclusionary conduct as a preemptive measure to prevent exploitative conduct. The Commission’s reasoning can be discerned from its submission before the Organization for Economic Co-operation and Development (OECD), wherein it stated that:
high profits may often be the result of superior innovation and risk taking, which should not be penalized as this would work as a disincentive to innovate and invest … [T]his does not mean that intervention against exploitative conduct should necessarily be totally excluded but it indicates that it may be better to tilt the balance in favour of addressing exclusionary conduct. 89
Similarly, in China, even though Article 17(1) of the Anti-Monopoly Law (AML) prohibits dominant firms from ‘selling commodities at unfairly high prices or buying commodities at unfairly low prices’, 90 the Government has as a matter of policy decided to rely on the market to determine prices to preserve the incentive to innovate that has driven their economy since the 1970s. 91
The problem with condemning high prices based on a static analysis is that it looks at the market conditions at a given point in time, and disregards the dynamics that led to the situation: the efforts and investment made by the monopolist based on the promise of being able to charge high prices. 92 The difficulty in determining whether a price is excessive is exacerbated in patent-related matters, because pricing issues within the patent law framework cannot be analysed using a cost-plus approach. In industries where firms innovate regularly, only a few companies succeed and enjoy enormous profits. These profits appear excessive ex post after commercialization of the innovation; but the price that a patent holder charges is not only meant to cover the costs of the product, but also to cover the risks inherent in the innovative efforts that culminated in the patent. 93
That is why constraining the ability of a firm to price its own products is undesirable in patent related matters, because a monopolist should be permitted to charge a monopoly price so that it can earn sufficient profits to engage in risk-heavy innovation. In fact, Evans and Padilla advocate a standard of per se legality when it comes to examining pricing issues, and call for intervention only in cases where prices deter the emergence of a new market; they argue that excessive pricing is often pro-competitive, because it enhances the competitors’ incentive to innovate. 94 This approach is reflected in the decision of the Supreme Court of the United States in Verizon Communications Inc. vLaw Offices of Curtis V. Trinko, LLP, 95 wherein it held that:
The opportunity to charge monopoly prices – at least for a short period – is what attracts ‘business acumen’ in the first place; it induces risk taking that produces innovation and economic growth.
Similarly, in Berkey Photo, Inc. vEastman Kodak Co., the Court of Appeals for the Second Circuit held that ‘[s]etting a high price may be a use of monopoly power, but it is not in itself anti-competitive … Judicial oversight of pricing policies would place the courts in a role akin to that of a public regulatory commission …’ 96 Therefore, antitrust law in the USA acknowledges that a monopolist may charge as high a rate as the market will bear, as long as the monopolist has acquired and maintained its monopoly without excluding competitors by improper means, because ‘limiting the freedom to set prices may well conflict with the underlying premise of antitrust policy, i.e. promoting a robust competitive process that produces high-quality, innovative goods at low prices’. 97 In fact, the right of a manufacturer to unilaterally announce its pricing policy and refuse to do business with distributors who decline to follow the announced policy dates back to a decision of the Supreme Court of the USA in 1919 (albeit in a different context). 98
When allegations of exploitative pricing are considered within the patent law framework in India, it is necessary to remember that the patent holder is within its rights to fix the price as a percentage of the sale price of the final product. There is nothing in the Patents Act 1970 which restricts the patent holder from valuing his patent as a percentage of the selling price of the final product, and he does so because it is the most suitable method to determine the value of the patent. In United Brands, the ECJ held that it must be considered whether the price is either unfair in itself or when compared to other competing products, 99 but the value of a patent cannot easily be determined through either approach.
A patent confers the right to exclude others from producing the goods covered by the patent, and this right is a property right that is not different in principle from other property rights. 100 But patents do not have an ‘off shelf’ value, nor can its value be determined with reference to the cost of developing the patent as discussed above. It is typically one component among many in the production process and derives value from its combination with complementary factors, such as manufacturing and distribution facilities. 101 The value of each component that contributes towards the final product or service is best determined by agreeing upon a relative value that it contributes to the final product, and allow the objective value to be determined based on the market demand for the final product or service. That is what is being done in Monsanto’s case, the trait value is the estimated value for the trait of insect resistance conferred by the Bt gene technology. Thereafter, the value of the patent is determined by the market, based on the demand for the product embodying the patent.
Without looking into any of these factors, the CCI arrived at the prima facie conclusion that the royalty has no linkage to the patented product, and is discriminatory because it will result in different license fees for different phones. 103 In arriving at this finding, the CCI appears to be following an emerging trend in comparative jurisdictions with respect to determination of royalty for SEPs that form part of a multi-component product.
The court held that ‘[t]hese steps are necessary to ensure that the royalty award is based on the incremental value that the patented invention adds to the product, not any value added by the standardization of that technology.’ Prominent scholars have suggested that reasonable royalty for SEPs ought to be based on the smallest salable patent-practicing unit (SSPPU), 105 and is largely based on a normative claim that royalties linked with market value of end products do not reflect the true value of the patent in question. However, this overlooks the competitive dynamics involving SEPs that place competitive constraints on the ability of patent holders to engage in exploitative conduct.
In Laser Dynamics, Inc. vQuanta Comput., Inc., 106 the court held that the royalty must be determined based on the SSPPU, and stated that ‘[w]here small elements of multi-component products are accused of infringement, calculating a royalty on the entire product carries a considerable risk that the patentee will be improperly compensated for non-infringing components of that product.’ The court held that the exception to basing royalty on the SSPPU is the entire market value rule, wherein a patentee can rely upon the end product’s entire market value if it can prove that the patented invention drives demand for the end product. 107 But this is a rare case where the court laid down a very high burden of proof on the patentee, there are several other cases where the court held that the patentee was only required to prove that the patent forms the basis of the consumer demand or substantially enhances the value of the component parts. 108
While determining a suitable royalty rate, one of the primary factors considered by the court is a comparable license. The court looks into comparable licenses to determine the royalty that would have been payable by a willing licensee to a willing licensor pursuant to hypothetical negotiations just before the first infringement. 109 But the problem with employing the SSPPU approach is that it does not sufficiently mirror real-world negotiations, where most parties enter into royalty agreements based on the value of the downstream product. 110
Using the price of the smallest salable patent-practicing component as the royalty base does not sufficiently capture the value of the patent in the market, because it ignores (i) the effects that the patented technology has on the value of the downstream product, (ii) the value that synergies between complementary technologies create, 111 and (iii) fluctuations in demand for the end product incorporating the patented technology from time to time. Licensing agreements usually use the selling price of the downstream product as the royalty base, to account for the complementarities effect and network effects resulting from the interaction of the patented component with the non-patented components of the downstream product. 112 Therefore, it is desirable to base the royalty on the selling price of the downstream product, if (i) the patent contributes to complementarity and network effects, and (ii) the demand for the downstream product is driven by the patented feature.
Endorsing this approach in CSIRO vCISCO, 113 the District Court for the Eastern District of Texas rejected the licensees method for calculation of royalty based on the value of the chipset, holding that ‘[t]he benefit of the patent lies in the idea, not in the small amount of silicon that happens to be where that idea is physically implemented.’ The district court reasoned that ‘[b]asing a royalty solely on chip price is like valuing a copyrighted book based only on the costs of the binding, paper, and ink needed to actually produce the physical product. While such a calculation captures the cost of the physical product, it provides no indication of its actual value.’ Eventually, the district court fixed the royalty based on the proposals put forward by either party in previous negotiations for a license.
Cisco appealed this judgment, on the ground that (i) the district court ought to have carried out the damages analysis based on the wireless chip, which is theSSPPU, and (ii) the district court did not take into account the fact that the patent was essential to the standard. The appellate court remanded the matter back to the district court holding that it needed to account for the value accruing to the patent by virtue of its adoption as the standard, but held that it ‘did not err in valuing the asserted patent with reference to end product licensing negotiations’. 114
Similarly, in Lucent Technologies, Inc. vGateway, Inc., 115 despite the fact that the Federal Court rejected the calculation of royalty based on the EMVR of the downstream product, it recognized that:
the base used in a running royalty calculation can always be the value of the entire commercial embodiment, as long as the magnitude of the rate is within an acceptable range (as determined by the evidence) … even when the patented invention is a small component of a much larger commercial product, awarding a reasonable royalty based on either sale price or number of units sold can be economically justified.
Nevertheless, all these cases were decided in the context of calculation of damages for patent infringement. Even the decision of the ECJ in Huawei Technologies Co. Ltd. vZTE Corp. 116 was delivered in the context of whether an action for infringement brought by the patentee could constitute an abuse of dominant position; the ECJ did not discuss the issue of royalty because it was not referred to it by the German Court for preliminary ruling. The only court that has addressed the issue of pricing patented products in the context of antitrust law is the National Development and Reform Commission in China, while fixing the royalty payable to Qualcomm for its SEPs relating to 3G and 4G technologies. 117 Even though Qualcomm was found to have engaged in anticompetitive conduct relating to the licensing of SEPs for wireless communication technology and baseband chip sales, the NDRC only reduced the royalty base to 65 per cent of the device wholesale price, and did not require the royalties to be based on the smallest saleable component, ie the chip. 118
In Telefonaktiebolaget LM Ericsson (Publ) v Intex Technologies (India) Ltd., 119 the Delhi High Court endorsed the CSIRO versus CISCO reasoning, and rejected the defendant’s argument that the royalty ought to be based on the value of the chipset, rather than as a percentage of the net selling price of the devices. Therefore, it appears that the CCI’s prima facie conclusion is misplaced, in light of the fact that industry practices in voluntary licensing negotiations often and exclusively rely on EMVR.
The CCI also discussed the concerns of patent holdup and royalty stacking as possible outcomes of Ericsson’s conduct. But such claims cannot be relied upon in the absence of actual and sufficient evidence to show that the royalty demanded by the patentee is resulting in patent holdup or royalty stacking. 120 This is based on the view that evaluation of abuse of dominance is based on an effects-based analysis. In TeliaSonera, 121 the ECJ stated that the potential anticompetitive effects must be demonstrated while determining whether a margin squeeze amounts to abuse of dominance. While adopting the Guidance on Article 102 Enforcement Priorities, the EC stated that it will adopt an effects-based approach while evaluating abuse of dominance under Article 102. 122 But while the trend is towards adopting an effects-based analysis, rather than a form-based approach, 123 doubt has been cast on the implementation of this approach by the decision of the General Court in Intel Corp. vEuropean Commission 124 whereby exclusivity rebates were held to be inherently anticompetitive because by their very nature they seek to impede dealings with competitors.
A similar conundrum can be found in the Indian context, where it is not particularly clear from the CCI’s approach whether an effects-based analysis would be required under the framework of section 4 while evaluating abuse of dominance. Although there is no clear-cut requirement under section 4 for an effects-based analysis, there is a limited provision for effects-based analysis in the explanation to section 4(2)(a), wherein discriminatory conditions on price may be justified as long as they are adopted to meet the competition. However, a review of the conditions under Section 19(4) of the Competition Act 2002 to evaluate abuse of dominant position points to a requirement of considering test that would prompt an effect-based analysis. 125 This could likely help the CCI to avoid errors in antitrust enforcement. Much would depend on how these factors are considered by the Commission during investigations, which the CCI broadly failed to account for in its primafacie investigative orders. While the concerns about patent holdup and royalty stacking have been highlighted in the context of high-tech industries involving thousands of patents, 126 the empirical research reveals no evidence of royalty stacking in the wireless telecommunication industry. 127 The theory of royalty stacking suggests that the prices for end consumers for similar products rise as the number of SEPs and SEP owners increases, or at least do not drop sharply due to competition; 128 but the evidence suggests otherwise as the handset prices and royalty costs continue to fall. 129 In the last two decades, the number of SEP holders for 3G and 4G standards has increased from 2 to 130, and the number of SEPs rose from 150 to 150,000. Despite this, the number of devices sold each year has risen, the average selling price for each device has fallen sharply, the number of handset device manufacturing firms has increased, and the average gross profit margins for implementers of SEPs have remained relatively constant. 130 These trends are the opposite of what would be expected if the industry were characterized by royalty stacking.
In the context of the smartphone industry, Galetovic, Haber, and Zaretzki calculated a predicted cumulative royalty yield of 80 per cent as per the royalty stacking theory. They compared this prediction against the actual royalty yield of 3.4 per cent of the average selling price of a smartphone, and concluded that patent holders do not have any meaningful monopoly power to increase prices in those industries that are supposedly characterized by royalty stacking. 131
Similarly, the implications of patent holdup are empirically testable. According to Carl Shapiro:
[t]he holdup problem is worst in industries where hundreds if not thousands of patents … can potentially read on a given product. In these industries, the danger that a manufacturer will step on a land mine is all too real. The result will be that some companies avoid the minefield altogether, that is, refrain from introducing certain products for fear of holdup. 132
To determine whether these industries are actually suffering from patent holdup, we can look into the rise or fall of consumer prices, the rate of competition or innovation based on the entry and exit of firms in these product markets, the rate of new product offerings, and the patenting trend; but no empirical evidence of this sort exists in the literature for the occurrence of ‘patent holdup’ in any product market. 133 On the contrary, the rapid rate at which prices of SEP-reliant products has fallen in comparison with industries characterized by holdup and patent-intensive, non-SEP reliant industries reflects a fast rate of innovation. 134 For example, the price of goods in the patent-intensive SEP industries relative to other goods have fallen by 90 per cent since the early 1990s. 135 Therefore, the CCI’s inclination to intervene in an industry that is characterized by rapid innovation and falling prices defies the existing empirical evidence and the broader objectives of antitrust law.
Another flaw in the CCI’s finding that Ericsson is engaging in exploitative pricing practices is that it is based on the presumption of market power conferred by the standardization of its patents. This approach overlooks the teachings of innovation economics, which suggests that industries with dominant technological standards can be highly competitive and innovative due to endogenous nature of innovation and technical standardization. 136 In the USA, the FTC recognizes that interoperability is achieved ‘by working together in standard-setting organizations (SSOs) to jointly adopt industry-wide technical standards. Alternative technologies compete for inclusion in the standard’. 137 In other words, technology standards are endogenous, as the prospect of standardization provides incentive for increased competition and innovation; not only is there competition between technologies within a standard, there is also competition among standard setting organizations and across standards. 138 Importantly, standards once established may also fail, so there is no cause to presume that standardization confers market power. Consequently, there is no need for the CCI to intervene in price-related matters at the cost of dynamic efficiency, when the nature of the telecommunication industry precludes the possibility of market power in the long run.
Therefore, the intrinsic linkage between the patent system and the market mechanism, coupled with the fact that an objective determination of an efficient price de hors the market is an exercise that is inherently fraught with uncertainty, leads to the conclusion that it would be difficult for the CCI to intervene in allegations of excessive pricing when it comes to patents.
In Monsanto, the CCI also held that the restrictive covenants are a violation of section 4, because they amount to imposing stringent and unfair conditions, resulting in denial of market access to seed manufacturers and restriction of development of alternate Bt cotton technologies. 139
At the same time, the CCI also held that these agreements entered into by Monsanto with its sub-licensees ‘[appear] to be causing appreciable adverse effect on competition in the Bt cotton technology market’ and the ‘termination conditions are found to be excessively harsh and do not appear to be reasonable as may be necessary for protecting any of the IPR rights, as envisaged under Section 3(5) of the Act’. 140 To examine the anticompetitive effects of these specific clauses, it is necessary to keep in mind that the primary anticompetitive concern with exclusive dealing contracts in general is that it allows a monopolist to fortify its market position, raise rivals’ costs, and ultimately harm consumers. 141
To being with, the clauses in question are not absolute restraints—they do not bar the sub-licensees from dealing with Monsanto’s competitors in the upstream market entirely. They are best characterized as restrictions in the licensing arrangement that must be evaluated by weighing the adverse effect on competition against the pro-competitive justifications for the restrictions. Therefore, in the present case, it may not be appropriate to characterize the agreement as a refusal to deal or an exclusive supply agreement, because the contractual restrictions are not absolute restraints on dealing with competitors. The sub-licensees are free to procure the technology of Monsanto’s competitors as long as they comply with the procedure agreed to in the contract with Monsanto.
The shift in treatment of non-price vertical restraints from per se illegality to the rule of reason approach in the USA is the legacy of the Chicago school, 142 that was adopted by the Supreme Court of the USA in Continental Television, Inc. vGTE Sylvania. 143 Although the recent approach of the antitrust agencies in the USA has been critiqued for weakening the safe harbours approach, 144 it the courts have broadly upheld safe harbours for exclusive dealing arrangements that are short in duration, 145 terminable at will, 146 or do not foreclose a substantial fraction of the market. 147
While the presumption of legality for such exclusive dealing arrangements has been substantially weakened over the last few decades, 148 condemning any such agreement will still require an analysis of its exclusionary effect in the market. In other words, it is necessary to look into the effects of such a licensing arrangement to determine whether it is anticompetitive. The exclusionary effect can be tested empirically, because if vertical restraints are used to lessen competition by foreclosing or disadvantaging rivals, then consumer prices should be higher and output should be lower than they would be in the absence of restraints. 149 Studies by Lafontaine and Slade suggests that manufacturers that impose vertical restraints benefit themselves, while also benefitting consumers in the form of better products and better provision of other services; they conclude that manufacturers and consumer interests are aligned because manufacturers have every incentive to develop efficient distribution systems to reach the consumers. 150
The antitrust authorities in the USA also adopt a rule of reason approach while considering any such restrictive licensing arrangements. 151 The framework for evaluating licensing restraints is spelt out in part 3.4 of the Guidelines. 152 While applying the rule of reason approach, antitrust law emphasizes focus on the actual practice and its effects, not on the formal terms of the arrangement. In this context, exclusive dealing arrangements may give rise to the possibility of anticompetitive exclusion only if the monopolist is able to exclude rival suppliers from a large enough fraction of the market to deprive them of the opportunity to achieve minimum efficient scale. 153
The economic reasoning of the rule of reason approach is also reflected in paragraph 6 of the Vertical Restraint Guidelines in the EU, which provides that:
[f]or most vertical restraints, competition concerns can only arise if there is insufficient competition at one or more levels of trade, i.e. if there is some degree of market power at the level of the supplier or the buyer or at both levels. Vertical restraints are generally less harmful than horizontal restraints and may provide substantial scope for efficiencies. 154
Furthermore, the restrictive covenants cannot be considered ‘stringent and unfair’ or ‘excessively harsh’, because there are usually legitimate pro-competitive justifications for employing such clauses in relation to intellectual property rights. More often than not, the motives for vertical non-price restraints are the enhancement of distribution efficiency and stimulation of inter-brand competition by resolution of the free rider problem, ie particular dealers enjoying cost advantages by benefiting from the demand-stimulating activities of other dealers. 155 The typical examples of demand stimulating activities are investments in promotions and training of personnel. The FTC–DOJ Guidelines also recognize that ‘the fact that intellectual property may in some cases be misappropriated more easily than other forms of property may justify the use of some restrictions that might be anticompetitive in other contexts’. 156 In fact, there is also a body of empirical evidence, which suggests that vertical restraints are not likely to produce anticompetitive effects. 157 Asker and Sass examined the welfare effects of exclusive dealing in the beer industry, finding that it is actually output increasing and does not generate foreclosure. 158
The Chicago school went to the extent of a advocating a standard of per se legality for vertical restraints based on Judge Easterbrook’s error-cost approach, 159 which presumes that the costs of false convictions will be significantly larger than the costs of false acquittals, since judicial errors that allow anticompetitive practices to slip through the net will eventually be corrected by market forces. 160
The pro-competitive effects of non-compete obligations are also recognized in paragraph 231 of the Technology Transfer Guidelines: 161
Non – compete obligations may also produce pro-competitive effects. First, such obligations may promote dissemination of technology by reducing the risk of misappropriation of the licensed technology, in particular know-how. If a licensee is entitled to license competing technologies from third parties, there is a risk that particularly licensed know-how would be used in the exploitation of competing technologies and thus benefit competitors. When a licensee also exploits competing technologies, it normally also makes monitoring of royalty payments more difficult, which may act as a disincentive to licensing.
To sum up, while dealing with non-price vertical restraints in relation to patents, the CCI has overlooked the importance of rule of reason-based analysis that is central to the question of competitive harm created by non-price patent licensing conditions. This is apparent from a reading of the explanation to section 4(2)(a), which states that for the purpose of assessing the unfair or discriminatory condition in purchase or sale of goods or service shall not include such discriminatory condition or price that may be adopted to meet the competition. It may be argued that the conditions imposed in Monsanto’s patent licensing agreements were designed to meet the conditions of competition in the market for licensing of Bt cotton technology, which is a market that thrives on dynamic efficiency driven by competition through innovation.
This article has presented a detailed analysis of several CCI orders (prima facie orders and final orders) that raise intricate questions relating to the constraints imposed on the rights of patent holders in the context of competition law in India.
There is a distinction in the scope and operation of sections 3 and 4 of the Competition Act 2002, which the orders of the CCI have tended to overlook. As a result, the CCI has conflated the standards for evaluating anticompetitive agreements with the standards to applicable to section 4 of the Act relating to abuse of dominance.
Additionally, there is an intrinsic linkage between the patent system and the market mechanism on the question of determination of royalties, involving both cases of SEPs and non-SEPs. Given that an objective determination of an efficient price de hors the market is an exercise that is inherently fraught with uncertainty, it would be difficult for the CCI to intervene in allegations of excessive or exploitative pricing when it comes to patents.
Furthermore, while dealing with non-price vertical restraints in relation to patents, the CCI ought to adopt a rule of reason-based analysis which is reflected in the statute, to determine whether the anticompetitive effects of these restraints outweighs the pro-competitive justifications.
This finding that section 4 analysis on abuse of dominance involving IP does not have an explicit IP exception as in section 3(5) of the Competition Act 2002 appears to be flawed. Such a view will lead to the absurd conclusion that IP rights are irrelevant in determining whether a firm has abused its dominance. In such cases, there will be a tendency to presume the existence of market power, and consequently, concluding that the patent holder has engaged in abusive conduct. The absurd consequence of the CCI’s approach is that every vertical restraint that is employed to complement the exercise of patent rights will be deemed violative of section 4 of the Competition Act 2002, irrespective of whether it serves to enhance efficiency in the market or to protect the patent rights.
Finally, the CCI has failed to consider the practice of price discrimination in unified systems market encumbered by intellectual property, which is widely recognized as having to potential to enhance efficiency.
The IP–Antitrust relationship in India is at crossroads for several reasons. The inherent ambiguity in the Competition Act 2002 in providing bright-line safe harbours that has allowed the Commission to intervene in IP matters that may routinely arise by virtue of the property-contract function of IP in a marketplace. The Commission has not issued any guidelines to clarify the situation in which conduct of IP holders would be held suspect. Recent investigative orders involving patents suggests that the CCI has failed to provide reasonable basis for its interventionist approach by grounding it in economic theory and market effects. It is submitted that the overall approach adopted by the CCI in IP–Antirust matters has to be measured by way of an informed and nuanced understanding of the intricate relationship between innovation, patents, and competition. This is particularly important in the light of the fact that the CCI does not have powers to draw consent orders. In such a situation, there may be substantial error costs in initiating overzealous investigations that may have ripple effects thereby leading an uncertain regulatory environment.
The authors would like to thank Archana Negi, Varsha Rao, Anveshna Chainwala, Aiswarya Kane and Puneet Dinesh for their research assistance. Views expressed are personal. This research paper is an output of the CIIPC project on patents and competition law. CIIPC has received grants from Qualcomm Inc. and the University Grants Commission of India in conducting its research/activities.
United States v Westinghouse Electric Corp. 648 F.2d 642, 646 (9th Cir 1981).