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Cotton seed price control: Stifling innovation

Policy interventions could result in undoing the years of hard work that has witnessed India transform itself from an importer of cotton to an exporter

Published: September 20, 2016 6:24 AM

The foundation of a modern knowledge based economy, rests on respecting the intellectual property of an innovator. Without that, there is no incentive to innovate. This innovation can happen at an individual, as well as an institutional level, and it is important that the government put in place the necessary framework that encourages this. Strong IP and contract laws, as well as objectivity and consistency in their application are the steel frame of this structure.

The NDA government has attempted to institute a series of measures to foster innovation. Startup India, the flagship programme to encourage startups, as well as programmes to encourage innovation and skill development have been some of the major areas of focus.

But, while the right hand of the government seeks to encourage innovation, its left hand may be striking a lethal blow to the legal and contract framework that is vital for this innovation to thrive.

CSPCO over-reaches in determining remuneration

On May 18, the agriculture ministry issued a notification on guidelines and formats of agreements for licensing of technology in the cotton sector (licensing guidelines). This notification was issued under the Cotton Seed Price Control Order (CSPCO), which in turn, was issued on December 7, 2015, in exercise of powers under the Essential Commodities Act (ECA).

Under the CSPCO, the central government sought to empower itself to determine a uniform maximum sale price for cotton seeds across the country, something that while running contrary to free market principles, it is within its powers to determine under the ECA.

The pricing for seed and trait value royalty was an industry linked issue rather than primarily being a concern raised by cotton farmers. But in a substantial over-reach on ministry’s part, it also sought to determine the price of the individual inputs that go into the production of the seed, especially seed biotechnology. The government order also determines the fees payable by seed companies to technology providers.

In other words, the ministry of agriculture and farmers welfare has undertaken the task of determining how much an innovator can charge for intellectual property, disregarding the very basic tenets of international IP Law.

The order also exposed rifts within the government, with the agriculture and finance ministry providing different perspectives. The Economic Survey by the finance ministry pointed out the limitations of administratively fixing prices in India which can result in price rigging and cartelisation.

Damaging the framework of contract law

More damaging is the government’s move to interfere in private contracts. On May 19, the agriculture ministry came out with a notification that shocked Indian industry. Through this notification the government sought to determine who a technology provider can enter into a contract with, even how much they can charge over time. Protests from industry forced the government to rescind the notification, and put it up for consultation.

The power of the ministry to fix terms and conditions in technology license agreements at the B2B level is questionable. The license agreement between a technology holder and a licensee is a private contract and unless there is clear authority of law to interfere with such specific terms, it cannot be done so through an executive notification. The Supreme Court recently chastised the Trai for attempting to interfere with private contracts between network providers and consumers through a regulation without clear authority in the law and struck down its notification on call drops on the same grounds.

The draft licensing guidelines appear to impose FRAND licensing obligations, i.e. obligations to grant licenses under Fair, Reasonable and Non-Discriminatory terms, on genetically modified cotton technology. FRAND is something that is known to apply in the context of patents covering standards such as in the electronics and telecommunications sector. Such obligations usually apply only because electronics and telecommunication companies, when participating in standard-setting bodies, may give commitments that they would license any patent essential to the implementation of the standards, to any willing licensee, under FRAND terms. Through this draft notification, the government is attempting to impose this system for cotton technologies, even if the technology holders have not consented to such an obligation earlier, and in the absence of any mechanism to determine what such standards should be, in the context of agriculture.

The draft guidelines also seem to overlook the existing framework under the Patents Act and also to deliberately highlight only certain aspects of the Protection of Plant Varieties and Farmers’ Rights Act (PPVFR). Thus, it is sending the wrong signal to the global investor community that sanctity of IP and contact laws in the country are not inviolate, and can be interfered with arbitrarily.

Agriculture needs innovation

The draft guidelines also dilute the regulatory requirements under the Environment Protection Act and also forces GM technology holders to undergo unnecessary and burdensome compulsory license negotiations with licensees who may not even have the regulatory approval to sell transgenic varieties. Every patentee, consistent with the principles of the natural justice and Article 14 of the Constitution, has the right to defend against an application and convince the authorities not to grant such a compulsory license. This statutory and constitutional right is completely taken away by the executive notification, where a license is forced to be granted on certain terms without any adjudication.

For the Indian seed R&D industry to be competitive on its merit, such elements should be discouraged to pave way for fair, ethical, win-win business.

Laws safeguarding IP need to be respected to ensure that the innovator’s interests are adequately protected. The innovator invests significant resources in getting a product/technology into the market and also continues to funnel the returns for further research and development. Sectors that invest significantly in IPs, need safeguards to continue to make investments in the long term.

These interventions could result in undoing the years of hard work that has witnessed India transform itself from an importer of cotton to an exporter.

Innovative research should be incentivised to create value for farmers, IPRs thus created should be respected, seed trade policies should be devoid of restrictive and regressive Government controls, and farmers should not only have a greater choice of products but should also benefit from increased competition in the market.

Lalit Bhasin

The author is a Supreme Court advocate

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