Tackling IPR excuses through the new competition law

Pradeep S Mehta & Ujjwal Kumar

India risks throwing away its right to regulate the abuses of intellectual property rights (IPRs), if the new Competition Bill is adopted in its present form. International law under the controversial World Trade Organisation (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) allows governments to enforce access to vital technologies for the nation at affordable costs to people.

Instead of taking advantage of this, the new draft Bill retreats to an out-dated and potentially damaging position on IPRs that amounts to legitimising monopoly exploitation. The same is the position in the existing competition law: the Monopolies & Restrictive Practices Act. Our mandarins feel that these issues can be dealt with through the route of ‘notifications’, virtually giving them law-making powers, and thus subject to ‘influence’. The country cannot afford this route, because it relies too much on bureaucracy rather than on informed debate in the legislature, and civil society. If the Bill is not suitably improved, we may end up as a loser in the new global economy.

Even though the exercise of IPRs is extensively regulated through laws, competition law provides an extra tier of regulation to ensure that the exclusivity granted by IPR laws is not misused to proliferate anti-competitive behaviour. The TRIPs agreement recognises this fact.

IPR protection drives forward innovation in the market by providing incentives for firms to compete with new products and processes. But there is a risk that the exclusive right that a patent gives to an innovator will lead to abuse of market power. A successful IPR regime strikes a balance between protecting consumers from exploitation, ensuring adequate access to and use of the innovation in the economy while encouraging firms to invest in research and development.

Whatever its faults—the Agreement is widely considered to be deeply flawed—TRIPs does try to achieve a degree of balance between protecting consumers and protecting innovators. Articles 6, 31 and 40 of the Agreement, providing for parallel imports, compulsory licensing and control of anti-competitive practices respectively, are some of the tools to attain the said balance. However, the onus lies on the member states to use such provisions by building them into their national laws.

Article 6 of TRIPs recognises the possibility of legally admitting parallel imports, the use or sale of licensed goods outside the territory in which they have been licensed. This is based on the principle of “exhaustion of rights” which means that once the right holder has authorised the release of the IPR, they are considered to have ‘exhausted’. The IPR owner has no right to control the use or resale of goods that he has put on the market or has allowed the licensee to market. The inventor is rewarded through the first sale or distribution of the product, while subsequent sales ensure the spread of the technology making intellectual property work “to mutual advantage of producers and users of technological knowledge” (Article 7) in a global economy.

Parallel imports reduce prices and increase consumer welfare by enhancing competition. However, to be certain that society benefits from this window in TRIPs, the legality needs to be stated clearly within the national competition law. Surprisingly, the draft competition Bill does not contain any such provision.

Firms generally block parallel imports through licensing arrangements with their retailers and distributors. Legal experts around the world are also advising their clients to write special clauses into licensing arrangements should they want to prevent parallel imports. Such advices are set to proliferate as firms become more conscious of the issue. From a legal standpoint, it is not clear whether these restrictive licensing arrangements fall within the purview of the exclusive rights granted under IPR laws or whether they should be considered as anti-competitive practices. The TRIPs agreement does not provide much insight on the matter and this lack of clarity at the international level is forcing countries to develop their own strategies vis-a-vis parallel imports.

For instance, Japan permits parallel imports unless contract provisions explicitly bar them. The United States follows a similar practice, however, discouraging other countries in this regard. Australia has recently recognised the international exhaustion principle. The position of the European Union (EU) is somewhat different. Although it recognises ‘regional’ exhaustion, i.e., parallel imports within the EU countries, it is still to come out openly on ’international’ exhaustion. However, few judicial decisions in individual countries of the EU, such as Davidoff and Levi vs. Tesco in the United Kingdom, have recognised the international exhaustion principle. Due to pressures from such members, the European Commission is reconsidering the matter seriously.

TRIPs provides scope for the issue to be resolved at the national level in Article 40. This allows members to specify, in their legislation, licensing practices or conditions that may, in particular cases, have an adverse effect on competition and constitute abuse of IPR. It further allows members to adopt appropriate measures to prevent or control such practices in the light of relevant laws and regulations of that member.

The national competition authority is the ideal body to weigh up the competitive effects of a licensing agreement. But for it to do so, carefully drafted provisions have to be inserted into the national competition law. Yet India’s new Competition Bill disregards the potentially harmful use of exclusive IPRs, focusing entirely on the protection of the owner.

The draft Bill seems to legitimise all efforts to exploit IPR, more to the detriment of the public interest. The Bill prohibits the authority from restricting a right-holder to impose reasonable conditions on the licensee (which may include disallowing parallel importation) for the purpose of protecting or exploiting such IPRs. In a sense, it infers that IPR laws override competition law, where as it should be the other way round.

The writers work with the Jaipur-based CUTS Centre for International Trade, Economics and Environment