Competition Law and Policy vis-à-vis Intellectual Property

By Pravesh Aggarwal and Narayan Prasad

Editor’s Note: This paper attempts to analyze the two seemingly separate branches of law in connection with each other and read the interface between the two branches after establishing the interconnection between them. Before delving deep into the interconnection, this paper shall give a glimpse of two branches and make the ground for the study and analysis of such interconnection. Part 1 of the paper gives a brief and a detailed account of how the competition law emerged in India. Part 2 of the paper elucidates the nexus between Competition Law and Intellectual Property Rights by dealing with four main aspects: 1) both as a means to achieve improved efficiency and better welfare, 2) both as a driving force for innovation, and 3) both promoting consumer welfare. The paper finally concludes by highlighting some of the key suggestions which must be followed and adopted in our legislation in order to ensure welfare of the society.

INTRODUCTION TO COMPETITION LAW IN INDIA

In pursuit of globalization, India has responded positively by opening up its economy, removing controls and resorting to liberalization. In a quest of increasing the efficiency of the nation‘s economy, the Government of India acknowledged the Liberalization Privatization Globalization era. As a result, the Indian market faces competition from within and outside the country. This led to the need of a strong legislation to dispense justice in commercial matters and the Competition Act, 2002 was passed. Healthy and fair competition has proven to be an effective mechanism which enhances economic efficiency.[i]

Competition laws involves in formulating a set of policies which promote competition in the local and national market.[ii] These are aimed at preventing unfair trade practices and curbing abuse of monopoly in the market by the dominant company.[iii] Besides, it prevents artificial entry barriers and aims to remove monopolization of the production processes by encouraging entrance into industries by new players. The objectives of competition policy include the maximization of consumer and producer welfare, as well as maximizing efficiency in production. Well designed and effective competition laws promote the creation of an enabling 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.[iv]

The roots of Indian law on competition can be traced back to Articles 38 and 39 of the Constitution which lay down the duty of the State to promote the welfare of the people by securing and protecting a social order in which social, political and economic justice is prevalent and its further duty to distribute the ownership and control of material resources of the community in a way so as to best subserve the common good, in addition to ensuring that the economic system does not result in the concentration of wealth. It is from these duties that the MRTP Act, 1969, also influenced by US, UK and Canadian legislations,[v] came about.[vi]

The process of initiating a new competition law in India was started by an Expert Group set up to study trade and competition policy, following the Singapore Ministerial Declaration of the WTO in 1996.[vii] Taking into cognizance that competition policy is a prerequisite to economic liberalization, the Expert Group, in its report submitted to the Ministry of Commerce in January 1999 recommended that a fresh competition law be drawn up.[viii] In October 1999, the government appointed a High Level Committee on Competition Policy and Competition Law to draft the new competition law, which was submitted in November 2000.[ix] The resultant Competition Act, 2002,[x] coming into force mere months before the expiry of the TRIPS compliance period for India can therefore be seen as India‘s fulfillment of its TRIPS obligations.

COMPLEMENTARITIES BETWEEN IPR’S AND COMPETITION LAW

It follows from the above discussion that when we think of the relationship between these two regulatory systems at a high level of abstraction, rather than being simply antithetical to each other, they complement each other in .promoting an efficient marketplace and long-run dynamic competition through innovation.[xi] As discussed above, IPRs policy creates and protects the right of innovators to exclude (ius excluendi) others from using their ideas or forms of expression. This provides economic agents with the incentives to engage in efforts that produce technological innovation and/or new forms of artistic expression. This will create more inputs for competition on the future market, as well as promote dynamic efficiency, which is characterized by increasing quality and diversity of goods and growth generated through increased productive efficiency.

However, in the short run, and in some circumstances when patents, copyrights or other IPRs confer market power (through exclusivity), they may lead to restriction of production, a supra-competitive price, and what economists call a deadweight loss. Moreover, in the rational exercise of its self interest, an IPR holder may sue would-be rivals for infringement, deterring entry to compete, or prolong its market power by precluding access to technology necessary for the next generation of products to emerge.[xii] This is where competition law comes in to help IPRs protection to be fair and on the right track of its virtue towards the welfare goal.

1. Both as a means to achieve improved efficiency and better welfare

Thus, competition is not the end goal of competition law just as IP protection is not the end goal of IPRs policy but only a means to achieve improved efficiency and better welfare in the long run. In some circumstances, the society would be better off by allowing for limited market restrictions, monopolistic profits and short-term allocative inefficiency when these can be proven to promote dynamic efficiency and long-term economic growth. This has even been explicitly included among those factors to be taken into account by competition authorities in some competition statutes. For example, it has been asserted that allowing price to rise above the marginal cost through a succession of temporary monopolies can spur dynamic competition. Analysts also argue that rapid innovation, increased importance of declining average costs, and network externalities have created conditions ideal for ―dynamic competition for monopoly, in which temporary monopolies rise and fall in the rhythm of rapid entry and exit.[xiii]

2. Both as a driving force for innovation

Moreover, competition may drive a race for innovation, as firms compete to exploit first- mover advantages, learning-curve advantages, as well as to gain IPRs protection.[xiv] It is also one of the tasks of competition law to protect this type of competition: competition in the innovation race or competition for the market as distinguished from competition in the product market. Nevertheless, it should be noted as well that competition cannot serve as the sole driver of innovation. Inventors sometimes cannot appropriate value from the invention without the grant of IPRs, making IPRs protection an important incentive for innovation in such settings.

3. Both promoting consumer welfare

Both regimes can thus function to promote consumer welfare in the same manner, while showing similarities and differences in their consideration of short and long run effects on consumer welfare. Patent law and the incipiency elements of antitrust law are similar in that they both are ultimately based on inherently uncertain predictions of what is going to happen in the future. The difference is that in the antitrust regime we sometimes are concerned about conduct that in the short-term may be benign or even helpful to consumers, but that may be harmful in the long run, whereas in the patent regime, we are willing to tolerate immediate consumer harm, e.g. monopoly pricing in the expectation that in the long run it will benefit consumers by encouraging innovation.[xv]

We can sum up the above discussion with the words of the US Department of Justice (DoJ) and the Federal Trade Commission (FTC), which in their 1995 ―Antitrust Guidelines for the Licensing of Intellectual Property‖, have stated:

“The intellectual property laws and the antitrust laws share the common purpose of promoting innovation and enhancing consumer welfare. The intellectual property laws provide incentives for innovation and its dissemination and commercialization by establishing enforceable property rights for the creators of new and useful products, more efficient processes, and original works of expression. In the absence of intellectual property rights, imitators could more rapidly exploit the efforts of innovators and investors without compensation. Rapid imitation would reduce the commercial value of innovation and erode incentives to invest, ultimately to the detriment of consumers. The antitrust laws promote innovation and consumer welfare by prohibiting certain actions that may harm competition with respect to either existing or new ways of serving consumers.”

These types of guidelines need to be re-examined and appropriately adjusted in the context of the New Economy, which is characterized by an increased dependence on products and services that are the embodiment of ideas. A major challenge is, thus, to identify policies that will ensure an efficient operation of the competitive process that underlies this IP revolution. More narrowly, questions abound concerning the relationship between competition and IPRs laws, or the right way to bring out the benefits of as well as reinforce the complementarities between these two regulatory systems for the sake of dynamic efficiency and consumer welfare in the new era.

Thus, by creating and protecting the right of innovators to exclude others from using their ideas or forms of expression, IPRs provide economic agents with the incentives for technological innovation and/or new forms of artistic expression.[xvi] This will create more inputs for competition on the future market, as well as promote dynamic efficiency, which is characterised by increasing quality and diversity of goods, which is also the objective of competition policy. Moreover, IPRs may create a race for innovation, as firms compete to exploit first-mover advantages so as to gain IPR protection. Therefore, both IPRs and competition policy are necessary to promote innovation and ensure a competitive exploitation thereof. It is necessary therefore to ensure their co-existence.[xvii]

Further, they pursue the goals of consumer welfare and encouraging innovation through different means. Premised on the idea that enterprises in a competitive market will be less complacent and have greater incentive to innovate to gain market share, competition law can indeed act as a spur for intellectual property.[xviii]

Competition Law has never questioned or interfered with the most primary function of IP rights: preventing free riding of creative achievements and/or the firm‘s identity and reputation, acting as an incentive to innovate.[xix] In fact, the former acknowledges the role of IP in promoting competition because by preventing free-riding, firms are encouraged to produce their own innovative products, which necessarily leads to competition. The competition law promote innovation and consumer welfare by prohibiting certain actions that may harm competition with respect to either existing or new ways of serving consumers.[xx]

SUGGESTIONS

It is suggested that innovation has always been a cause in a growing economy resulting in more innovation. The advent of fresh innovations gives rise to healthy competition at macro as well as micro economic levels. IP laws help protect these innovations from being exploited unlawfully. In view of this, IP and Competition laws have to be applied in tandem to ensure that the rights of all stake holders including the innovator and the consumer or public in general are protected.

Besides, it is implicitly understood that the real issue that competition law has is not with the existence but with the exercise of IPRs. Striking this balance involves walking the tightrope between over-and under-protection of innovators’ efforts—not compromising on a sufficient incentive for the innovator but also ensuring that follow-on invention is not delayed and consumers are not victimized for unnecessarily long periods by high prices.

Three theoretical bases may be suggested for this reconciliation between IPRs and competition law regimes:

  1. a) The view that competition law should only interfere with innovation/IPRs when social welfare is at risk;
  2. b) The view that concentration and monopoly markets have the edge over competitive markets in terms of innovation owing to greater capital and resources and
  3. c) The view that competition law only concerns itself with consumer welfare when the effects of a proposed action on production and innovation efficiency are neutral or indeterminate.

Additionally, other recommendations which can be made include:

  1. a) The concept of the abuse of IPR is not defined in any legislation in India. Hence, the understanding of it must not be restricted to the narrow scope of case laws of other countries like the US and EU.
  2. b) The definition of abuse of IPRs’ ought to be unjustifiable use of the IPRs causing damage to the interest of the consumers and the society at large.
  3. c) Using licensing as a strategy to expand IPR and to restrict or eliminate competition for improper benefits also must also be considered as abuse of IPRs.

Edited by Hariharan Kumar

 

[i]     Atul Patel et al., Intellectual Property Law & Competition Law, 6 J Intl Com Tech 120 (2011).

[ii]     Keith E. Maskus & Mohamed Lahouel, Competition policy and intellectual property rights in developing countries, 23 World Econ. 595–611 (2000).

[iii]    Competition Commision of India, ADVOCACY BOOKLET: INTELLECTUAL PROPERTY RIGHTS, http://competitioncommission.gov.in/advocacy/PP-CCI_IPR_7_12.pdf .

[iv]    Cornelius Dube (CUTS International), Intellectual Property Rights and Competition Policy, 1 Viewpoint 3.

[v]     See Sherman Act, Clayton Act, the US Federal Trade Commission Act, 1914 (as amended in 1938) in the US, the Monopolies and Restrictive Practices (Inquiry and Control) Act, 1948, the Resale Prices Act, 1964 and Restrictive Trade Practices Act, 1964 of the UK and the Combined Investigation Act, 1910 of Canada.

[vi]    The Institute of Chartered Accountants of India, COMPETITION LAWS AND POLICIES (2004), at 117- 118.

[vii]   Id. at 128.

[viii]   Id. at 129.

[ix]    Id. at 129.

[x]     R. Dutta, Critical Analysis: Reflection of IP in Competition Law of India, http://www.indlawnews.com/display.a

      spx?4674.

[xi]    Anthony, S.F, Antitrust and Intellectual Property Law: From Adversaries to Partners, 28 AIPLA Q.J.1 (2000) at http://www.ftc.gov/speeches/other/aipla.htm

[xii]   Patent laws, in particular, can also encourage the diffusion of knowledge by making the grant of a patent conditional upon the disclosure of essential characteristics of the innovation for which the patent is sought. This facilitates access by other follow-on innovators to the knowledge embodied in the patent. A further incentive to diffusion, as well as commercialisation, is provided by provisions that make it possible to exploit intellectual assets via licensing arrangements.

[xiii]   Ordover, J.A (2002), Antitrust for the New Economy or New Economics for Antitrust, 2002, at http://www.ftc.gov/opp/intellect/020220januszordover.pdf.

[xiv]   The US FTC reports that, in the pharmaceutical industry, participants asserted that 60% of inventions would not have been developed and 65 percent would not have been commercially introduced absent patent protection.

[xv]   Leary, T.B (2001), The Patent-Antitrust Interface, Remarks before the ABA Section of Antitrust Law Program in Philadelphia, Pennsylvania at: http://www.ftc.gov/speeches/leary/ipspeech.htm.

[xvi]   A. Jones and B. Suffrin, EC Competition Law: Text, Cases and Materials (2008), at 777.

[xvii] Cornelius Dube (CUTS International), Intellectual Property Rights and Competition Policy, 1 Viewpoint 3.

[xviii] L. Peeperkorn, IP Licenses and Competition Rules: Striking the Right Balance, 26 World Competition (2003) 527.

[xix]   Gustavo Ghidini, Intellectual Property & Competition Law: The Innovation Nexus (2006 Edward Elgar Publishing Ltd.).

[xx]   US Antitrust Guidelines for the Licensing of Intellectual Property, http://www.justice.gov/atr/public/guidelines/

      0558.htm#back7.

 

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