By Shubhodip Chakraborty
Editor’s Note: Markets are governed by different regulatory mechanisms. One of the important objectives of the mechanism is to strike a reasonable balance between the conflicting interests among the various stakeholders. Free market operates automatically because of unregulated supply and demand of basic needs without much intervention of the government. Thus, in this mechanism, the entrepreneurs command the market. The absence of equitable regulatory measures ultimately harms the consumers. Regulated market mechanism is more efficient mechanism than the former, since the main goal in this mechanism is to ensure that all the basic needs of the consumer are met and the entrepreneur’s interests are also achieved. The legislations are one of the chief components of regulatory mechanism which in its concerned areas tries to balance between the free play of monopoly rights and interests of the society.
Intellectual Property Rights (IPR) consists of a bundle of legal rights conferred upon the owner of intangible property to acquire the monopoly to utilize commercially his intellectual creations. Competition Law regulates competition so that there is no adverse effect on the market. IPR grants durational limited monopoly preventing creation of unlimited dominant position in the market. The objectives of competition law is to prohibit abuse of dominant position, formation of anti-competitive agreements and regulating combinations and mergers. IPR also plays a positive role in encouraging innovation, technology creation, promotion of new business etc. therefore the role of IPR is also necessary.
This paper focuses that the objectives of laws on IPR and Competition law are closer to each other in so far as striking a balance between the interests of the right holders and the consumers and the society. The analysis concludes that objectively, laws on both fields attempt to prevent the abuse of dominant positions in the respective markets.
Markets are generally governed by different mechanism or system. For simplicity this paper concentrates on two mechanisms, they are free market operation and regulated market operation. In a country with a free market operation, the prices of goods are set freely by consent between buyers and sellers and are free from any intervention from the government or any other regulatory measures. In a regulated market economy, as from the name, it can be deduced that it is controlled by different regulatory bodies. The legislations are one of the chief components of regulatory mechanism which in its concerned areas tries to balance between the free play of monopoly rights and interests of the society.
The relationship between Competition Law and Intellectual Property Rights (IPR) is one of the most discussed topics in recent years. Competition Law has been regarded as the most efficient mechanism in countering anti-competitive agreements, prohibiting abuse of dominant position, regulating mergers and combinations and provoking efficient allocation of resources to ultimately benefit the consumers, providing them with wider choices, better quality products at a reasonable price. Intellectual Property Rights vouches for striking a balance between the exclusive right of the owner and the social interest. It ensures that the owner of the intangible property gets an exclusive right, so as to exploit commercially his intellectual creation, gaining the monopoly rights thereof. IPR consists of a bundle of rights which gives the owner the right to exclude others from accessing the product, subject to a limited period of time.
It can be inferred from above that a scrimmage is bound to arise between IPR and Competition Law. IPR seeks to grant monopoly power to which Competition policy dissents to provide, on one hand, it is necessary to encourage innovation and on the other proper competitiveness in the market should also be observed. Therefore it is not a conflict which exists between the two laws but they are also complementary in nature in certain areas. IPR provides incentives to economic agents for technological innovation, which will create more products and result in the dynamic growth of the product, which is one of the objectives of the competition policy.
The paper concentrates on the fact that in order to ensure proper competitiveness in the economy we need a regulated market economy, but not flooded with regulation, which will make the economy stagnant. This paper fleetingly discusses that proper co-existence of both Competition Law and Intellectual Property Rights is required in order strike a balance in the economy and how the legislation of a developed economy, a developing economy, and the TRIPS agreement seeks to strike this balance.
Free Market and Regulated Market Operations
Looking into the two operations of market, it is to be deduced which form of economic operation a country should adopt for the better working of a country’s market. In a Free market system products are produced with very little or no involvement of the government. Products and the prices of the product are largely influenced by the forces controlling supply and demand including the monopolistic behavior of the producers.
In the given scenario, the manufacturers decide the number of their products, investment for innovation and invention of new products as well as determines the pricing mechanism. Since in the free market economy, the governmental control over the supply and pricing does not interfere significantly, the manufacturers are rendered with a free hand in controlling the chain of supply and demand.
In other words, the manufacturers create the consumer market and there remains a somewhat direct relation between the consumers and manufacturers or producers or service providers. This phenomenon can be sectarian with spillover effects on other inter-connected other sectors. These entrepreneurs, therefore, can easily take unfair advantage over the consumers for profit and the fierce competing interests often can cause haywire in the country’s market or economy. The apt example on this regard would be the real estate market crash of 2008.
A regulated market form is where buying and selling are controlled by the state through different market regulatory bodies. Unlike free market operation, checks and balances framed by the government through legislations monitor different forces operating in the market giving less scope for acquiring a monopoly over the supply and manufacture of the various products which are essential for the livelihood of general masses and the development of national economy.
Thus unfair practices by the manufacturers, suppliers are curtailed but not abolished. Prices are also kept in check so that both the suppliers and the buyers benefit from there. But on the other hand, too much regulation is detrimental to the economy since it will make the economy a stagnant one and there will be lesser flexibility in operation, where there will be lesser innovation, consumers might not get what they actually want etc.
It can be concluded that some form of free market operation is required as well in a regulated market system, since both have their pros and cons and in keeping with the operation of IP and Competition Law innovation is required, prices should be balanced so that both the suppliers as well as the buyers meet their requirement, the economy should not be stagnant but open but with regulation to keep it under control. A market without any regulatory body will eventually go haywire and once it spins out of control it is very hard to revert back.
Objectives of Competition Law and IPR
The law on intellectual property seeks to strike a balance between the exclusive right of the owner and the social interest. Bainbridge sums up “in the area of intellectual property the law strives to reach a balance between conflicting interests to reach a justifiable compromise. Justifiable on the ground of protecting the private interest and promoting investment and providing benefits and providing benefits for society at large in terms of increased wealth, knowledge and employment”.
Intellectual Property Rights consist of a bundle of legal rights in favor of stakeholders of the intellectual property to exploit them commercially. Those rights are acquired not through delegation but through statutory recognition. While granting the rights the State confers them for a specific duration to prevent firstly, a perpetual monopoly of the rights and secondly, to maintain balance harmony between the conflicting interest of the stakeholders and the public. The curtailed monopoly led some jurists to conclude that the IPR in actuality cannot be bracketed within a monopoly in a strict sense. But it cannot be denied that the objective of curtailed monopoly is to foster innovations of newer products of the product. The conferment of Intellectual Property Rights further strives to reward the innovator or creator in commercially viable means.
The similarities and dissimilarities of the concept of ‘competition’ between Intellectual Property Rights and Competition law.
The denotation of ‘competition’ in the IPR and Competition Law are contextually different. The primary objectives of granting IPR encourages fierce competition among the intending innovators and simultaneously restricts the competition in a number of ways and at the end of the specified duration, the rights go to the public domain ending the completion. The objective of Competition Law is to prevent abusive practices in the market, promote and sustain competition in markets and ensure that the consumers get the proper products at a reasonable price and better quality. Presence of horizontal agreements, that is agreements in between enterprises who are engaged in trading with similar or identical goods is said to have an appreciable adverse effect on competition.
An agreement is said to have an appreciable adverse effect on competition if the agreement has a force of limiting or controlling product or services at any stage and which directly or indirectly results in bid rigging or collusive bidding. Anti-trust law also prohibits vertical agreements which might result in having an appreciable adverse effect on competition. Vertical agreements are the agreements between enterprises at a different level of production, distribution, etc. Competition Law also prohibits abuse of dominant position of an enterprise.
Dominance over a specific area of a market can be earned by any enterprise through monopoly power, this is not per se violation of anti-trust law but abuse of this position is illegal and has a detrimental effect on the market. An enterprise tends to become dominant if the relevant market is narrowly defined and it ceases to be so if it is defined widely.
The law also regulates mergers and acquisitions. Competition Law also regulates monopolies and their position of dominance. The focus of Competition Law is primarily on three areas, agreements among enterprises, abuse of dominant position and mergers or combination among enterprises. In a nutshell, prevention of unfair competition.
Article 10(b) is (2) of the Paris Convention defines unfair competition as “any act of competition contrary to the honest practices in industrial and competition matters”.
There is little hope of fairness in competition being achieved solely by the free play of market sources. Therefore, some amount of regulation is required for preventing such unfair competition. Paris Convention recognizes such acts as unfair competition, causing confusion, misleading, discrediting competitors, the disclosure of secret information, taking advantage of another’s achievements (free riding) and comparative advertising. It is to be noted that this list of unfair competition is not exhaustive, it continues to extend as new cases are dealt in different countries.
IPR competition is allowed as a reward based. But in competition law, the competition is regulated for the purpose of eliminating unfair advantages by the monopoly holders. In Competition Law there is no concept of right, but in IPR the competition is allowed for exploiting the rights in a restricted manner but in a restricted manner. But in the two domains of law, the basic concept of competition is a main driving force of respective legislation.
From the façade, it seems the objectives of both the laws are poles apart but somewhere down the line, the ultimate objective is the same, i.e. to achieve consumer welfare. Both IP and Competition share the common objective even though the means to achieve it are different.
Competition and Patents
Patent laws mainly aim to prevent bootlegging, making and selling patented products and thus it can be said that Patent right also complements with competition policy in that it contributes to fair market behavior, which is the prime purpose of competition policy. A patent also fosters the innovation of the product, which is also one of the goals of competition law. Competition concerns only arise if patent owners use patents in ways that subvert the objectives of patent rights and are inconsistent with their essential function.
Mere granting of Patent right does not amount to an anti-trust violation, but abuse of that right amounts to a violation of anti-trust policies. Similar to other IP rights Patent right is also durational otherwise there will be an abuse of that monopoly power and it will choke the competition by stifling innovation of products. Therefore, a proper safety mechanism is framed so as to allow patent only for those inventions which are of public benefit. A situation might crop up where an exclusive license totally excludes other firms from entering the market, this where competition law needs to come into force and prevent such undesired market behavior.
Competition and Patents are not inherently in conflict. Patent and anti-trust “are actually complementary as both are encouraging innovation, industry and competition.”
Competition Law vs IPR: Comparative Analysis
The relationship between Competition Law and IP rights may inherently seem conflicting but in reality is not, rather it promotes investments in dynamic competition by limiting static competition. IP rights provide its holders a head-start over the others by providing them the right to exploit commercially his product within a specific duration. This is an obvious fact that during this period the IP right holder will always have the monopoly power and the position of dominance. Competition Law has never excluded that monopolistic behavior should be negated, but abuse of such position will amount to a violation of anti-trust law.
Over the years changes in the legislation from encounters in different cases, has led to a complementary and not conflicting functioning of these two laws. To understand the difficulties in applying competition law and IPR it is vital to observe the laws of different countries and how they have framed their legislation in order to counter these problems.
TRIPS in relation to Competition and IPR policy
TRIPS (Trade-Related Aspects of Intellectual Property Rights) is an international agreement formed by the WTO (World Trade Organization) that sets down minimum standards for many forms of IP regulation as applied to nationals of other WTO members. During the negotiation of the agreement, many countries expressed their concern on the regulation of unfair competition and abusive power of the IP rights holder.
Article 40 states that licensing practices or conditions pertaining to the IPR’s may have an adverse effect on trade and may impede the transfer of technology. Article 40.2 permits the members to specify any abuse of IP rights having an adverse effect and adopt measures to counter them. Some of the anti-competitive practices are mentioned in Article 40.2 of the agreement but it should be noted that this list is not exhaustive. The provisions regarding anti-competitive agreement practices (especially Article 40) generally are permissible rather than prescriptive in nature.
The policy of compulsory licensing is a statutory measure to deter concentration of IPR in the hand of right holder arising out of his refusal to part with the right without ostensible reason or parting with right in commercial consideration which is incompatible to existing market practice. It is a statutory mechanism in the hand of state for effecting non-voluntary transfer of copyright from its owner to such a person who applies to the state to republish such work to the public in lieu of paying royalty to the owner. Article 31 of the TRIPS agreement provides for the grant of compulsory licensing under certain situations such as national emergency or other circumstances of extreme urgency or inadequate exploitation of the patent in the country.
U.S in relation to Competition and IPR policy
The US held the root of completion law or anti-trust law, as it is called. The US has an open or free market system with a minimal amount of regulation, such type of system helps the country to regulate its market in such a way that no monopolistic behavior is abused, and if any business entrepreneur does abuse or engage in unfair competitive activities stringent legislations will play role in controlling it by way of either charging lump sum amount of compensation or drive them out of the market.
Section 2 of the Sherman Act primarily discusses (1) the possession of monopoly (2) the willful acquisition of power as distinguished from the growth of the power. This section also provides abuse of dominant position, aiming at prohibition of unfair competition. Section 13 prohibits discrimination of prices while selling the same product to different consumers. Clayton Act, 1914 came up with some additional provisions regarding exclusive dealing agreements, mergers, and combination. US laws on competition and IPR is far more developed than many other countries.
Indian Competition Act in relation to Competition and IPR policy
If we take the example of a developing country like India, Section 3 of the Indian Competition Act, 2002 states: “No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”
Section 3(5) of the Act bestows a blanket exception on IPR which shows how the competition law does not interfere with IPR policies. But, Section 4 of the said Act deals with abuse of dominant position which interferes with IPR rights, when violated. This shows how Competition Law complement with IPR instead of conflicting with it.
India is still at a developing stage in regard to Competition and IPR regulation. The case of Aamir Khan Production vs The Director General, 2010 opened a plethora of cases dealing with IPR and Competition issues. Bombay High Court held that CCI has the jurisdiction to deal with cases relating to IPR and competition issues. In Kingfisher vs Competition Commission of India, it was also held that the CCI has the jurisdiction and power to deal with cases which rose before the Copyright Board. These leading cases showed the path to this issue relating to Competition and IPR policies. But having said that, India is still in its infant stage and requires a much deeper perspective on this issue.
Like the TRIPS, India can adopt policies such as Compulsory Licensing in case of excessive pricing of a product, tying agreements should be dealt by the CCI, the CCI should come up with more stringent principles and guidelines based on findings of the US and EU. The courts have now come up with the view that the ‘interest of the consumer is of supreme importance’ and cannot be sacrificed at the cost of the right holder. If India can adopt ways and refer to cases and legislation of the US and EU it can develop to large extent on this issue.
US Microsoft Case
“It is a longstanding topic of debate in economic and legal circles: how to marry the innovation bride and the competition groom”
This is one of the landmark case in relation to this issue of competition and IPR policy during the TRIPS regime. The case originated in the year 1998, where Microsoft was alleged of abusing its monopoly power by tying its operating system and web browser and selling. This restricted the market for other web-browser competitors since Windows operating system users already had a copy of Internet Explorer (the browser Windows tied with its browser). The opposition stated that IE was a different and separate entity altogether, since a separate version is found for other Operating Systems.
Judgment was given that Microsoft had altered its dominant position and by this, it wanted to crush other operating systems and it said that Microsoft had committed monopolization, and tying in violation of section 1 and 2 of the Sherman Anti-Trust Act.
Microsoft had appealed this decision and judgment was given that Microsoft would have to be broken into two different components, one for the browser and the other for the operating system.
The theory of Intellectual Property Right and Competition Law comes down to the fact that IPR is a right whereas Competition Law is legislation which acts as an artificial hand over the market operation. IPR is something which the State grants the inventor or it is a reward which the State provides to the creator of any product to exploit commercially his creation for a limited period of time. It seems that these two laws are of conflicting in nature but they are not as we find from the above study that these two laws complement each other by backing up when one is abused.
Competition Law attempts to provide a wider choice to the consumers and it seeks to balance the right of manufacturers and the consumers by providing profits and quality product and at a reasonable price, respectively. IPR also seeks to provide the manufacturer his reward in being the sole creator of the product, which should also be for the public benefit. The dominant position offered by IPR is per se not violating the Competition policies but abuse of that position is. In a nutshell, it can be concluded that both these laws have the common objective but there ways to achieve it are different.
Formatted on 14th Feburary 2019.
1. Aamir Khan Production vs The Director General, 2010 (112) Bom L R 3778.
2. Atari Games Corp. v. Nitendo of Am. , 897 F.2d 1572, 1576 (Fed. Cir.1990).
3. Bainbridge: Intellectual Property.
4. “Competition policy and the TRIPS Agreement: more guidance needed? Where might we look? What insights from policy evolution at the national level?” By Robert D. Anderson.
5. Kingfisher vs Competition Commission of India Writ petition no 1785 of 2009.
6. Lectures on Intellectual Property Rights by Dr.Jayanta Lahiri.
7. Mario Monti, European Commissioner for Competition Policy, January 2004.
8. Paris Convention Article 10.bis(2)specifies acts which shall be prohibited:
1. all acts of such a nature as to create confusion, by any means, with the establishment, the goods, or the industrial or commercial activities, of a competitor;
2. false allegations in the course of trade of such a nature as to discredit the establishment, the goods, or the industrial or commercial activities, of a competitor;
3. indications or allegations the use of which in the course of trade is liable to mislead the public as to the nature, the manufacturing process, the characteristics, the suitability for their purpose, or the quantity, of the goods.
9. Patents-Competition Law-European Digital Single Market by Thomas Graf, CLEARY GOTTLIEB LLP.
10. TRIPS Agreement Article 31(b)
Where the law of a Member allows for other use of the subject matter of a patent without the authorization of the right holder, including use by the government or third parties authorized by the government, the following provisions shall be respected:
(b) such use may only be permitted if, prior to such use, the proposed user has made efforts to obtain authorization from the right holder on reasonable commercial terms and conditions and that such efforts have not been successful within a reasonable period of time. This requirement may be waived by a Member in the case of a national emergency or other circumstances of extreme urgency or in cases of public non-commercial use. In situations of national emergency or other circumstances of extreme urgency, the right holder shall, nevertheless, be notified as soon as reasonably practicable. In the case of public non-commercial use, where the government or contractor, without making a patent search, knows or has demonstrable grounds to know that a valid patent is or will be used by or for the government, the right holder shall be informed promptly;
11. TRIPS Agreement Article 40
1. Members agree that some licensing practices or conditions pertaining to intellectual property rights which restrain competition may have adverse effects on trade and may impede the transfer and dissemination of technology.
2. Nothing in this Agreement shall prevent Members from specifying in their legislation licensing practices or conditions that may in particular cases constitute an abuse of intellectual property rights having an adverse effect on competition in the relevant market. As provided above, a Member may adopt, consistently with the other provisions of this Agreement, appropriate measures to prevent or control such practices, which may include for example exclusive grantback conditions, conditions preventing challenges to validity and coercive package licensing, in the light of the relevant laws and regulations of that Member.
12. UThe nited States vs Microsoft Corporation, 253 F.3d 34.
13. U.S. v. Grinnell, 384 U.S. 563, 570-71 (1966); see also Aspen Skiing Co., 472 U.S. at 595-96.
14. “U.S v. Microsoft: Timeline” Wired. Conde Nast. November 4, 2002.
15. Vinod Dixit on “COMPETITION LAW” Annual Survey of Indian Law, 2011 Vol. XLVII.