Introduction

IPR and competition law are two highly significant and dynamic domains of the overall legal structure whose salience and impact in our lives has increased over the years. Regulatory authorities cutting across jurisdictions have shaped their respective frameworks in response to the flux in these fields. Their interrelationship has been a major focal point of academic discourse and the endeavor to understand the nuances of this interplay still persists. At various instances, IP and competition are seen at loggerheads and efforts are made to achieve an optimal balance between the exercise of respective rights. On the other hand, scholars have pointed out how IPR is a catalyst to further innovation and creativity that in turns promotes competition in any market sector. This, according to them, has a net positive effect on dynamic competition and might tend to suppress the static facet of competitiveness.

In India, the relationship is conceptualized in the former, antagonistic sense. The same is apparent from the section 3(5) of Competition Act 2002 that provides safe harbor to agreements from attracting the tag of anti-competitive agreements provided they are in furtherance of IP rights. The legal rider is that the exercise of rights has to be reasonable. This aspect of reasonability, itself subject to intense scrutiny across legal fields, is what muddles the jurisprudence in India. In this blog, I analyze the decisions rendered by CCI in the context of s. 3(5) and excavate the legal reasoning at the core of these pronouncements. This, as I shall point out, brings out the inconsistency and theoretical untenability of the current understanding of IP-competition interplay.

A textual appraisal and case law analysis of s. 3(5)(i)

On a bare textual reading, clause (i) of sub-section (5) of s. 3 exempts a person from the ambit of anti-competitive agreements u/s 3 if he does the following: (a) restrains the infringement of IP rights guaranteed by relevant statutes (b) imposes reasonable restrictions as the situation necessitates to protect these rights. One potential inference that can be drawn is that the reasonability standard only applies to the second limb of clause (i) and thus, the right holder has complete leeway to enter into agreements to restrain any infringement of any right. This argument, however, was completely repelled by the HC in Monsanto Holdings Private v CCI wherein it held that no such right to restrain infringement can be without concomitant restrictions. The phrase ‘or to impose reasonable conditions’ was held to qualify the right to restrain the infringement of IP entitlements. The implication of this construction was that the Commission would always enquire into the fact whether the impugned agreement is actually necessary to protect the IP rights and doesn’t have an excessively onerous impact on competition. This interpretation of s. 3(5)(i) shall be critiqued in the next section. For now, it is pertinent to undertake a brief overview of existing case law.

In Honda Siel cars Ltd, the Original Equipment manufacturers of the automobile industry had entered into arrangements to restrain the sale of spare parts in the open market. They argued for its justifiability as a measure to protect their IPR u/s s. 3(5). The CCI, however, found that the measure to be not a reasonable condition. According to the Commission, the OEMs could have protected their IPR without having to prevent the sale of the products in the open market. Thus, the impugned measure was not protecting their IP rights and there existed less restrictive measures to attain the same. In any case, the OEMs had failed to establish the existence of IPRs with respect to the spare parts. The requirement of establishing the existence and subsequent contravention of one’s IP rights also found resonance in FICCI Mulitplex Association of India v United Producers/Distributors forum. In this case, the UPDF had released a notice instructing all producers and distributors to not release any new movies to the multiplex association for exhibition owing to conflicts over revenue sharing. One of the justifications rendered by UPDF was exercise of their copyright u/s 3(5) of competition act. The commission responded to this argument that there is a preliminary need to make out a situation of infringement of rights or the need to impose reasonable conditions to protect such rights. The multiplex owners had posed no threat to the producers’ rights under copyright act 1957.

Muddled jurisprudence and misconstruction of the true nature of an exception

The framework of s. 3(5)(i) and the contours of its applicability are still muddled in uncertainty owing to multiple factors, the most prominent being the lack of sufficient case laws where it has been applied. In this section, I shall highlight some conceptual gray areas that persist in this interface of competition and IPR. Firstly, the interpretation of s. 3(5)(i) as rendered in Monsanto Holdings is highly vulnerable to contestation. I am unable to agree with the mixing of measures (i) taken to restrain the infringement , and (ii) necessary to protect rights conferred under statutes. Monsanto construed the clause as one integrated safe harbor qualified by ‘reasonable conditions’. One could very well argue that the situations (i) and (ii) are different and necessitate a diverging degree of measures. Situation (i) would involve a case where the right is already being infringed whereas (ii) is about preemptive measures. Can both situations be governed using the same threshold of reasonability? It is something that can be debated.

Secondly, there needs to be a clear explication on the balancing approach that needs to be taken while applying s. 3(5)(i) to the situation at hand. This is not to say that Honda Siel and FICCI were decided wrongly. In those cases, the question couldn’t traverse beyond the existence and infringement of IPR. Coming back to the point, the existence of an exception to a rule implies that the rule was violated in the first place. For instance, self-defense as an exception to murder will apply where the act that would normally constitute as murder has been committed. If no act of killing was committed , the exception wouldn’t be a point of discussion at all. Similarly s.3(5)(i) aims to protect agreements that would otherwise be rendered anticompetitive under s. 3. In K sera sera v. Pen India, the producers had refused to provide the content of the movie to K sera sera Digital Cinema for exhibition owing to piracy concerns. The Commission found that Pen India hadn’t entered into any anticompetitive agreement with K sera sera’s competitors and no prima facie case of s. 3 was made out. In such a situation, there would have been no need to discuss s. 3(5)(i). However, the Commission still dealt with it and held their conduct to be valid under s. 3(5)(i) in furtherance of protection of copyright.

Way ahead: moving with ‘reasonability’

There are certain additional considerations that need to be taken cognizance of to develop the jurisprudence in a coherent and clear fashion. The foremost amongst them is a better theoretical conceptualization of the dynamic between competition and IPR. IP and competition are not inherently antagonistic. The negative repercussions of IPR on competition pertain to the static aspect of competition. On the other hand, grant of IP rights has been well recognized to be one of the best ways to spur innovation and dynamic competition in the market. This understanding seems to be absent in the Indian statutory framework. The analysis undertaken by CCI needs to be substantiated with the rigors of economic analysis. There should be a proper examination of the anti-competitive nature of impugned agreements. After this, the economic costs and benefits of the exercise of IP needs to be factored in before ascertaining whether they amount to reasonable restrictions or not.

The competition law review committee had recommended the incorporation of a similar non-obstante provision to s. 4 that deals with abuse of dominant position. However, the fundamentals need to be strengthened before making any explicit changes to the statute. The ball is in CCI’s court.