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For the greater common good

09 October 2014
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Hindu Business Line

Harmony between intellectual property rights and the competition law can ensure economic and social welfare

Earlier this month, the Competition Commission of India (CCI) revealed its intentions of bringing under its scanner the patent settlement deals between Swiss drug-maker F Hoffmann-La Roche and Cipla over a lung cancer drug and between US multinational Merck Sharp and Dohme Corp (MSD) and Glenmark Pharmaceuticals concerning a diabetes drug.

This move was preceded not too long ago by a case involving complex issues of licensing of standard essential patents.

This trend evinces the Commission’s willingness to venture into a divergent regime of intellectual property, which focuses on producer gains driving dynamic efficiency through innovation.

Consumer welfare

Modern competition law adopts an approach based on economic effects. In the Indian context, this is termed as the ‘appreciable adverse effect’.

The effect is measured in terms of efficiency and welfare standards. While it is often easy to mistake the underlying objective of the competition law to be regulation of anti-competitive business behaviour, this is but a means towards meeting the ultimate end of maximisation of consumer welfare. In India, consumer welfare is one of the underlying goals of the competition legislation.

Consumer welfare is defined as the maximisation of consumer surplus realised through economic benefits received by consumers of a particular product as measured by its price and quality. Hence, an effective competition law is one that prevents increases in consumer prices and restriction of output or deterioration of quality which are often a result of the rent-seeking anti-competitive conduct of monopolies.

Accessibility and affordability are two of the core functions of the competition law. And this is where the competition law significantly interfaces with the intellectual property regime to address the impacts of the exclusions conferred by intellectual property laws.

Global drug-makers have been increasingly entering into negotiations with generic companies to keep their drugs off the market. While such agreements are not illegal, if they end up stifling domestic competition allowing the brand owners to continue to enjoy monopoly rents, they can hugely impact consumers by restricting access and compromising affordability. This dreaded impact motivates the CCI to dig deeper into such agreements for the first time in India.

Apprehending an adverse impact on the competitive market process and the resulting impact on consumers, the Commission has reportedly revealed its intentions to examine the impact of injunctions that were obtained over the past year by Novartis and Merck against many domestic drug-makers directed at preventing them from selling copies of diabetes drugs.

IPR and competition

The scope of the competition and intellectual property regimes may be starkly different from one another, but in the industrial set-up today they surely coincide. Intellectual property driven by the goal of innovation seeks to serve this end by defining legal boundaries of the property and allowing the owner to appropriate rents by excluding others.

If the protected intellectual property is necessary for the production of a good, it gives the owner the right to exclude others from producing this good, which ultimately subverts the competitive process in the given market. The curbing of the anti-competitive impact of such legally-conferred monopolies is understood and has evolved well under the doctrine of essential facilities.

An essential facility is understood as an input or factor of production that has no economically viable substitute(s) so that the owner of the input is able to exercise market power in the output. This concept rose to prominence with the case of dominance of Microsoft’s Windows as the de facto operating system for computers all over the world.

The European Court of Justice (ECJ) in its 2004 ruling on Microsoft held that Microsoft’s refusal to disclose interoperability information created significant barriers to market entry, owing to indirect network effects, and is thus an abusive conduct. Therefore, the interoperability decision was seen as the remedy to the denial of an essential facility to other operating system developers.

In India, even thsough the doctrine does not find explicit mention, the Indian Competition Act has sufficient structure for the judiciary to invoke it. Similar to the European legislation, the Act has clauses that prohibit the abuse of a dominant position. Section 4 (c) asserts that denial of market access to others by a dominant player would be an abuse of dominant position.

Two to tango

The CCI recently took up such a matter on a complaint by Micromax Informatics against Swedish telecoms equipment maker Ericsson for alleged abuse of dominance in the licensing of its standard essential patent. Much like an essential facility, if a company’s patented product becomes an established standard, then the patent is known as a Standard Essential Patent (SEP). There exist no non-infringing alternatives; which means it faces no competition from other patents until that patent becomes obsolete due to new technology/inventions.

Companies with SEPs that possess such market power have the ability to engage in exclusionary or exploitative practices harmful for their competitors as well as consumers.

To this end, standard setting organisations require owners of patents covered by the standard to grant licences on fair, reasonable and non-discriminatory (FRAND) terms. The complaint filed by Micromax alleged that Ericsson who was a holder of an SEP was licensing this patent at exorbitant and unfair terms. The Commission not only directed the matter for further investigation but tried to determine applicable royalty rates — a herculean task in itself.

While these exercises were in their preliminary stages, they were commendable. Both intellectual property and competition interface with varied yet significant consequences for consumers — be it the innovative IT markets often featured by standardisation and the creation of network effects in the interest of consumers, or the pharmaceutical markets where both social concerns and potential innovations are imperative considerations.

Two fundamental questions for both are determining how welfare should be defined and how the welfare goals should be implemented. Producer welfare rises as the amount producers receive exceeds the costs incurred.

Consumer welfare rises with the difference between the amount consumers must pay and the amount they are willing to pay. Economic welfare is typically the sum of the two. Economic efficiency measured in terms of static (short-run) and dynamic (long-run) is an indicator of welfare and this is where the two systems digress. While the competition law focuses largely on enhancing static efficiency, intellectual property seeks to promote dynamic efficiency. To this end, one is seen as curbing monopolies (economic) and the other as promoting monopolies (legal). Needless to say, intellectual property and competition are essential tools of economic welfare.

What is needed is for regulators to recognise this complementarity and work together towards finding the optimal balance on which economic growth is hinged.

The writer is an assistant professor of law at the OP Jindal Global University