The introduction of competition law has made the businesses and their legal advisers learn a new way of thinking. It is natural for business managers to expect that agreements are meant to be kept and law protects their rights to enforce them. However, can the law restrict their freedom to choose who they would like to deal with? Are Companies not free to set prices that benefit them – by offering deep discounts, deciding price-bids in tenders, by charging high license fee or royalties for the heavy investment in innovation? The answer to the set notions need to be seen through the requirements of Competition law that aims to protect fair competition and ensure that consumer choices are not taken away by business strategies designed for a company’s leadership in the market. Competition Law provides that the liberty provided for a free market cannot be used to stifle the freedom of the stakeholders – the competitors and the consumers. In other words, the benefits of a competitive market that a consumer enjoys should not be restricted.
Thus, the competition watchdog’s duty is to let market forces work to promote a competitive market with the “invisible hand” theory as Adam Smith had said. The Competition watchdog steps in to protect competition only if a market player causes or is likely to cause any adverse effect on competition. The result of non-compliance is dealt with strictly by fining heavily so that there is effective deterrence. Further, for setting the competitive forces right, anti-competitive agreements need to be modified else they are rendered unenforceable. Regulatory regime in India owes its genesis to the introduction of reforms in 1991. Specialised regulatory bodies like CERC (Electricity), TRAI (Telecom), PNGRB (Oil and Gas), came into being in the early 90s while there was a paradigm shift in policies leaning in favour of open markets, luring FDI. Thus, there was a need to shift the focus from curbing Monopolies to promoting Competition. Competition law scrutiny applies to all these economic activities that were once regarded as natural monopolies or preserve of the State. In India, the first legislation relating to Competition was the MRTP (Monopolies and Restrictive Trade Practice ) Act,1969. As times changed it was seen that MRTP Act was unable to deal with anti-competitive practices like cartels, boycotts, refusal to deal, predatory prices and other such practices.
The Indian Competition law is modelled on the European Union Competition law. Although the Indian market is very different from EU, the economic principals give a conceptual framework to analyse market competition and distortions by market players through anti-competitive or abusive means. In the case of CCI V. Sail, (2010) 10 SCC 744, the Supreme Court held that the main objective of the competition commission is to promote the economic efficiency by using competition, to reach allocative/ productive /dynamic efficiency.
So, what does this mean for the Businesses – how does this law affect them?
- Business conduct that did not raise eyebrows before 2009 such as price – setting and other collusive, exclusionary business tactics are since outlawed as strictly prohibited. Bid rigging and hardcore restrictions to control the market are even presumed to be anti-competitive and penalised unless proven otherwise.
- Companies with market power are not bad but they need to operate with caution so that the market is not harmed. As a result, their commercial operations gets restricted for maintaining a level playing field.
Several instances of alleged cartelization come before the Competition Commission of India (CCI). Cartels that were never caught have been fined heavily by CCI. For eg. the Cement cartel ( 6700 Cr), LPG cylinder cartel( 165 Cr), Karnataka Film Chamber ( 16.82 Lakhs), Railway tender for Electricals Cartel ( Rs. 2.92 Cr ) to name a few. Even Dominant enterprises that have abused their market power have been fined. For eg. DLF ( 630 Cr), Coal India(Rs.1773 cr reduced to 591 Cr) , BCCI ( 52 Cr).
Cartels in India and their Economics
Cartelization violates Section 3 of Competition Act, 2002 since it is harmful to the interests of consumers. Typically, when a fairly competitive industry gets cartelized, the cartel members raise the market price and reduce the supply / quantity traded in the market. Getting direct proof of such conspiracy is often difficult. Regulatory authorities rely on economic tools to help detect evidence of cartelization.
In some recent decisions, CCI has taken less exacting evidence to fine an anti-competitive agreement. For instance, in the Cement Cartel Case,the CCI found an agreement among various cement manufacturers who were members of the Cement Manufacturers Association (CMA) and their participation at the CMA facilitated collusion, giving an opportunity to exchange sensitive price and production information with each other. The CCI was not persuaded by the defence that the government directed the collection of price and production data, as well as market share volatility and such other justifications given by these members to counter the allegation of cartelization.
In a recent Airline cartel case, CCI imposed a total penalty of Rs.151.69 crore on Jet Airways, IndiGo and SpiceJet after investigating a complaint over the fixing of fuel surcharges in cargo transport.
CCI looked into allegations of “connivance” by airline companies to introduce a fuel surcharge (FSC) without any legal basis. Since the parties were unable to provide any evidence to support their contention that they determined their respective fuel surcharge independently, the CCI went on the presumption that a clandestine ‘understanding’ among various airline operators existed.
CCI is also investigating abusive and oppressive conduct of licensors towards the licensees.
In recent years, there has been tension between the IPR owners and licensees to use the IP or essential inputs in technology-driven industries such as the telecommunications, mobile devices, BT Cotton and pharmaceutical industries.While IPR holders are in a position of strength and can be exclusionary (they could refuse granting license to others from using or exploiting their proprietary product or technology if high royalties as demanded are not paid), competition law is a tool to stop such exclusionary conduct in the interest of fairplay that benefits consumers. The underlying tension between the two is particularly palpable in the case of SEPs ( Standard essential patents) that is chosen as an industry standard technology.
Since the enforcement of the Competition Act, the licensees ( usually on a weaker footing ) have found a new forum to challenge unfair terms / royalty rates imposed by patent holders / licensors, to limit SEP holder’s right to exploit their intellectual property by abusing means.
TECHNOLOGY PATENT HOLDERS UNDER CCI’s SCANNER
On an information filed by smartphone manufacturers (Intex, Micromax, Iball) Ericsson is being investigated by CCI for coaxing the smartphone makers to enter into one sided and onerous NDA; tying and bundling of patents irrelevant to their products by way of GPLA; demanding unreasonably high royalties by way of a certain percentage value of handset as opposed to the cost of actual patent technology used besides threat of patent infringement proceedings. Such business conduct violates the provisions of section 4 of the Act.
CCI took a prima facie view that when royalty rates are based on the cost of the final product rather than the patent itself, such terms cannot be considered to be on FRAND ( Fair Reasonable and Non-discriminatory ) terms. Accordingly, the CCI found Ericsson to have prima facie violated its FRAND commitments by licensing its essential patents for 3G and 4G technologies on unfair terms in contravention of Section 4(2) of the Competition Act. The CCI directed its investigative arm, the DG ( Director General), to conduct a detailed investigation.
Hoffmann-La Roche AG
Pharma major Roche and its two group firms are being investigated by CCI for alleged abusive conduct involving frivolous litigation and suppressing information from Courts and influencing regulatory authorities like National Pharmaceutical Pricing Authority (hereinafter ‘NPPA’) for exclusion of the Informants’ (Biocon Ltd. & others) biosimilars and disparaging their reputation, thereby, foreclosing the market for its competitors.
The CCI observed the existence of pricing and non-pricing strategies so as to unlawfully raise their rivals’ costs or exclude them from the market. Some of these practices have been held by other competition authorities as being abusive when adopted by dominant entities like:
(i) Indulging in vexatious litigation purely aimed at harassing rivals;
(ii) Influencing government or regulatory procedures; and
(iii) Impeding entry of generics/biosimilars by denigrating or disparaging rivals’ products.
In pursuance to the reference made by the Ministry of Agriculture & Farmers Welfare (MOA&FW), Govt. of India as well as cases filed by several other seeds producers, the CCI has initiated an investigation into the allegedly excessive royalty fee charged by Monsanto, Inc. (USA) through its subsidiary in India, Mahyco Monsanto Biotech (India) Ltd. (Mahyco) for licensing of its patented Bt. Cotton seeds technology to Indian seeds manufacturing companies. It has been alleged that seed producers entered into sub-license agreement with Monsanto for procuring its Bt. cotton technology in consideration of an upfront one time non–refundable fee of INR 50 lakhs and recurring fee called as ‘Trait Value’ – a significant portion of the Bt. cotton seed prices. This issue concerns the seed companies of vidarbha also.
The CCI noted that various terms and conditions in the sub-licensing agreement appear to be unfair, discriminatory, coupled with stringent termination conditions not only discourages the sub-licensees from dealing with the competitors but also amounts to restriction of development of alternate Bt cotton technologies. Further, charging of trait value payable on the basis of MRP of the seed packet apparently has no economic justification in light of the fact that performance of the Bt cotton crop depends not only on the BT cotton technology but also on other factors like genetic composition, climatic conditions etc. and appears to be unfair.
However, the minority view of CCI differed as regards imposition of unfair condition by Monsanto restricting seed manufacturers from obtaining similar technology from competitors, as they are not prohibited from engaging with competitors; the terms merely require a notification to Monsanto.
Although IP law grants statutory rights that are protected and regulated by specific legislations like Patent Act and Designs Act, Competition law ensures such legal monopoly is not misused to the detriment of the market and the consumer’s benefit that the law promises is not taken away.
On the other hand, while Competition authorities often depends on “effects” based conduct of IP owners for detecting any abuse of their market power, they have to balance it with the incentive to continue to innovate. If innovation is stifled, improved products would not come in the market and harm the consumers particularly. After investigating both parties, CCI may fine abusive conduct of IP owners or fine licensees if they are guilty of avoiding their obligations by anti-competitive means.
Despite significant developments in relation to both IPRs and competition laws in India, it remains to be seen how the Indian courts and the CCI will navigate the regulatory landscape to enable fairplay between the Patent holders like Ericsson, Monsanto, Roche and their licensees so that the benefits reach the consumer at a competitive price. Equally, there exist reservations on the appropriateness of the CCI to effectively resolve disputed relating to FRAND ( Fair Reasonable and Non-discriminatory ) terms. Given that the CCI is a competition authority rather than a price regulator, its role in settling FRAND terms, particularly with respect to price exploitation, may not be very effective. Even when CCI finds prevailing royalty rates “excessive”, it may be hesitant to actually determine the FRAND rate that is often the primary issue. However, the CCI could garner guidance from leading foreign jurisdictions where principles of determining a FRAND rate have been set out in jurisdictions outside India – With its latest decision (Microsoft v. Mototola and Huawei v. InterDigital), the European Court of Justice requires that a specific process be followed when seeking injunctive relief based on the alleged infringement of FRAND-committed SEPs in order to balance the interests of the patent owner and the implementers of standards.
No matter whether the courts or the CCI are ultimately the arbiter, Indian industry would benefit greater from the setting of economically sound principles to determine the FRAND range, rather than the actual determination of a FRAND rate.
The risk of non-compliance with competition law has to be managed on a daily basis as both formal and informal agreements, business conduct, pricing and market strategies of all businesses, irrespective of size, gets caught in the competition lens as long as it adversely affects the market.
Through Competition Advocacy, the Commission takes measures for promotion of Competition Advocacy, creating Awareness and imparting training about competition issues to PSUs, Government departments and also the private sector industries.
As a part of the overall economic liberalization and widespread economic reforms the modern competition law is in sync with sound economic principles and must not be underappreciated by business managers. Implementation of the new Competition Act,2002 can eventually be a great leveller and also play a crucial role in regulating capitalism.