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IPR and Competition law - are they complimentary or contradictory to each

other?

Introduction-Markets are generally governed by different mechanisms. In this paper, the


emphasis is put on two mechanisms, the free-market mechanism, and a regulated market
mechanism. In a free market, the price of goods and services are set freely by consent between
buyers and sellers. There is no intervention of government and other concerned authorities. In a
regulated market, there are various regulatory measures which govern the functioning of a
market. Legislations are one of the components of regulatory operations which in its concerned
area seek to balance between the free play of monopoly rights and interests of society.

The relationship between Competition Law and Intellectual Property Rights (IPR) is one of the
most crucial issues in the regulation of market practices. Competition law is regarded as an
effective mechanism in countering anti-competitive agreements, prohibiting abuse of dominant
position in the market, regulating merger of enterprises, encouraging timely allocation of
resources to benefit the consumers, creating a nexus that by which product reaches to the
consumer at a reasonable price. IPR is a bundle of rights which works for creating a balance
between the exclusive rights of the owner and social interest. These rights ensure the ownership
and control of the creator over his/her intellectual creation to the exclusion of others from its use
however for a limited period of time. IP rights give the owner of intangible property exclusive
privilege for its commercial exploitation.

It may be evident that the concerned areas of IPR and Competition law may overlap and some
conflicts are bound to arise. Where on one hand IP rights give monopoly rights to entrepreneurs
over their innovation, on other hand Competition rules work towards ending this monopoly and
bring fair and healthy competition practice in the market.

This paper is an endeavor to analyze the interrelationship of IPR and Competition law and the
conflicts that arise from the overlapping between these two policies. The paper stresses on the
fact that for a competitive market there is a need for a regulatory market economy but not
flooded with regulations, which may make the economy stagnant. The paper discusses that
proper co-existence of IPR and Competition law is necessary for striking a balance in the
economy.
Free market and Regulated market operation- Before looking into the two forms of
market operation, it should be understood what type of market operation should be chosen for
better working of the market system. In a free market, there is very little or no interference of
government in the production of goods or delivery of services. Production of goods and the price
of products are largely governed by forces controlling the demand and supply of goods in the
market, resulting in a monopoly trend by the manufacturers. The manufacturers of goods decide
the quantity and quality of goods, the investment needed for manufacturing and innovation in
manufacturing as well as the price for the goods. With no government interference over pricing
and supply, the manufacturers have a free hand in controlling the chain of supply and demand in
the market. There remains a direct relation between the consumers and manufacturers or
producers or service providers. Because of this immediate relation, entrepreneurs can take unfair
advantage of consumers for profit and the fierce competing interests among them can cause
upheaval in the country’s economy. A prominent example of this is real estate market crash of
2008.

The regulatory market is a market which is controlled and governed by government mechanisms.
The chain of supply and demand in the market is controlled by the government through different
regulatory bodies. The government monitors the activities in the market through legislation thus
giving less scope for acquiring monopoly over demand and supply of goods. The anti-
competitive practices prevalent in the market are thus curtailed but not abolished. The regulatory
mechanisms are beneficial to both buyers and sellers as the prices of goods are kept under check.
But excessive use of legislation is detrimental to the economy as it can make the economy
stagnant and the flexibility of market operation can be lost; too many regulations can slow the
process of innovation and the consumers may not get the desired product.

It can be concluded that for a steadily growing economy, the elements of both fee and regulated
market are required. A free economy is a detrimental one as the sources of the market are
without any control. On the other hand, an economy which is too much regulated, it may become
stagnant and less flexible. Both have their pros and cons and keeping in view the operation of IP
and Competition law, innovation is required for improving the quality of goods and meeting the
needs of consumers so that consumer can get better quality. However, a totally free economy
will eventually get out of control which may not be possible to revert back.
IPR laws in India-IPR law framework in India is mainly regulated by national laws like
Copyright Act, Trademark Act, Patent Act, and Designs Act. These laws are framed to meet the
international requirements on the subject of IP rights. For this purpose, these laws are compliant
with many notable international agreements in this regard e.g, WTO /TRIPS Agreement. Apart
from the traditional areas of IPR, newer forms of protection are also emerging such as
semiconductor layout design, plant variety, and biological diversity; encouraged by advancement
in scientific and technological activities.

The concept of IP -Property is divided into tangible and intangible properties and this division
was recognized in Roman law and has been adopted under art. 1226 of Modern Civil Codes.
However, as the industrial revolution and the rapid development happened in science,
technology, and culture; new kinds of rights and properties like patents, copyright and industrial
designs, which collectively came to be known as intellectual property rights (IPRs) received
attention due to their unique characteristics

.Intellectual property as a concept consists of many aspects. It is subject to various influences.


The change in information technology, market reality (globalization) and generality have
affected the contents of the intellectual property. For example, in ancient era-because of religion;
plants or animals were not protected. Thus, defining IP is difficult as its concept changes. It is
diverse, challenging and has application in every day to day life.

Competition law in India -In the wake of globalization and economic development across
the world, India opened its economy while adopting the policy of Liberalization Privatization
Globalization. As a result, the Indian market has been facing competition from within the
country as well as outside. This led to the need of a strong legislation to fairly adjudicate
commercial matters and the Competition Act, 2002 was passed. Healthy and fair competition has
proven to be an effective mechanism which enhances economic efficiency.

Competition law involves making a set of policies which promote competition in the domestic
and national market. These policies are aimed at preventing unfair, restrictive and monopolistic
trade practices and curbing abuse of dominant position in the market by a company. Besides, it
prevents artificial entry of goods and services and aims to remove monopolization of the
production processes by encouraging the entry of new players into the market. The objectives of
competition policy include the maximization of consumer and producer welfare, as well as
maximizing efficiency in production. Well formulated and effective competition laws promote
the creation of a healthy business environment, which improves static as well as dynamic
efficiencies and leads to efficient resource allocation, in which the abuse of market power is
prevented mainly through competition.

History of Competition Law in India- The foundation 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 serve 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 the US, UK and Canadian
legislation, came into existence.

The process of formulating a new competition law in India was started by an Expert Group
established to study trade and competition policy, following the Singapore Ministerial
Declaration of the WTO in 1996. Taking into account that competition policy is a necessary
requirement to economic liberalization, the Expert Group, in its report submitted to the Ministry
of Commerce in January 1999 recommended that a fresh competition law is formulated. 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.

The result of this was that Competition Act, 2002, came into force mere months before the
expiry of the TRIPS compliance period. Therefore it can be seen as India‘s fulfillment of its
TRIPS obligations.

IPR and Competition Law: objectives and possible conflict

The intellectual property laws seek to strike a balance between the exclusive right of the owner
and the interest of the people in the society. In the words of Bainbridge “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”. IP rights consist of a bundle of legal rights in
favor of stakeholders of the intellectual property to exploit them commercially. These rights are
acquired not through delegation but through statutory recognition. While granting the rights the
State grants them for a specific duration to prevent firstly, the perpetual monopoly of the rights
and secondly, to maintain harmony between the conflicting interest of the stakeholders and the
public. Because of curtailed monopoly concept, some jurists concluded that the IP rights in
reality cannot be bracketed within 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 IP rights further strives to reward the innovator or creator in commercially viable
means.

Concept of competition in IPR 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 players in market
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. On the other hand, 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 of better quality at
a reasonable price. Presence of horizontal agreements (agreements in between enterprises who
are engaged in trading with similar or identical goods) are said to have an appreciable adverse
effect on competition. Anti-trust law also prohibits vertical agreements (agreements between
enterprises at different level of production, distribution, etc.) which might result in having an
appreciable adverse effect on competition. Competition Law also prohibits abuse of dominant
position of an enterprise. Dominance over a specific area of 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 negative 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 therefore 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 brief words, prevention of unfair competition.
Article 10bis (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, 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 extent as new cases are dealt in different countries.

IPR competition is allowed as 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
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.

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 in 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.

Compulsory Licensing
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.

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 complements 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 much deeper
prospective 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 consumer are of
supreme importance’ and cannot be sacrificed at the cost of the right holder. If India can adopt
ways and refer to cases and legislations of 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 cases 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.

How IPR and Competition Law are complimentary to each other- Thus it can be
deduced from above discussion that both IPR and Competition Law instead of being anti-ethical
to each other as regulatory systems at high level of functioning, they are complimentary to each
other in bringing a effective marketplace and dynamic and healthy competition through
innovation.

As discussed above, IPR policy creates and protects the right of innovators to exclude 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 dead weight 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. This is where competition law comes into 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.

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. 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
innovations.

The above discussion can be summed up 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.”

Conclusion- The above type of guidelines needs to be examined and tested carefully in the
wake of new economy, which is characterised by rapid innovations and a marketplace dependent
on products and services that are expressions of ideas. For the better functioning of this type of
marketplace, there needs to be harmony and peaceful co-existence between the IP mechanism
and competition mechanism.
IP rights provide the innovators an opportunity to gain financial incentives which acts as a
reward for their scientific innovation and/or artistic expression. Furthermore the innovators gain
exclusive rights over their creations which protect their innovations from being exploited
unlawfully. IPRs may also create a race for innovations, as for market players to gain first
advantage over these and gain IPR protection. This will create competition in the market which
will further result in dynamic efficiency and improved quality of goods and services which is
also the objective of competition policy. Consumer welfare is a common goal of both
mechanisms; increased and efficient competition in the market results in improve quality of
goods and the competition policies focus on reducing monopolistic and anti competitive
practices in the market and also the abuse of dominant position of firms in the market, which
ultimately is necessary for consumer welfare.

In reality, competition law has never questioned the existence of IP law and never interfered with
the primary functioning of IP law- preventing unhindered exploitation of innovator’s work
and/or firm’s identity and reputation. In fact, the former acknowledges the role of IP law in
promoting competition because by preventing exploitation, firms are encouraged to create their
own innovative products, which therefore leads to competition. The competition law promotes
innovation and consumer welfare by prohibiting certain practices that may harm competition by
way of either existing or new ways of serving consumers.

Suggestions- It is well understood that innovation has always been an important factor in a
growing economy resulting in more innovations. The emergence of fresh and dynamic
innovations gives rise to healthy competition at all fronts of economic horizon. IP laws help
protect these innovations from being exploited unlawfully. In view of this, IP and Competition
laws have to be applied in co-existence as 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 between competition law and IP law is not
with the existence but with the exercise of IP rights. Striking this balance dealing with the
oscillation between over-and under-protection of innovators’ efforts—not compromising on a
sufficient incentive and protection for the innovator but also ensuring that invention and/or
innovative product is not delayed and overpriced and consumers are not unnecessarily
victimized.
Following are some suggestions which may be applied for the effective co-existence between
IPR and Competition mechanism:

• that competition law should only interfere with innovation/IPRs when social welfare is
at risk;

• that concentration and monopoly markets have the edge over competitive markets in
terms of innovation owing to greater capital and resources and

• 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.

• 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 case laws of other countries like UK,
USA and other countries and its meaning should be inclusive and not exhaustive.