Competition Law and Intellectual Property Rights: Confronting Paradigms

Aviral Saxena

I. INTRODUCTION

World has changed drastically after globalization. In other words, as coined by Thomas Friedman, the world is flat now. Among others, markets internationally could not have remained untouched. Markets have been affected drastically. Some have reengineered, some have revamped and some in a state of flux. What unfortunately has been observed in certain quarters is that unregulated markets have the tendency to assume monopolistic or near monopolistic character thereby affecting consumer welfare.

We all realize that Markets have an important role to play in any economy be it developed or developing. Economic theory brings out the clearly the benefits that flow from a market of competitive nature. A market where there is level playing field for players of all sort operates freely. Efficiency is associated with competition and the efficient functions of the markets could be achieved only when there is competition. Regulatory framework therefore becomes imperative to halt the degeneration of the markets to a monopolistic or a near-monopolistic situation.

A. What is Competition Policy?

It basically promotes efficiency and maximizes welfare. Competition Policy essentially comprises in place a set of policies that promotes competition in local and national markets, which includes a liberalized trade policy, openness to foreign investments and economic deregulation .

B. What is Competition Law?

It basically comprises legislation, judicial decisions and regulations specifically aimed at preventing anti-competitive business practices and unnecessary government interventions, avoiding concentration and abuse of market power and thus preserving the competitive structure of markets .

II. IPR AND COMPETITION LAW: NECK to NECK

Competition law and IPRs policies are bound together by the economics of innovating and an intricate web of legal rules that seeks to balance the scope and effect of each policy.

IPRs protection is a policy tool meant to foster innovation, which benefits consumers through the development of new and improved goods and services, and spurs economic growth. It bestows on innovation the right to legitimately exclude for a limited period of time, other parties from the benefits arising from new knowledge and more specifically from the commercial use of innovative products and processes based on that new knowledge. In other words, innovators or IPR holders are rewarded with a temporary monopoly by the law to recoup the costs incurred in the research and innovation process. As a result, IPR holders earn rightful and reasonable profits so that they have incentives to engage in further innovation.

Competition law on the other hand, has always been regarded by most as essential mechanism in curbing market distortions, disciplining anti-competitive practices preventing monopoly and abuse of monopoly, inducting optimum allocation of resources and benefiting consumers with fair prices, wider choices and better qualities. It therefore ensures that the monopolistic power associated with IPR is not excessively compounded or leveraged and extended to the detriment of competition. Besides seeking to protect competition and the competitive process which in turn prods innovations to be first in the market with a new a product service at a price and quality that underscores the importance of stimulating innovation as a competitive input, and thus also works to enhance consumer welfare.

III. REGULATING IPR vis-a-vis COMPETITION LAW

As a piece of individual property – IPRs are fully subject to general anti-trust principles because what is conferred upon its owner is precisely that autonomy of decision in competition and freedom of contracting according to individual preferences that recalls from any private property no matter tangible or intangible and that is the object of and connecting factor for restraint of competition.

Competition law, thus, while having no impact on the very existence of the IPRs, operates to contain the exercise of the property rights within the proper bounds and limits which are inherent in the exclusivity conferred by the ownership of intellectual assets. This starts the tussle when exercise of IPRs give rise to some competition concerns because of anti-competitive dimensions that it may embody.

Competition law is a framework of legal provisions designed to maintain competitive market structures. Competition laws in general seek to:-

a) prohibit anti-competition agreements

b) prevent abuse of dominant position and

c) regulate mergers and acquisition .

However Section 3(5) defines the very interface between the paradigm of Competition law and IPR. It states that nothing contained in this section shall restrict:-

1) The right of any person to restrain any infringement of or to impose reasonable conditions , as may be necessary for protecting any of his rights which have been or may be conferred upon him under:

a) The Copyright Act, 1957

b) The Patent Act, 1957

c) The Trademarks Act, 1957

d) The Geographical Indication of Goods(Registration & Protection) Act, 1999

e) The Design Act, 2000

f) The Semi-Conductor Integrated Circuits Layout Design Act, 2000.

Broadly speaking, IPRs related competition issues include:-

1) Exclusionary terms in the licensing of IPRs, specifically the inclusion of restrictive clauses such as territorial restraints, exclusive dealing arrangement, tying or grant back requirements in licensing contracts

2) Use of IPR to reinforce or extend the abuse of dominant position on the market unlawfully.

3) IPRs as an element of mergers and co-operative arrangements.

4) Refusal to deal

Case of Mahyco-Monsanto

Mahyco-Monsanto( a 50-50 joint venture between Maharashtra Hybrid Corporation and American Agricultural Company) was found guilty of price gouging ( price above the market price when no alternative retailer is available) in a Bt Cotton case filed by the Andhra Pradesh government and some civil society organizations before the MRTP Commission of India. Mahyco-Monsanto was charging an excessively high royalty fee for its Bt gene which made the seed too expensive for the farmers. As there was no competition due to their IPR on Bt cotton seeds, Mahyco-Monsanto had a monopoly and had acted arbitrarily .

The Competition law applies to IPR in relation to abuse of dominant position and combination. Therefore abuse of dominance due to an IPR is liable for action under the Indian Competition Act just as IPR- related dealings in combination leading to an anti – competitive effect.

IV. THE OTHER VIEW: COMPLEMENTARY IN NATURE

The second view contends that competition law continues to be a vital means of ensuring continued innovation and economic growth. The aims and objectives of IPRs and competition laws are complementary, as both aims to encourage innovation (investment in research and development), competition (use of innovation in the economy) and enhance consumer welfare (protecting consumers from exploitation).

V. HARMONIZING IPR WITH COMPETITION LAW

The Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS) is an international agreement administered by World Trade Organization (WTO) that sets down minimum standards for many forms of intellectual property regulation as applied to nationals of other WTO members. It was negotiated at the end of Uruguay Round of the General Agreement on Tariffs and Trade (GATT) in 1994. India is a signatory for the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS).

The TRIPS agreement introduced intellectual property law into the international trading system for the first time and remains the most comprehensive international agreement on intellectual property to date.

TRIPS Agreement covers 9 categories of Intellectual Property: — they are Copyright rights, including the right of performers, producers of sound recordings and broadcasting organization, geographical indications, including appellations of origin , industrial designs, integrated circuit layout designs, patents, monopolies for the developer of new plant varieties, trade mark, trade dress, and undisclosed or confidential information .

TRIPS ensures protection and enforcement of all intellectual Property should result in social and economic welfare and balance of rights and obligations. Arising out of this, TRIPS does try to achieve a degree of balance between Competition law (protecting the consumers) and Intellectual Property Rights (protecting the innovators). Some of the tools provided to attain a degree of balance are parallel imports (Section 6), Compulsory Licensing (Section 31) and Control of anti Competitive Practices (Section 40).

 

A. Parallel Imports

Parallel Imports are imports of a patented or trademarked product from a country where it is already marked. For e.g.:- in Mozambique 100 units of Bayer’s CIPROFLOXACIN(500mg) costs US$ 740 but in India Bayer sells the same drug for US$ 15 (owing to local generic competition) Mozambique could import the product from India without Bayer’s consent.

According to the theory of exhaustion of IPR, the exclusive right of the patent holder to import the patented product is exhausted and thus ends, when the product is first launched on the market. When a state or group of states applies this principle of exhaustion of IPRs in a given territory parallel importation is authorized to all residents in the state in question. In a state that does not recognize this principle, however only the patent holder who has been registered has the right to import the protected product.

Sometimes referred to as “grey market” parallel imports often take place when there is differential pricing of the same product – either brand name or generic drugs—in different markets ( using owing to local manufacturing costs or market conditions). TRIPs agreement explicitly states that this practice cannot be challenged under the WTO dispute settlement system and so is effectively a matter of national discretion.

B. Compulsory Licensing

The TRIPS agreement allows compulsory licensing as part of the agreement‘s overall attempt to strike a balance between promoting access to existing drugs and promoting research and development into new drugs. Under TRIPS Article 31—a WTO member may in its domestic law provide for compulsory licensing of national or extreme emergency or in cases of public non-commercial use. Procedural safeguards require that the measure is used for essential products and that prior negotiations with the right holder have failed to obtain a reasonable result. TRIPs waive the requirement of prior negotiation in emergency cases or when the subject matter of the patent is required for public non-commercial use. The scope and the duration of the license shall be limited to the purpose for which it was authorized. The TRIPs Agreement does not specifically list the reasons that might be used to justify Compulsory Licensing. However, the DOHA DECLARATION on TRIPS and Public Health confirms that countries are free to determine the grounds for granting Compulsory Licenses. In Article 31, the TRIPS Agreement does prescribe a number of conditions which ought to have been fulfilled before issuing compulsory licenses. In Particular such conditions require that:-

a) Normally the person or company applying for a license must have tried to negotiate a voluntary license with the patent holder on reasonable commercial terms. Only if that fails can a compulsory license be issued and

b) even when a compulsory license has been issued the patent owner has to receive payment, the TRIPS Agreement says “the right holder” shall be paid adequate remuneration in the circumstances of each case , taking into account the economic value of the authorization but it does not define “adequate remuneration” or “economic value”.

Again, Compulsory Licensing must meet certain additional requirements:–

1) It cannot be given exclusively to licenses (e.g.—the patent holder can continue to produce)

2) It should be subject to legal review in the country.

Case of Natco Compulsory licensing in India

The first ever compulsory license application made in India was by Natco Pharma (Hyderabad based Indian Pharmaceutical Company) for the manufacture and exportation of Roche’s patented anti-cancer drug – ERLONITIB to Nepal, the Sub-Himalayan Kingdom. Besides ERLOTINIB, Natco Pharma had also applied for the issue of a second compulsory license to the IPO for manufacture and export of SUNITNIB also an anti-cancer drug .

C. Control of anti –Competitive practices in Contractual licenses

Article 40 of the TRIPS Agreement recognizes that some licensing practices or conditions pertaining to IPRs which restrain competition may have adverse effects on trade and may impede the transfer and dissemination of technology.

Member countries may adopt consistently with the other provisions of the Agreement, appropriate measures to prevent or control practices in the licensing of Intellectual Property Rights which are abusive and anti-competitive.

The TRIPS provides for a mechanism where a country seeking to take action against such practices involving the companies of another member country can enter into consultations with that other member and exchange publicly available non-confidential information of relevance to the matter in question and of other information available to that member , subject to domestic law and to the conclusion of mutually satisfactory agreements concerning the safeguards of its confidentiality by the requesting member . Similarly, a country whose companies are subject to such action in another member can enter into consultations with that member.

VI. SUMMARY AND CONCLUSION

The interface between competition law and IPRs protection is very complex and multifaceted. It needs to be handled very carefully.

There are certain similarities between IPR and Competition Law. IPR system promotes innovation which is a key form of competition,, on the other hand , competition policy by keeping market open and effective , preserves the primary source of pressure to innovate and diffuse innovation . But there are also conflicts such as when as IPR serves to entrench market power. A regulatory balance therefore should be maintained.

Current developments indicate that the enforcement of competition laws no longer begins with the assumption that restrictive use of IP is necessary anti-competitive. Current enforcement instead starts with three basic assumptions about intellectual property .

First, intellectual property is comparable to other forms of property so that ownership provides the same rights and responsibilities.

Second, the existence of IP does not automatically mean that the owner has market power.

Third, the licensing of IP may often be necessary in order for the owner efficiently to combine complementary factors of production and thus may be pro-competitive.

Raghavan Committee observed that Innovation has always been a catalyst in a growing economy resulting in more innovation. The advent of fresh innovation give rise to healthy competition at macro as well as micro-economic levels .IP laws help protect these innovations from being exploited unlawfully. In view of this IP and Competition laws have to be applied in tandem to ensure that the rights of all stakeholders including the innovators and the consumer or public in general are protected.

Intellectual Property Rights and The Challenges to Indian Pharmaceutical Industry

The Indian pharmaceutical industry has changed remarkably over the last 50years, from being traders in imported drugs in the fifties, to major bulk drug producers by the eighties. During this transitional period Indian pharmaceutical units have learnt the technology of bulk drug production by their own research and adaptation, and today they produce more than 250 bulk drugs, emphasizing on import substitution and use of indigenous raw materials. At present the Indian pharmaceutical industry has about 300 large units, 1700 medium-size units and about 8000 small-scale units throughout the country.

The Indian law on this subject is contained in the Patents Act, 1970 (a law made by the Indian Parliament) as amended from time to time. In pharmaceutical industry what is patentable is an invention for making a product, and not a discovery in the field of fundamental science. In a discovery nothing new is created. On the other hand, an invention is creation of a new entity, or a new process, though this usually involves utilization of scientific discoveries. The basic requirement for patentability under the Patents law is that the invention should be new and useful, that is, it must have novelty and utility, vide Bishwanath Prasad Radhey Shyam v.Hindustan Metal Industries Once an invention is patented the patentee gets exclusive right to use it, though he may sell or lease it to another. Infringement of the patent can be prevented by an injunction in a civil suit.

TRIPs, the Agreement on Trade-Related Aspects of Intellectual Property Rights is an International treaty by the World Trade Organization (WTO) which sets down minimum standards for most forms of intellectual property (IP) regulation within all member countries of the World Trade Organization. It was negotiated at the end of the Uruguay Round of the General Agreement on Tariffs and Trade (GATT) treaty in 1994. After India signed the General Agreement on Trade and Tariff (GATT) and the Trade Related Aspects of Intellectual Property Rights Agreement, 1994 (TRIPS) and became a member of the World Trade Organization (WTO). As India is a signatory to the TRIPS Agreement and is a member of WTO, the Patents Act is amended in 2005 to make it confirm to these international agreements. Under Article 70(8)(9) of the TRIPS Agreement regarding pharmaceutical industry, India has the following obligations:

(a) To recognize in principle all kinds of inventions in the area of pharmaceutical and agricultural chemical products in accordance with Article 27 of the Agreement.

(b) To provide a mechanism by which applications can be filed for new inventions as understood in Article 27 in these areas from 1-1-1995.

(c) To apply the test of patentability as laid down in the Agreement irrespective of the law of the country on the date of filing, at the time when patent is granted or rejected.

(d) To provide patent protection for a period of 20 years, from the date of filing once the parties decide to grant the patent.

(e) In the case of product patent applications in these areas, grant exclusive marketing rights for five years or until patent is granted or rejected, whichever period is shorter.

Granting of exclusive marketing rights is subject to three conditions:

(i) product patent for the invention has been granted by another member country;

(ii) market approval is obtained in such other member country; and

(iii) market approval from the country/member granting exclusive marketing right is granted.

Before the recent amendment Section 5 of the Indian Patents Act, 1970 Expressly prohibited product patents and only permitted process patent. After the implementation of TRIPS, the Patents (Amendment)Act, 2005 repealed it and therefore gave way to product patents as well. The difference between process patent and product patent is that under a process patent, medicine or drugs which have been patented can be manufactured by another manufacturer but by using a different process. However, in a product patent drugs which have been patented cannot be manufactured by any process. Thus, product patent is a much stringent restriction than process patent. In consequence of India signing the TRIPS Agreement and WTO India accepted the product patent from 1-1-2005 in accordance with the obligation under Article 27(1) of the TRIPS. It is open to a country signing the TRIPS Agreement to exclude from patentability inventions which are necessary to protect morality, order or health or avoid serious prejudice to the environment, but such exclusion can only be in areas where the majority of member States are also prohibiting the commercial exploitation and denying protection.

The implementation of the TRIPS Agreement will give rise to factors that can put access to medicines out of reach for millions of people in the developing world. The TRIPS Agreement obliges WTO Members to adopt and enforce high standards of intellectual property rights protection, which were derived from the standards used in developed countries. Conforming to TRIPS – by recognizing and strengthening protection of intellectual property rights over pharmaceutical products and processes – will cause problems for developing countries. Implementation of the TRIPS Agreement may lead to high drug prices, low access to medicines and a weakening of pharmaceutical industries in the developing countries. It is feared that patent protection for pharmaceutical products and processes will have the effect of reducing or eliminating competition from generic production of medicines. There are about 10 industrialised countries with the pharmaceutical industry and research base, capable of developing new chemical entities or new medicines. The multinational drug companies in these countries own most of the pharmaceutical technologies and products through patents. The minimum term of 20-year patent protection required by TRIPS effectively allows a pharmaceutical company a monopoly over the production, marketing and pricing of patent protected medicines. It will be able to keep the price of the drug high during the protection period, free from competition. By virtue of TRIPS protection, no generic equivalent can come into the market until expiry of the 20 years, denying patients cheaper alternatives. Domestic manufacturing of pharmaceutical products in developing countries will come to a standstill. Developing countries are able to produce new medicines by a process of reverse engineering; that is, researchers in developing countries may develop a new process different from the process invented (and protected by patent) to manufacture the new medicine or chemical entity. Reverse engineering is possible only in countries where the patent law protects processes but not products. The TRIPS Agreement extends the scope of patent protection to both products processes. It would therefore be possible to apply for patent rights over products for 20 years, and thereafter, further periods of 20 years each could be applied for products covered by patented processes. Developing country pharmaceutical producers will find themselves pushed out of the market, having to compete with the large MNCs. For the smaller producers in the developing world, which specialise and depend on manufacturing cheaper generic alternatives, this would no longer be possible at least, until the expiry of the 20-year period. The TRIPS Agreement further requires patents to be granted, regardless whether the products are imported or locally produced. The means that patent holders can merely import their product, without having to work the patent in the country granting the right. This will mean that a MNC can supply global markets under the patent monopoly, exporting the finished product instead of transferring technology or making foreign direct investment. This is contradictory of the argument of TRIPS proponents that strict patent regimes will increase the flow of technology and investment into developing countries. The TRIPS Agreement, in its present form, contains certain provisions that can be used to limit patent rights. These limitations or exceptions are to be effected through national legislation, in order to curb abuses of intellectual property rights and anti-competitive practices, and generally, to offset the negative impact of patent monopolies. Two of the most important measures include the right of government to grant compulsory licenses and the application of the principle of exhaustion of intellectual property rights, which allows for parallel importation of patented products.

National Pharmaceutical Policy, 2006 Announced

The National Pharmaceutical Policy, 2006 has been announced, it is focusing on research and drug development with clinical trials. The policy lays emphasis on developing human resources in pharmaceutical sciences by opening more institutions on the pattern of the National Institute of Pharmaceutical Education and Research (NIPER). The policy aims at providing a better access to anti-cancer and anti-HIV/AIDS drugs to the patients.

Hon,ble Minister Shri Paswan said the draft National Pharmaceutical Policy, 2006 seeks to rationalise the excise duty on pharmaceuticals. It also seeks to streamline the system of bulk procurement of drugs by the Government besides promoting the generic medicines. The Minister said consumer awareness campaigns would be launched to educate the masses on the new policy. Drugs would be made available to the poor, especially the families living below the poverty line. He said the new policy encourages production of critical bulk drugs in India with emphasis on good manufacturing practices. There would be a Settlement Commission for settling old dues under the Drugs (Prices Control) Order, 1979. A Drug Price Monitoring Awareness and Accessibility Fund (DPMAA Fund) would be set up along with pharma parks. Shri Paswan said the policy lays greater thrust on pharma exports and on improving the retail system for an efficient network for distributing drugs. A Pharmaceutical Advisory Forum would be set up at the national level besides an advisory committee in the National Pharmaceutical Pricing Authority(NPPA) at its head office and five in different regions. These would be headed by the NPPA Chairman.

In addition to the existing 74 drugs and their formulations, the 354 drugs with specified strength as mentioned in the National List of Essential Medicines (NLEM), 2003 have also been included in the draft Pharmaceutical Policy. Apart from the cost plus method, other systems of price control like negotiated prices, differential prices, reference prices and bulk purchase price have also been proposed. He said the raw material cost would be obtained from the manufacturers, central public enterprises in the pharmaceutical sector, import data and market sources.

Govt. disclosed that the Maximum Allowable Post-manufacturing Expenses (MAPE), presently 100 per cent over the manufacturing cost, is proposed to be revised as follows:

(a) 150% in general

(b) 50% additional MAPE for R&D intensive companies which fulfill the laid down standards.

(c) For existing 74 drugs under price control MAPE would continue to remain at 100% for one year in order to avoid a sudden increase in prices. It would be increased thereafter on the above pattern.

(d) Based on the given percentage of MAPE, prices would be fixed for all drugs in the cost plus price control system. Wherever possible ceiling prices would be fixed.

(e) Maximum Retail Price (MRP) would be inclusive of all taxes as in the case of all other packaged commodities.

(f) Some exemptions have been provided for certain drugs from the price control-new drugs developed in India through product patent, process patent and new drug delivery systems would be exempted from price control for 5 years. This will boost R&D in India. Simultaneously, vaccines and biological drugs, drugs for sale to hospitals only, drugs whose MRP is at Rs. 1 per capsule / tablet and generic formulations fulfilling the prescribed norms would be exempted.

(g) A new Drugs (Prices Control) Order would be issued under the Essential Commodities Act 1955 to replace the existing DPCO, 1995.

(h) Re-structuring and strengthening of the National Pharmaceutical Pricing Authority (NPPA) – greater computerization and better monitoring.

(i) Price Monitoring Cells in the State Drug Controller Offices with funding from Government of India.

(j) Drugs (Price Management and Distribution) Act to be enacted for effective regulation of drug prices and for handling health emergencies – it will also provide compounding of minor offences.

(k) Trade Margins on generic-generic drugs, would be fixed (15% – wholesalers and 35%-retailers).

(l) Change in the name of Department of Chemicals and Petrochemicals to reflect Pharmaceuticals also (Name proposed is – Department of Chemicals, Petrochemicals and Pharmaceuticals).

(m) Draft policy along with Cabinet Note has been circulated to all Departments for their comments. On receipt of their comments it would be put up before the Cabinet.

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