VOLUME I MAY, 2016 ISSUE 3

CENTRE FOR COMPETITION LAW & POLICY

NATIONAL LAW UNIVERSITY, JODHPUR

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EDITORIAL BOARD

CHIEF PATRON

Professor Poonam Pradhan Saxena

EDITORIAL ADVISORY BOARD

Mr. John Pheasant Mr. Manas Chaudhuri

Ms. Pallavi Shroff Mr. Arshad (Paku) Khan

Mr. Harman Singh

EXECUTIVE DIRECTOR

Prof. I.P. Massey

CHIEF COORDINATOR

Mr. Deepankar Sharma

EDITORS IN CHIEF

Apurva Joshi

Shrijita Bhattacharya

ASSOCIATE EDITORS

Ayushi Mishra

Kastubh Madhavan

Sinjini Majumdar

Yashika Maheshwari

ASSISTANT EDITORS

Abhilash Agrawal Ayushi Choudhary Indulekha Mary

Sourav Modi

COPY EDITORS

Shivam Tripathi

Sakshi Malhotra Rishav Dixit Varun Thakur

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CONTENTS

THE DRAFT FINANCIAL CODE 2015: THE RISE OF A SUPER-REGULATOR

-UJJAL BANERJEE AND RAHUL SATYAN .................. 5

LESSONS FROM SELECTED JURISDICTIONS ON ABUSE OF DOMINANCE

-DR. SOUVIK CHATTERJI ......................................... 10

INTERFACE OF IPR AND COMPETITION LAW: IMPACT ON ACCESS TO MEDICINE

-DR. GARGI CHAKRABARTI ..................................... 27

THE CURIOUS CASE OF COMPULSORY LICENSES IN PATENTS

-GUNJAN CHAWLA ................................................. 44

CRITIQUE OF EXTRATERRITORIAL JURISDICTION AND EFFECTS DOCTRINE

-RAGHUVEER SINGH MEENA .............................. 62

OVERLAPPING JURISDICTION OF REGULATORS IN INDIA: A NEVER ENDING BATTLE?

-KRITIKA SETHI & AKSHITA AMIT ......................... 74

THE DRAFT FINANCIAL CODE 2015: THE RISE OF A SUPER-REGULATOR

-UJJAL BANERJEE & RAHUL SATYAN

1

On July 23, 2015, the Ministry of Finance, Government of India (‗Finance Ministry‘)

released the revised draft of the Indian Financial Code 2015 (‗2015 Code‘). The 2015 Code

aims to regulate the financial sector and the workings of financial agencies such as the

Financial Authority, the Reserve Bank of India (‗RBI‘), the Financial Redress Agency, the

Resolution Corporation, the Financial Stability and Development Council and the Public

Debt Management Agency, together called the ‗ Financial Agencies‘. It seeks to replace a

gamut of different laws governing the financial sector and thus bring coherence and

efficiency in the financial regulation network. The 2015 Code was written by the Financial

Sector Legislative Reforms Commission (‗ FSLRC‘) set up in 2011 and headed by Justice

Srikrishna. The FSLRC initially submitted its findings and the draft Financial

Code in 2013 (‗2013 Code‘). After incorporating comments from various

stakeholders, the Finance Ministry released the 2015 Code in June 2015.

By introducing the 2015 Code, the Government of India (‗GoI‘) seeks to strengthen

regulatory accountability of such Financial Agencies. The 2015 Code also removes a highly

contentious issue in the 2013 Code, namely the provision (of the 2013 Code) empowering the

Financial Sector Appellate Tribunal to review regulations and general guidance given by any

Financial Agency. However, scarcely had the 2015 Code been released that the Finance

Ministry and the GoI ran into a heavy storm of controversy. The 2015 Code, inter alia,

dilutes the absolute powers that the RBI governor currently enjoys in setting benchmark rates.

Under the provisions of the 2015 Code, the RBI governor will no longer have the power to

veto interest rates; instead the decision of the monitory policy committee will be by majority.

The 2015 Code also grants the government the power to appoint a majority of the members of

the monetary policy committee. Detractors have been vehemently claiming that these

proposals would lead to the dilution of the near-autonomy that the RBI governor enjoyed in

taking key policy decisions.

However, amidst all the controversy regarding the RBI governor‘s veto power, the powers

given to the Competition Commission of India (‘CCI‘) under the 2015 Code have gone

1 The authors are Anti-trust Associates at AZB, Mumbai. The authors may be contacted at

rahulsatyan@gmail.com.

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unnoticed. Chapter 16 of the 2015 Code gives CCI the power to review and submit its

comments on any draft regulations made by a financial regulator, i.e. the RBI or the Financial

Authority (together referred to as (‗ Financial Regulators‘). The RBI has the powers to

regulate banking, systemically important payment systems and authorised dealerships. The

Financial Authority has the power to regulate all financial services and products, apart from

banking, systemically important payment systems and authorised dealerships.

Under the provisions of the 2015 Code, the CCI may submit comments to every regulations,

guidance or code proposed by Financial Regulators, if it feels that the regulations will create

or are likely to create any restriction or distortion of competition in the market for financial

products or financial services (‗Negative Effect‘). Further, the CCI may give such comments

even when the Negative Effect has been created on account of ‗a feature or combination of

features of a market that could be dealt with by regulatory provisions or practices‘.‗Features

of a market‘ include both the structure of the market for financial products / services as well

as the conduct of financial service providers or consumers (even if this conduct is not in the

market for the concerned financial product/services). Once the CCI has submitted such

comments to the Financial Regulator concerned, the Financial Regulator is required to, within

a mutually agreed time, provide a response to the CCI stating what action it proposes to take

and the reasons if it does not. Post such response, if the CCI continues to remain of the

opinion that a Negative Effect is/will be created, it may issue binding directions to the

regulator requiring it to take particular actions to remedy the negative effect. When the CCI

issues such binding directions, a copy is required to be submitted to the Central Government.

Finally, such binding directions need to be approved by the Parliament.

Further, the 2015 Code imposes an obligation on the CCI to make a reference to the Financial

Regulator when it undertakes any proceedings under the Competition Act in which at least

one of the parties is a financial services provider. In such proceedings, the Financial

Regulator would be entitled to nominate a member or senior official to attend the CCI‘s

proceedings as a non-voting participant. The 2015 Code also obliges the Financial Regulator

to make a reference to the CCI to report any conduct of a financial service provider which it

believes is in violation of the provisions of the Competition Act.

The competition law regime at present has a mechanism whereby regulators can make

references to the CCI and vice versa. Although the intention behind the 2015 Code may have

been inculcating free and fair competition in the market for financial services and products,

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there are certain fundamental issues which the current scheme gives rise to. These are

discussed briefly below –

A. VAST INCREAS E IN THE POWERS OF THE CCI

The Competition Act, 2002 (‗Competition Act‘) lays down a framework of co-operation

between the CCI and a statutory authority. Under the provisions of Section 21of the

Competition Act, a statutory authority may make a reference to the CCI if, in the course of

any proceedings before it, any party to such proceeding raises the issue that any decision

which the statutory authority has taken / proposes to take may violate the provisions of the

Competition Act. The statutory authority may also make this reference suo motu. When the

CCI receives such a reference from a statutory authority, it must give its opinion within 60

days. Similarly, under the provisions of Section 21A of the Competition Act, where in the

course of a proceeding before the CCI, an issue is raised by any party that a decision which

the CCI has taken or proposes to take (during the proceeding), is contrary to the provision of

any legislation whose implementation is entrusted to a statutory authority, the CCI may make

a reference in terms of such issue to the said statutory authority. The CCI may also make such

a reference suo motu. Post the receipt of such reference, the statutory authority must provide

its opinion within 60 days.

As is evident from the above, the provisions of the 2015 Code give the CCI much wider

powers with respect to a regulation / guidance / code promulgated by a Financial Regulator.

The CCI has been given the right to comment on and issue binding directions to such

Financial Regulator in the event it is of the opinion that a Negative Effect will be or is likely

to be created as a result of such regulation, guidance or code. It is to be noted that such

binding directions given by the CCI need to laid by the Central Government before

parliament and approved. Hence, the FSLRC seems to have acknowledged the fact that such

power is to be exercised by the CCI only in rare cases. However, the 2015 Code contains no

guidance or guidelines to this effect. There are also no provisions which allow further

guidelines to be issued in this regard. While the 2015 Code lays down that the CCI and the

Financial Regulator must enter into a memorandum of understanding to provide for issues

such as procedures for reference, appointment of nominees, co-ordination in relation to the

review of any combination, exchange of information between the CCI and the Financial

Regulator and identification of a market, there is no scope for guidelines under the 2015 Code

with respect to the CCI‘s power to issue binding directions to the Financial Regulators.

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B. VIABILITYOF CCI ACTION IN THE FINANCIAL SERVICES/PRODUCTS MARKET

The CCI is a pan–sectoral regulator which is tasked with regulating competitive forces

across sectors and markets. However, the 2015 Code gives the CCI unprecedented power to

review and revise policy decisions of the Financial Regulators, if it is of the opinion that the

said decisions cause a Negative Effect in the market. Such regulations / guidance issued by

the Financial Regulators may be aimed at correcting certain specific issue s in the financial

services / products market. Subjecting them to over-arching competition law may not be

prudent in all cases. It is to be noted that competition regulators have been given such powers

in no major competition law jurisdiction apart from India.

C. COLOURING OF PROCEEDINGS BEFORE THE CCI

The 2015 Code further prescribes that in proceedings under the Competition Act in which at

least one of the parties is a financial services provider, the Financial Regulator would be

entitled to nominate a member or senior official to attend the CCI‘s proceedings as a non-

voting participant. While in concept, such a nomination looks like a sound way to lend

sectoral expertise to the CCI proceedings, the presence of the nominee (even if non- voting)

may prejudice the case against the defendant. The viewpoints of regulatory agencies,

including the Financial Regulators, are necessarily formed by a multitude of issues and policy

considerations. However, these considerations do not and should not form part of any

assessment of anti-competitive affects by the CCI. In the event a senior official of the

Financial Regulator is present during the proceedings, he/she will have the power to influence

the proceedings even without a vote. This would be prejudicial towards the rights of the party

concerned. Further, if an issue in the alleged contravention by the party is a rule or regulation

of the Financial Regulator itself, then the Financial Regulator, though its non-voting

nominee, may be said to be sitting in judgement over its own case and thus violating the

principles of natural justice. In sum, the presence of a non-voting nominee may create a

multitude of due–process issues which may detract from the CCI‘s role as a competition

regulator – as opposed to a setter of financial policy.

CONCLUSION

In sum, the 2015 Code is a welcome step towards harmonising the various financial norms

and regulators under one common umbrella. Instituting the CCI as a watchdog over anti-

competitive effects of financial policy is a testament to the fact that the GoI places high

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importance on a market without significant distortions. However, as can be seen above, the

present text of the 2015 Code leaves significant questions unanswered. Further, there is an

abject lack of guidelines to clearly demarcate the nature and scope of the CCI‘s oversight on

the market for financial services and products in India. The need of the hour thus, is for the

GoI to inject some much-needed clarity into the picture by coming out with comprehensive

guidelines which clearly show the position and powers of each stakeholder in this market,

including the CCI.

I

LESSONS FROM SELECTED JURISDICTIONS ON ABUSE OF DOMINANCE

- DR. SOUVIK CHATTERJ

ABSTRACT

Abuse of dominance is a serious menace all across the world. More than 100 jurisdictions

across the world have identified abuse of dominance as an anti-competitive activity. India

also considers Abuse of Dominance a wrong under section 4 of the Competition Act, 2002, as

amended by the Competition (Amendment) Act, 2007. The article examines abuse of

dominance in selected jurisdictions and mentions the way ahead.

I. INTRODUCTION

The leading jurisdictions across the world treat abuse of dominance as serious anti-

competitive activity and punishes the alleged wrong-doers in their own way. Dominance is

not considered a per-se offence in any jurisdiction. Abuse of dominance is considered anti-

competitive. All the jurisdictions examine relevant market in their own way.

The European Commission in a number of judgments mentioned the criteria to be examined

in determining relevant market in the context of a abuse of dominance. Hoffman La Roche v.

Commission of the European Communities1 observed that it is essential to define the relevant

market and it must be defined both from the geographical and the product points of view.

For the purposes of Article 102 of the Treaty of Functioning of European Union, the proper

definition of the relevant market is a necessary precondition for any judgment as to allegedly

anti-competitive behaviour, since, before an abuse of a dominant position is ascertained, it is

necessary to establish the existence of a dominant position in a given market, which

presupposes that such a market has already been defined.

In USA also abuse of dominance is tested seriously with the first consideration of relevant

market. The American Courts have emphasized the importance of first defining the relevant

markets, taking into account both the product and geographic aspects in the following cases,

LLM (Warwick University, UK), PhD (National Law University, Jodhpur). The author can be contacted at

souvikchatterji2000@gmail.com 1Case 85/76. European Court reports 1979 Page 00461

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Walker Process Equipments Inc. v. Food, Machinery and Chemical Corp, 2 Image Technical

Services Inc v. Eastman Kodak Co,3 Green Country Food Market, Inc v. Bottling Group,4

LLC and Bottling Group Holdings, Inc, United States v. E.I. du Pont de Nemours & Co.,5

Brown Shoe Co. v. United States,6 etc.

Australia has its own considerations. Section 4(e) of the Australian Trade Practices Act, 1974

defines market as ―For the purposes of this Act, unless the contrary intention appears, market

means a market in Australia and, when used in relation to any goods or services, includes a

market for those goods or services and other goods or services that are substitutable for, or

otherwise competitive with, the first-mentioned goods or services‖. 7 The Australian Courts

begin a determination of ―misuse of market power‖ by defining both dimensions of the

relevant market.

India has its own criteria to determine abuse of dominance. Section 4 of the Act prohibits the

abuse of dominance by any enterprise or group of enterprises. 8 The Act prescribes a three-

step test for the determination of abuse of dominance: defining the relevant market; assessing

dominance in the relevant market; and establishing abuse of dominance.

Each of the above steps is key to establishing liability under section 4 of the Act.

A. DEFINING THE RELEVANT MARKET

The dominance of an enterprise is always determined with respect to a particular relevant

market. The concept of the ‗relevant market‘ is critical to competition law, and in the case of

an abuse of dominance investigation, sets the parameters for the determination of

‗dominance‘.

The relevant market is determined on the basis of relevant product or service market and

relevant geographic market. The relevant product market is defined as all those products or

services which are regarded as interchangeable or substitutable by the consumer, on the basis

of product characteristics, prices and end-use. Apart from such demand-side factors, the CCI

considers supply- side factors such as switching costs for producers, etc, in defining the

2382 U.S. 172 (86 S.Ct. 347, 15 L.Ed.2d 247).

3504 U.S. 451 (1992).

4371 F.3d 1275.

5351 U.S. 377 (1956).

6June 25, 1962. 370 U.S. 294.

7Section 4 (e ) of the Australian Trade Practices Act (The year of the Act?).

8Section 4 of the Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007.

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relevant product or service market. The relevant geographic market is defined as a market

comprising the area in which there exists distinct homogenous competitive conditions in

terms of demand and supply of goods or services, which can be distinguished from the

conditions prevailing in neighboring areas.

As such, the breadth of the relevant market definition is an important factor in establishing

whether an enterprise is dominant or not. A classic example is the case of real-estate major,

DLF Limited in Belaire Owners‟ Association v DLF Limited (‗DLF case‘).9 The CCI defined

the relevant market extremely narrowly to be the market for ‗high-end residential apartments

in the city of Gurgaon‘. By restricting the product scope and the geography of the relevant

market to a particular suburb, the CCI‘s decision that DLF was dominant in the relevant

market was but a given. In contrast, in the Coca-Cola cases, (which dealt with the alleged

abuse of dominance in relation to the sale of its aerated drinks and bottled water at high

prices by Coca-Cola in multiplex theatres), the CCI held that Coca-Cola was not dominant,

by defining the market to be all multiplex theatres in India, as opposed to any single

multiplex theatre, which would no doubt have led to the obvious conclusion that Coca-Cola

was dominant.10

The CCI has assessed numerous sectors in the four years since Section 4 of the Act was

notified, such as real estate, public utilities, stock exchange services, publishing houses, food

and beverages, etc. and appears to be moving towards a trend of more substantive analysis,

including econometric data. Section 4 of Competition Act, 2002, as amended by the

Competition (Amendment) Act, 2007 reads as follows. Section 4 in the Competition Act,

2002

4. Abuse of dominant position.-

(1) No enterprise shall abuse its dominant position.

(2) There shall be an abuse of dominant position under sub-section (1), if an enterprise,—

(a)directly or indirectly, imposes unfair or discriminatory—

(i) condition in purchase or sale of goods or services; or

9Case No. 19/2010

10Consumers Guidance Society v. Hindustan Coca-Cola Beverages Private Limited, (UTPE 99/2009) ;M/s Cine

PrekshakulaViniyogaDarulaSangh v. Hindustan Coca-Cola Beverages Private Limited, (RTPE 16/2009).

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(ii) price in purchase or sale (including predatory price) of goods or service; or

Explanation.—For the purposes of this clause, the unfair or discriminatory condition in

purchase or sale of goods or services referred to in sub-clause (i) and unfair or discriminatory

price in purchase or sale of goods (including predatory price) or service referred to in sub-

clause (ii) shall not include such discriminatory conditions or prices which may be adopted to

meet the competition; or

(b) limits or restricts—

(i) production of goods or provision of services or market therefor; or

(ii) technical or scientific development relating to goods or services to the prejudice of

consumers; or

(c) indulges in practice or practices resulting in denial of market access; or

(d) makes conclusion of contracts subject to acceptance by other parties of supplementary

obligations which, by their nature or according to commercial usage, have no connection with

the subject of such contracts; or

(e) uses its dominant position in one relevant market to enter into, or protect, other relevant

market. Explanation —For the purposes of this section, the expression—

(a) ―dominant position‖ means a position of strength, enjoyed by an enterprise, in the relevant

market, in India, which enables it to—

(i) operate independently of competitive forces prevailing in the relevant market; or

(ii) affect its competitors or consumers or the relevant market in its favor;

(b) ―predatory price‖ means the sale of goods or provision of services, at a price which is

below the cost, as may be determined by regulations, of production of the goods or provision

of services, with a view to reduce competition or eliminate the competitors

The CCI has also considered several natural monopoly sectors, such as the coal sector as

well as the sports sector. As discussed in greater detail below, the CCI seems to have

departed from its usual standards in its assessment of sports federations as a natural

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monopoly, as is demonstrated from the contradictory holdings in Surinder Singh Barmi v

Board of Control for Cricket in India11 and Dhanraj Pillai v Hockey India.12

B. ASSESSMENT OF DOMINANCE

Dominance is defined as the ability of an enterprise to operate independently of market forces

and enables it to affect competitors or consumers or the relevant market in its favor. 13Under

section 19(4) of the Act, the CCI is required to assess dominance on the basis of the

following factors:

market share;

size and resources of the enterprise;

market share of competitors;

economic power of the enterprise, including commercial advantages over competitors;

vertical integration of the enterprises or sale or service network of such enterprises;

dependence of consumers on the enterprise;

legal monopoly or dominant position;

entry barriers, including barriers such as regulatory barriers, financial risk, high

capital cost of entry, marketing entry barriers, technical entry barriers, economies of

scale, high switching costs;

countervailing buyer power;

market structure and size of the market;

social obligations and social costs;

relative advantage, by way of the contribution to the economic development, by the

dominant enterprise; or

any other factor that the CCI may consider relevant for the inquiry. 14

Section 19 of Competition Act states the following. Section 19 in the Competition Act, 2002

19. Inquiry into certain agreements and dominant position of enterprise.—

11

Competition Commission of India, Case No. 61 of 2010 12

Competition Commission of India, Case No. 73/ 2011 13

Exp lanation (a) of Section 4 (2) of the Competition Act, 2002, as amended by the Competition (Amendment)

Act, 2007. 14

Section 19 (4) of the Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007.

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(1) The Commission may inquire into any alleged contravention of the provisions contained

in sub-section (1) of section 3 or sub-section (1) of section 4 either on its own motion or on—

(a) receipt of a complaint, accompanied by such fee as may be determined by regulations,

from any person, consumer or their association or trade association; or

(b)a reference made to it by the Central Government or a State Government or a statutory

authority.

(2) Without prejudice to the provisions contained in sub-section (1), the powers and functions

of the Commission shall include the powers and functions specified in sub-sections (3) to (7).

(3) The Commission shall, while determining whether an agreement has an appreciable

adverse effect on competition under section 3, have due regard to all or any of the following

factors, namely:—

(a)creation of barriers to new entrants in the market;

(b) driving existing competitors out of the market;

(c) foreclosure of competition by hindering entry into the market;

(d) accrual of benefits to consumers;

(e) improvements in production or distribution of goods or provision of services;

(f) promotion of technical, scientific and economic development by means of production or

distribution of goods or provision of services.

(4) The Commission shall, while inquiring whether an enterprise enjoys a dominant position

or not under section 4, have due regard to all or any of the following factors, namely:—

(a) market share of the enterprise;

(b) size and resources of the enterprise;

(c) size and importance of the competitors;

(d)economic power of the enterprise including commercial advantages over competitors;

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(e) vertical integration of the enterprises or sale or service network of such enterprises;

(f) dependence of consumers on the enterprise;

(g) monopoly or dominant position whether acquired as a result of any statute or by virtue of

being a Government company or a public sector undertaking or otherwise;

(h) entry barriers including barriers such as regulatory barriers, financial risk, high capit al

cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost

of substitutable goods or service for consumers;

(i) countervailing buying power;

(j) market structure and size of market;

(k) social obligations and social costs;

(l) relative advantage, by way of the contribution to the economic development, by the

enterprise enjoying a dominant position having or likely to have appreciable adverse effect on

competition;

(m)any other factor which the Commission may consider relevant for the inquiry.

(5) For determining whether a market constitutes a ―relevant market‖ for the purposes of this

Act, the Commission shall have due regard to the ―relevant geographic market‖ and ―relevant

product market‖.

(6) The Commission shall, while determining the ―relevant geographic market‖, have due

regard to all or any of the following factors, namely:—

(a) regulatory trade barriers;

(b) local specification requirements;

(c) national procurement policies;

(d) adequate distribution facilities;

(e) transport costs;

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(f) language;

(g) consumer preferences;

(h) need for secure or regular supplies or rapid after-sales services.

(7) The Commission shall, while determining the ―relevant product market‖, have due regard

to all or any of the following factors, namely:—

(a) physical characteristics or end-use of goods;

(b) price of goods or service;

(c) consumer preferences;

(d) exclusion of in- house production;

(e) existence of specialised producers;

(f) classification of industrial products.

Thus, there is no bright line market share test, unlike as with other jurisdictions, for the

determination of dominance under the Act, even though market share is treated as an

important indicator. The CCI has considered market share in most cases of abuse of

dominance it has reviewed, but has also considered subjective factors such as vertical

integration, countervailing buyer power, economic power of the enterprise, entry barriers,

statements in the public domain, etc. This is evident from two important orders passed by the

CCI relating to abuse of dominance: the MCX Stock Exchange v National Stock Exchange of

India Limited (the NSE case)15 and the DLF case.

C. DETERMINATION OF DOMINANT POSITION

Dominance is a position of economic strength enjoyed by an undertaking which enables it to

prevent effective competition being maintained on the relevant market by according it the

power to behave to an appreciable extent independently of its competitors, its customers and

ultimately of the consumers. This has been stated in the case United Brands Company v.

15Case No. 13 / 2009.

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Commission of the European Communities16.Let us now examine the interpretation of

‗dominant‘ position in various jurisdictions.

European Commission - The European Commission treaty does not contain a specific

definition of ―dominant position‖. However, the European Court of Justice has, in some

decisions defined ―dominant position‖.

United Kingdom - According to Section 18(3) of the Competition Act of the United

Kingdom, "dominant position" means a dominant position within the United Kingdom; and

"the United Kingdom" means the United Kingdom or any part of it‖. Section 18 does not

provide what is meant by dominant position.

United States of America - Under the antitrust law of the United States, the term

corresponding to ―dominant position‖ is ―monopoly‖. ―Monopoly Power‖ is defined as the

power of the concerned entity to control prices or to restrict or exclude competition. It is

reiterated in the case of United States v. E.L. du Pont de Neumours and Co United States v.

du Pont de Neumours and Co.17

India - The Indian Competition Act contains a definition of dominant position that takes into

account whether the concerned enterprise is in such a position of economic strength that it

can operate independently of competitive forces or can affect the relevant market in its

favour. Explanation (a) to Section 4 of the Indian Competition Act 2002 defines dominant

position as ―dominant position means a position of strength, enjoyed by an enterprise, in the

relevant market in India, which enables it to- operate independently of competitive forces

prevailing in the relevant market or affect its competitors or consumers or the relevant market

in its favour.‖

The Competition Act, 2002 displays a marked shift from the Monopolies and Restrictive

Trade Practices Act, 1969 (MRTP) as regards the definition of dominance or dominant

position goes. Under the MRTP Act, a dominant undertaking was defined as one which

supplied, produced or controlled not less than one fourth of the total supply of that good or

service in India.

16 [1978] ECR 207

17 351 US 377 (1956)

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D. PREDATORY PRICING

Predatory Pricing has not been mentioned specifically in the competition laws of most of the

jurisdictions studied as amounting to ―an abuse of dominance‖. However, under the Indian

Competition Act, ―directly or indirectly imposing unfair or discriminatory price in the

purchase or sale (including predatory pricing) of goods or services‖ has been specified as

amounting to an abuse of dominance if engaged in by a dominant enterprise. 18

European Commission - Article 82 of the EC Treaty is the relevant provision in the EC,

concerning predatory pricing. It prohibits a firm's conduct that abuses a dominant position

within the Community and may affect trade between Member States as mentioned in the case

of AKZO Chemie BV.

United States of America - Section 2 of the Sherman Act condemns monopolisation or the

attempt to monopolise any part of commerce among US States. In the United States, the

Clayton Act prohibits predatory pricing and price discrimination.

In India, in reality, on which the Competition Act, 2002 is based on, the supply of a product

is more often than not, limited to the hands of a single market player, who, using his

dominance has grown so powerful because of the low production cost he has, for the simple

reason that his economies of scale are huge and research and development facilities better

than most, he can determine the price without considering the fixed price, thereby

misallocating efficiency.

As per Explanation (b) at the end of Section (4), ‗predatory price‘ means the sale of goods or

provision of services at a price below cost with the subject to reduce competition or eliminate

competitors.19

Although, India‘s theoretical law is based on the UK model, but a careful study of the

practical reality shows that the Indian judges have followed the US model.

One of the most important things that the Indian Supreme Court had to decide on was

whether or not selling at a lower price is illegal per se. Prima facie, the section has been

divided into two parts and so both the parts/conditions need to be fulfilled, and therefore,

18Section 4 of the Competition Act, 2002, as amended by the Competition (Amendment) Act, 2007.

19Section 4 (b) of the Competition Act, 2002, as amended by the Competition (Amendment) Act 20 07

20

only when the goods are priced below the cost with an intention of driving out the

competitors, it can be said to be illegal and termed predatory pricing.

Moreover, as per the Competition Act, 2002 even dominant position in itself is not an abuse

or a restrictive trade practice. This is also the position under Section 2 of the Sherman Act,

1860 and under Article 82 of the EC Competition Law.

E. ABUS EOF DOMINANCE IN INDIA

Under the Indian Competition Act, and the competition laws of different jurisdictions,

relevant determination is the first step in the context of fact finding and examination of abuse

of dominance and anti-competitive activity.20As per Section 2 (s) of the Competition Act,

India, relevant geographic market includes a market comprising of the area in which the

conditions of competition for supply of goods or provision of services are distinctly

homogenous and can be distinguished from the conditions prevailing in the neighbouring

area.

Section 2 (t) defines ―relevant product market‖ as ―market comprising all those products or

services which are regarded as interchangeable or substitutable by the consumer, by reason of

characteristics of the products or services, their prices and intended use .‖

Different jurisdictions define relevant markets in their own ways. In determination of the

relevant market it is common to use certain economic tools. One such tool is the SSNIP test

(Small, but Significant, Non-transitory Increase in Price). It is also called the Hypothetical

monopolist test.

The question asked is that if the price of the product is increased by a factor of around 5 to 10

per cent, which other products would the customer switch to, all such products being covered

by the relevant product market. 21 In Malaysia, the relevant market is defined as a smallest

group of products (in a geographical area) that the hypothetical monopolist controlling that

product group (in that area) could profitably sustain a price above the competitive price.

Relevant Product and Geographical Market in India

20

Relevant Product Market and Relevant Geographical Market is defined under section 2 of the Competition

Act, 2002, as amended by the Competition (Amendment) Act, 2007. 2121

United States v. E.I.Du Pont de Nemours and Co ., 118 F Supp 41 (D Del 1953. In USA, inspite of the failure

of the SSNIP test, many cases had been decided on the basis of relevant product market being determined by

using SSNIP.

21

Relevant product market and geographical market is defined in the following way in India:

Relevant product market – In addition to the definition u/s 19 (7), India had specified

criteria like physical characteristics or end uses, consumer preferences, price of goods

or services, etc.

Relevant geographic market – India had specified criteria u/s 19 (6) like regulatory

trade barriers, transport costs, language, consumer preferences, etc. Physical

characteristics or end- uses have huge relevance across the globe. In the Aerospatiale-

Alenia/de Havilland case, ,22

the European Competition Commission decided that

commuter turboprop aircraft with more than 20 seats occupied three distinct markets:

aircraft with 20-39 seats; with 40-59 seats and with 60 or more seats.23The differences

in the seating capacities were fundamental to definition of separate markets because

this determined the type of routes on which these aircrafts could be used.

F. IMPORTANCEOF DLF CAS E IN INDIA IN THE CONTEXT OF ABUS EOF DOMINANCE

The DLF Case is the most landmark case in India in the context of the success of the

Competition Commission of India in addressing abuse of dominance. 24 Unilateral changes

can be made by the builder without the buyers‘ consent. DLF unilaterally decided to increase

the size of the building from 19 floors to 29. The builder enjoys unilateral right to increase or

decrease the super area at his sole discretion without consulting allottees, who, nevertheless

are bound to pay additional amounts or accept a reduction in the area.

Allottees have no exit option except when builder fails to deliver possession within the

agreed time, but even in that case, they get refunds without interest, and that too only after the

apartment is sold. Punitive penalties can be imposed if you default, but not if the builder

defaults. DLF took crores of rupees from the allottees, even before the first brick was laid.

CCI found all the 16 conditions to be unfair and abusive.

In this connection, it is necessary to examine the concept of ―after market abuse‖ as explained

by the U.S. Supreme Court in the case of Eastman Kodak Co. v. Image Tech.25 In this case,

Kodak was the seller of photocopying machines. In the market of photocopying machines,

22

91/619 [1992] 1 CEC 2,034 23

91/ 619 [1992] 1 CEC 2,034. 24

Belaire Owner‟s Association versus DLF Limited , Case No. 19 of 2010. 25

SVCS504 U.S. 451(I992).

22

Kodak was not a dominant player. As far as the services and the repair market for the

photocopiers was concerned, Kodak was initially selling the spares to various dealers who

used to service the photocopiers and use the spares supplied by Kodak. Kodak found that

some of these service dealers started developing their own spares to service the photocopiers

and some of them used to give better service than Kodak itself. Kodak therefore changed its

business model and asked the equipment manufacturers to supply the equipment to it only.

Kodak then used to sell the spares to those buyers of Kodak photocopiers who could service

them themselves or used to service the photocopiers with spares in Kodak's premises. In this

manner, Kodak had control over 100% of the spares and around 85% of the service itself.

Thus, many of the earlier Kodak dealers who used to service the Kodak photocopiers were

driven out of business. These dealers filed an antitrust case against Kodak. The District Court

ruled in favour of Kodak. The dealers took the case in appeal to the court of Appeals for the

Ninth Circuit. The Court of Appeals held that Kodak's approach was anti-competitive,

exclusionary and involved a specific intent to monopolise. Aggrieved against the judgement

of the Court of appeals Kodak went to the Supreme Court of the U.S.A.

The Supreme Court considered the facts of the case. In the opinion of the Supreme Court

there were two markets: the market of photocopiers where Kodak was not a second market

and was described by the Supreme Court as an aftermarket and consisted of service after

sales. In this after market, there was a tie in scenario as spares would be given with the

service. The Supreme Court then relied on its own decisions on market power. In the case of

Jefferson Parish26, the Supreme Court had held that market power is power ―to force a

purchaser to do something that he I would not do in a competitive market‖.

In another case U.S. v. E.I. du Point de Nemours & Co.,27 the Supreme Court had defined

market power as ―the ability of a single seller to raise price and restrict output‖. The existence

of such power is ordinarily inferred from the seller's possession of a predominant share in the

market.28 The Supreme Court then held that in the aftermarket, Kodak enjoyed monopoly

power. The Supreme Court also held that a customer is ―locked in‖ after the purchase of the

equipment, as the switching costs are high. The customer can then be subjected to abuse. The

Supreme Court also held that it is a question of fact as to whether information costs and

26 466 US at 14.9

27 351 U.S. 377, 391(1956)

28Jefferson Parish 466 US 17.1.

23

switching costs foil the assumption that the equipment and service market act as a pure

complement to each other. On these facts, the Supreme Court held that the behaviour of

Kodak was anti-competitive.

In this particular case also, there are two markets. The first market is where a consumer

enters into an agreement with builder and the second market is the aftermarket after he has

entered into an agreement with the builder and then the consumer is governed by the

agreement which he has entered into with the builder. By the virtue of the agreement the

builder acquires a dominant position over the consumer. This issue is covered in Section

19(4)(g) of the Act. The word ―otherwise‖ mentioned in Section W19(4)(g) is very pertinent.

In this particular case, dominance is established in the agreement. The Section is inclusive

and therefore has to be given a wide interpretation.

In fact Section 19(4)(m) talks of ―any other factor‖ which the Commission may consider

relevant for the inquiry. Therefore, while determining the abuse of dominance, the

Commission is entitled to consider any other one factor which shows that the enterprise is in

a dominant position to affect its competitors or consumers or the relevant market in its

favour. In this particular case, the informant became a captured consumer and he could be

discriminated and abused. Therefore, in this case, in the aftermarket, as there existed high

switching costs and information asymmetry, the abuse of dominance is established. In fact

the decision of the U.S. Supreme Court in the case of Eastman Kodak has been incorporated

in the explanation to Section 4 read with Section 19(4) of the Act.

Acting on a complaint filed by the Owners‘ Association of one of the DLF building ―Belaire‖

in Gurgaon, in the case of Belaire Owners Association (“Informant”) v. DLF Limited &Ors.

(“Opposite Parties”) ,29 the CCI pronounced DLF Limited (―DLF‖) guilty for grossly

abusing its dominant market position in the concerned relevant market and imposing unfair

conditions in the sale of flats/apartments to home buyers/consumers. The CCI imposed a

penalty of INR 6,300 million (USD 140 million), at the rate of 7% of the average turnover of

DLF for the last three financial years and issued a ‗cease and desist‘ order against DLF from

imposing such unfair conditions in its agreements with buyers for residential buildings to be

constructed in Gurgaon.

29 Competition Commission Of India, Case No.19/ 2010

24

The relevant product market included services by developer/builder in respect of ‗high-end‘

residential building in Gurgaon and the CCI held that although there can be no hard and fast

rule to determine what constitutes ‗high-end‘, the same needs to be determined on the basis of

facts and circumstances of each case.

‗High-end‘ is not a function of size alone but includes a complex mix of factors such as size,

reputation of location, characteristics of neighbours, quality of construction and actual

customers and their capacity to pay.

Relevant geographic market included the market for services of developer/builder in respect

of high-end residential accommodation in Gurgaon. A decision to purchase a high-end

apartment in Gurgaon is not easily substitutable by a decision to purchase a similar apartment

in any other geographical location.

The CCI‘s scope was limited to the extent of the purchasing power of average citizens and

small increase in prices was immaterial in such cases. The CCI relied on the CMIE data

which said DLF had the highest market share (45%), vis-a-vis the market share of the nearest

competitor (19%) which was more than twice of its competitor, leading to hardly any

competitive constraints.30

G. AJAY DEVGN CAS E

The question of relevant market again was examined by the CCI in the Ajay Devgn Case.

Ajay Devgan v.Yash Raj Productions.31

It was alleged that Yash Raj Films had put a

condition to single screen owners that if they wanted to exhibit movie A (bound to be a

blockbuster) at the time of Eid, they would have to simultaneously agree to exhibit movie B

at the time of Diwali.

Any single screen theatre who did not agree to booking of his theatre for both the films would

not get the right to exhibit the single film. Out of 1407 single screens, 821 agreed to show A

(Ek Tha Tiger), and B (Jab Tak Hai Jaan).

The informant however failed to substantiate how ‗film industry in India‘ was the relevant

market and how YRF was dominant in this relevant market. As per the information available

in the public domain, in Bollywood itself, 107 and 95 films were released in 2011 and 2012

30 CMIE includes Center for Monitoring Indian Economy.

31Case No. 66 of 2012.

25

respectively. Out of this, YRF produced only 2-4 films each year. This cannot be said to

amount to dominance even in the Bollywood industry.

In the scheme of the Competition Act, tie-in arrangements per se are not violative of Section

3(4)(a) of the Act. Whether such an agreement is prohibited under the Act depends upon its

actual or likely appreciable adverse effect on the competition in India.

The Commission took the view that the agreement has neither created entry barriers for new

entrants nor has driven existing competitors out of the market, nor is there any appreciable

effect on the benefits accruing to the ultimate consumer viz. the viewers. Single screens

contributed to 35% of revenue while multi-screen theatres contributed to 65% of revenue.

Ajay Devgan appealed in Comp. Appellate Tribunal, for stay of JTHJ, but COMPAT rejected

the stay petition.

H. RECOMMENDATIONS

After analysing the DLF Case in India, the following recommendations can be made:

In the determination of relevant market, just like in case of abuse of dominance, the

CCI should also look into sub- markets in the cases of the anti-competitive

agreements.

In the determination of relevant geographic market in cases of anti-competitive

agreements, India should consider the relevant geographic area rather than entire

India.

India should give importance to ―intent‖ in the determination of abuse of dominance

and anti-competitive agreements like Competition agencies of Japan, UK, and if the

intent is to exclude competitors in the relevant market the alleged party should be

prevented from continuing the activity.

II. CONCLUSION

In conclusion, it can be said that determination of dominance is the most complicated task of

the competition agency in any jurisdiction. India has the relevant provisions in place.

According to Section 19(1) of the Indian Competition Act 2002, the Competition

Commission of India may inquire into any alleged contravention of Section 4(1) i.e. abuse of

26

dominant position by an enterprise on its own motion or by receipt of a complaint, or a

reference made to it by the Central Government, State Government or a statutory authority.

Section 27 of the Act lays down the orders that can be passed by the Commission upon

finding that the action of an enterprise in a dominant position is in contravention of Section 4.

Section 34 further states that the Commission has been empowered to pass an order for

compensation to be recovered from an enterprise due to whose conduct loss or damage has

been suffered. The successful implementation of these provisions by DG and CCI will ensure

India‘s success in abuse of dominance cases. India can look into the best practices in USA,

UK, European Union, Australia and other jurisdictions. CCI is very new. A lot of co-

operation is required also from the sectoral regulators and stakeholders for successful

implementation of the provisions of the Competition Act in India.

INTERFACE OF IPR AND COMPETITION LAW: IMPACT ON ACCESS TO

MEDICINE

-DR. GARGI CHAKRABARTI*

INTRODUCTION

Competition issues in pharmaceuticals largely pertain to the area of prescription medicines. It

must be noted that there is an inherent development dimension in the application of

competition law and policy to economic activity and its application to the p harmaceutical

industry is more so important. The pharmaceutical industry is an important source of health

care for billions of people globally. Hence, it is a highly regulated sector. The pharmaceutical

industry is influenced by a host of practices which may primarily relate to price regulations,

insurance and reimbursements, drug procurement by government agencies, patent laws,

innovation polices, biotechnology and safety policies, drug regulation, data protection,

trademarks and use of international non-proprietary names, drug promotion regulation, drug

advertising regulation etc. Hence competition law has to work in tandem with all such diverse

set of laws, polices and regulations governing the pharmaceutical sector. The legal and policy

issues raised by intellectual property have attracted increasing attention from policymakers

around the world. Modern advances in technology have created classes of products and

processes that present new challenges for patent and competition authorities. The Intellectual

Property Rights (hereinafter IPR) awarded under patent law gives exclusive rights to an

innovation which are limited in scope and duration and attempt to strike the appropriate

balance between these competing concerns. Competition law impacts on the exerc ise of those

rights, and therefore on the innovator‘s reward, by restricting certain practices involving the

IPR. The IP grant seeks to protect property rights, and, in so doing, limits competition. In

contrast, competition law generally has reflected the premise that consumer welfare is best

served by removing impediments to competition. However, this previous short–run view of

competition authorities has been replaced by a long–run view, which acknowledges that

technological progress contributes at least as much to social welfare as does the elimination

of inefficiencies from non-competitive prices. There is, therefore, a growing willingness to

restrict competition today in order to promote competition in new products and processes

*The author is an Associate Professor, National Law University, Jodhpur. The author can be contacted at

73.gargi@gmail.com.

28

tomorrow. Thus, IPRs and competition policy are now seen as complementary ways of

achieving efficiency in a market economy. In this literature two patent instruments are

considered, the length of the patent grant and the scope (or breadth) of the patent. While

patent length establishes the extent to which firms have exclusive rights over their own

inventions, patent scope establishes the extent to which a pioneer has property rights over

related inventions. That is, patent scope dictates how similar imitations can be to the original

innovation without infringing the patent grant. If patent scope is narrow, then firms may

develop a close substitute, for example, through small chemical changes in a drug‘s

composition. For patented innovations, patent law ensures the existence of property rights,

while antitrust policy restricts the exercise of those rights. While the rules or guidelines for

competition policy explicitly acknowledge the rights provided by patents and the benefits

from diffusion from particular licensing restrictions as well as the possible adverse effects on

prices, they are silent on whether competition policy should evaluate the impact that the

licensing restriction may have on incentives to innovate. The role that competition policy

should take in promoting research and development is more contentious. The belief is that

competition is the best approach for innovation and to save consumers money. In the

pharmaceutical industry, the first generic competitor typically enters the market at a price that

is 20% to 30% of the brand name counterpart and then gains a substantial market share in a

short time. After six months other generic companies can enter, meaning a discounted price

of about 80% of the price of a brand name drug, with generic sellers capturing 50-90% of the

market. In a typical pay for delay settlement, the branded manufacturer will pay the potential

generic entrant an amount of money, in exchange for the generic company delaying its entry

into the market. In the absence of an exclusionary reverse payment or a pay for delay

settlement, the generic companies could be expected to enter at an earlier date. In effect, these

agreements allow the brand name company and the generic firm to share the excess profit

that should have gone to consumers. Competition authorities should focus on the behaviour

after patents have been granted, rather than questioning the granting of monopoly rights

through allowing the patent in the first place. A less competitively distortive means of

incentivizing innovation could be the use of innovation prizes, where large sums of money

are offered for certain types of discoveries, e.g. a cure for neglected diseases.

The innovation should not be inexorably tied to IP rights, and a significant amount of

valuable innovation is never patented. There are other means of incentivizing innovation, e.g.

through the trade secret regime or contractual protections, and in some cases technology

29

moves too quickly for patenting to be worthwhile. However, in terms of prizes or government

funding, research suggests that these methods are not as effective as IP rights. Given the

substantial amount of investment necessary in pharmaceuticals, the prize fund would have to

match this. The prizes would also become distortive and drive innovation towards the prize

regime, rather than more valuable goals. An example from Italy will explain the impact of

patent policy on competition. Patent coverage is more extensive in Italy, resulting in a

distortive effect on competition. Legislative intervention gradually reduced this

supplementary patent coverage by six months every two years until the Italian legislation

aligned itself with other European legislation. Incentives are distorted as pharmacy

distribution margins are fixed by law as a percentage of the price of the product, and as a

consequence pharmacists have an incentive to sell higher priced drugs. Suggestions for

rectifying this include moving to a fee for service remuneration system or requiring doctors to

write the active ingredient on the prescription and not the name of the branded drug.

Competition Authority should judge the negative impact of patent related trade practices

more seriously and should intervene accordingly to minimize the anti-competitive effects on

the market.

WHETHER IPR AND COMPETITION LAW ARE IN AGREEMENT OR DISAGREEMENT?

The premise of intellectual property rights is to recognize and reward the innovators and

creators of intellectual work, encourage industrial and technical progress as it spurs invention

and innovation. It also infuses efficiency and stimulates competition in new products, new

markets and new technologies which is the life-breath of market driven economies; the

consequential positive impact of which is felt by the consumers as well. On the other hand,

competition law and policy also have a vital role to play in market based economies, as they

usher an environment of free and fair play of market forces. They carve space for new

entrants in the market by putting restraints on monopolistic anti-competitive behaviour of

dominant enterprises and by checking collusive tendencies. They function on the touchstone

of consumer welfare and economic efficiency. The ability of IPR owners to charge above

marginal cost derives from the exclusivity/monopoly which they are granted. This is not

necessarily a monopoly in an antitrust sense, but it does limit competition to a great extent.

The effect on competition depends on the nature and extent of IPRs granted and the extent to

which close substitutes are, or are likely to be, available. For example, patent rights provide

exclusive rights over ideas, whereas copyright only provides protection against copying

30

particular expressions of ideas; so, patents are likely to have a much greater impact on

competition than copyright. Hence, it is likely to be much more difficult, and require

considerably more sunk costs, to produce a substitute pharmaceutical product without

breaching existing patent. The nature of competition problems arising from IPRs include

excessive prices, price discrimination and raising barriers to entry in both the immediate and

downstream markets through licensing arrangements, brand loyalty, pre-emptive patenting

and restrictions on access.

At the highest level of analysis IPR and competition policies are complementary because they

share a concern to promote technical progress to the ultimate benefit of consumers. Firms are

more likely to innovate if they are at least somewhat protected against free-riding. They are

also more likely to innovate if they face strong competition. The problem is that even

completely legitimate use of IPR can restrict competition at least in the short run, thus

producing a trade-off between the benefits of increased competition and the gains from

further innovation. Such a trade-off probably lies outside patent office mandates, and is

inherently difficult for competition agencies to address. This problem could be aggravated by

competition agencies taking a strictly short run view of competition. Such agencies, however,

are increasingly adopting a dynamic view especially in the high-technology industries where

IPR can play a very important role in the competitive process. A common thread runs through

competition policy and intellectual property law as they intersect at the point of fostering

innovation, efficiency, consumer welfare and economic growth. Yet, an inevitable gap exists

in the sphere of ―monopoly rights‖ which is the essence of IPR. While an individual IPR may

have several substitutes and not pose competition problems, the aggregation of IP may create

market power. This is particularly likely to occur in a country where the original IPR are

located overseas and ownership may be dispersed, but a single company acquires the licenses

to manufacture and distribute a range of competing products. Another area of concern

regarding the aggregation of IPR occurs where rights are collectively administered.

Concomitantly, the abusive exercise of these very monopoly rights is antilogous with the

undisputable views of competition policy. The monopoly rights as granted by IPR could lead

to substantial market power (though not necessarily) which may be used to annihilate

competition in the market by ―exclusionary conduct‖ such as refusal to deal by dominant

enterprises. Likewise, anti-competitive behaviour could be in the form of ―collusive

activities‖ of a combination of IPR holders. IPR also afford an opportunity to the right

holders to maneuver the prices in a manner which enable them not only to recoup the R&D

31

costs but also secure unprecedented profits. These are only a few examples of how IPR

propelled market power could trample competition; these activities are discussed in depth in

next sections. There are quite a few practices in the market trend which can be considered as

anti-competitive. Merger and acquisition is the most important of them, but there are other

trends also which are also discussed here. The impact on intellectual property rights will be

discussed later on.

SIGNIFICANCE OF M ERGER AND ACQUISITION

The pharmaceutical industry is witnessing increasing consolidation, which is likely to

continue in the following years. Like the pre-1970‘s situation, it appears that the

multinational drug companies are all set to repeat its success in capturing a larger pie of

Indian markets. In 2009, India has seen few public offers for acquisitions. Experts believe

that a crash in the stock market over the year before that had helped the MNC‘s to increase

their acquisition activities. In the recent past there has been an increase in number of public

offers by the MNC‘s like Abbott India, Novartis India and Pfizer Ltd. to raise their equity

stakes. For e.g. it is reported that Pfizer Inc, a US pharmaceutical giant, has decided to raise

its equity stake in its Indian arm from 41.23% to 75%. This may work to an investment of Rs.

680 crore for Pfizer. In June 2008, Japanese firm Daiichi Sankyo Co. Ltd. had acquired 51%

stake of Ranbaxy, one of India‘s leading generic firm. Daiichi primarily looked at Ranbaxy‘s

marketing network in 60 countries as opposed to its own network of 21 countries, so the

market power for Daiichi had enormously increased by that deal. Again, Novartis AG had

acquired an additional stake of up to 39% in its majority owned Indian subsidiary Novartis

India Ltd. At present it has a controlling stake of 50.9% in its Indian arm. It was expected that

this will increase the stake to over 90% with investment of Rs. 440 crore. During September

2008, Abbott India completed its buy-back offer. With this offer, the promoters have

increased their stake from 65.14% to 68.94%. One of the major reasons identified by industry

experts is the current economic crises. If news reports can to be relied upon, at least seven out

of 10 foreign drug makers that have revenues of less than Rs. 500 crores each will find this

number rising to around Rs. 1,000 crore plus. In a recent move, global pharmaceutical major,

GlaxoSmithK line has signed an agreement with Dr. Reddy‘s to develop and market selected

products across an extensive number of emerging markets, excluding India. While the full

terms of agreement are not clear, news reports suggest that GSK will gain exclusive access to

Dr. Reddy‘s diverse portfolio and future pipeline of more than 100 off-patented, branded

32

pharmaceuticals. These products and pipeline falls under the fast growing therapeutic

segments such as cardiovascular, diabetes, oncology, gastroenterology and pain management.

Under the terms of the agreement, revenues will be reported by GSK and shared with Dr.

Reddy‘s as per the agreed terms. The products will be manufactured by Dr. Reddy‘s and

licensed and supplied by GSK in various countries in Africa, Middle East, Asia Pacific and

Latin America. In certain markets, products will be co-marketed by GSK and Dr. Reddy‘s.

However, Dr. Reddy‘s ,one of the major Ind ian firm investing in R&D, surprised everyone

when it decided to bury its prolific 15 year old R&D model. 15 years ago, Dr. Reddy‘s

developed itself under the guidance of Mr. K. Anji Reddy (founder chairman), who was a

scientist and whose visionary thoughts led to the experimentation of high risk and high

capital intensive model of drug discovery among Indian generic firms. It is well

acknowledged that any in new drug discovery, more molecules fail than succeed, and costs

run into millions of dollars. Dr. Reddy‘s built well-equipped labs and put together a team of

highly paid Indian scientists. It also created the Atlanta lab to research novel targets, but its

continued focus on generics to capture the lucrative market, did reportedly put it on the R&D

back front. Two major reasons have been manifested for Dr. Reddy‘s change in R&D

strategy - first, R&D is a high risk business, specially without appropriate human resource

and investor confidence and second, it is reported that Dr. Reddy‘s intended to save $10-15

million in fiscal 2011 from the renovation. In 2008-09, Dr. Reddy‘s spent Rs. 409 crores on

R&D (including on generics), up 18% over the previous year, however, the future investment

after the GSK tie- up is uncertain. During the period 2000-2006, the global generic industry

witnessed around US$ 35000 million of M&A value, suggesting increasing trends in

consolidation not just in research based pharmaceutical industry but in the generic industry.

Most of the Indian domestic mergers are between medium sized firms and most of them are

horizontal mergers. There are also high instances of cross-border acquisitions, and unlike in

case of mergers they are acquisitions by foreign companies. Large number of acquisitions

occurred among the foreign owned firms. It is noted that foreign firms are increasingly

willing to raise their stakes in the Indian subsidiary, the reason being a favourable investment

policy of the government and a conducive patent law regime for marketing new technology

products. These acquisitions have occurred where firms already had some managerial tie- ups.

Certain examples of firms that had such managerial tie- ups and subsequent acquisitions that

occurred are: Solvay Healthcare acquired 44.52% of equities in Solvay Pharmaceutical India,

the promoters of Syncom Formulations India have acquired 5.22% of equities; Abbott

Laboratory, USA acquired 51% of equity holdings in Abbott Laboratory India Ltd. etc. In

33

many cases, firms have acquired a small portion of the assets and later on opted for merging

with the same firms. Some of such cases are the mergers of Boehringer Mannheim with

Nicholas Piramal India Ltd. (NPIL), Roche Products with NPIL, Sumitra Pharmaceuticals

with NPIL, MJ Pharmaceuticals with Sun Pharmaceuticals, Vorin Laboratory with Ranbaxy

Laboratory, Rhone Poulance with NPIL, Matrix Laboratory with Ranbaxy Laboratory etc.

An interesting suggestion about a possible effect of combining through merger patents of

uncertain validity can be made. Suppose, prior to the merger, both the technology claimed by

A‘s patents and the technology claimed by B‘s patents are required to produce a

commercially marketable product. But each set of patents are also associated with a certain

probability that either the other patent owner or a third party will be able to invent around the

patent or have the necessary claims declared invalid. Thus, even without acquisition, pooling,

or cross- licensing, the two parties are potentially horizontal competitors, and there is some

possibility that a third party will be able to enter by obtaining a license from one and

inventing around or challenging the patent claims of the other. The prices for licenses will

reflect the perceived probabilities. After the acquisition or pooling, the probability of

competition is greatly reduced. A potential entrant will have to invent around or declare

invalid a much greater array of patents. This is potentially anticompetitive in the same way as

a two- level entry problem is anticompetitive under competition law. 1 Application of such a

theory would have to be limited by considerations such as the degree to which the transaction

increases the need for multiple- level entry, the extent to which such entry is more difficult

than single-level entry, and the degree to which the affected markets are susceptible to

monopolization or collusion.

In rapidly changing, high-tech industries, the most important dimension of competition is

often not the price of existing goods and services, but the price and, more importantly, the

quality, of goods and services that may come into being in the future. The US Guidelines

describe two ways of analyzing innovation effects: “as a separate competitive effect in

relevant goods or technology markets, or as a competitive effect in a separate innovation

market.”2 There has been considerable debate about the innovation market concept, 3 some of

it revolving around whether the effects in question can be analyzed equally well under the

1American Cyanamid Co., 72 F.T.C. 623, 684-85 (1967)

2 U.S. Dept. of Justice & Fed. Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property

(April 6, 1995), Section 3.2.3. 3Roscoe B. Starek, III, Former Commissione, Innovation Markets in Merger Review Analysis: The FTC

Perspective, Address before the Florida Bar (Feb. 23, 1996)

34

potential competition doctrine—with perhaps less risk of misunderstanding. 4 In Glaxoplc

acquisition case, Glaxo, the acquiring firm, sold an existing product for the treatment of

migraine attacks that was approved by the FDA in injectable form only. Both Glaxo and

Wellcome, the acquired firm, had products in the FDA approval process that would treat

migraine with an oral dosage. Hardly any other companies were involved in research and

development for such drugs, and barriers to entry were high. The FTC challenged that aspect

of the acquisition because it would have eliminated both the competition to develop those

drugs and the competition between those drugs once developed and approved. The result was

a consent order allowing the transaction as a whole to go through but restoring the

competition in that class of drugs.

IMPACT OF HIGH TRADE MARGIN

A survey conducted on doctors, pharmaceutical industry, consumer organizations, hospitals

and the pharmacists in India bring to light various facts about collusion along the

pharmaceutical distribution chain at the ground level.

In the study, the majority of the pharmaceutical companies surveyed claimed awareness with

respect to the existence of collusive practices in the pharmaceutical industry and a high

32.2% of respondents asserted that such practices prevail in the industry to a great extent.

Some of these unethical practices were pertaining to irrational drug prescriptions by doctors

motivated by kickbacks received from pharmaceutical companies. As a result they prescribe

expensive drugs that may not be even necessary. What encourages such rent-seeking

behaviour is the information asymmetry and low elasticity of demand to chang in price

because here the doctors are the influencers and not the consumers. Collusion also takes place

along the distribution between drug companies, stockiest, retailers, medical representatives

which disproportionately inflates the cost of medicines & the overall treatment. Consumers

have little or no choice in such a ‗rigged‘ market and have to buy what is prescribed by

Doctors or what is sold by Chemists.

Table1. Exorbitant Trade Margin in India

Company

Brand

MRP (Rs)

Purchase Price of

4FTC Staff, Anticipating the 21st Century: Competition Policy in the New High-Tech, Global

Marketplacech. 7 (1996); Richard T. Rapp, The Misapplication of the Innovation Market Approach to

Merger Analysis, 64 Antitrust L.J. 19, 37-46 (1995).

35

Retailers (Rs)

Ranbaxy

Stannist

26

1.80

Cadila Ceticad 26 1.60

Cipla Ceticip 27.50 2.00

Lupin

Lupisulide

24

1.94

Wockhardt

Setride

25.20

1.70

Lyka Labs Lycet 25 1.44

Ranbaxy

Pyrestat-100

25

1.50

Welcure Drugs

Omejel Cap

33

4.50

Wockhardt

Merizole-20

39

6.48

IMPORTANCEOF ANTI-COMPETITIVE AGREEMENTS

Collusive Activities are seen in India at different levels between manufacturer and health

service providers; like (i) Manufacturer and Doctors – driven by incentives for prescribing,

(ii) Irrational combinations, prescribing expensive brands and prescribing unnecessary

medicines – driven by incentives for prescribing, (iii) Manufacturer and Pharmacist –

colluding to clear a particular drug despite availability of cheaper variants, (iv) Tied Selling

Practices between manufacturer – doctor – pharmacist, (v) Manufacturers and Hospitals by

unethical manipulation. Affordable medicines are not produced – They are not stocked

owing to collusive agreements. Reining in such activities will go a long way in preventing

supernormal profits and allowing consumer access to affordable medications.

Over the last couple of years, Indian pharmaceutical companies have been increasingly

targeted by multinationals for both collaborative agreements and acquisition. During the first

half of 2011, Bayer and Zydus Cadila agreed to set up a joint venture called Bayer Zydus

36

Pharma (BZP), for the sales and marketing of pharmaceutical products in India. Other recent

collaborations include Sun Pharma working with MSD (Merck & Co) to market and

distribute Merck's Januvia (sitagliptin) and Janumat (sitagliptin+metformin) under different

brand names in India. In May 2011, Par Pharmaceutical Companies entered into a definitive

agreement to acquire privately- held Edict Pharmaceuticals, a Chennai-based developer and

manufacturer of solid oral dosage generics, Hikma Pharmaceuticals announced in April 2011

that it had agreed to acquire a minority interest in Unimark Remedies, a privately- held Indian

manufacturer of active pharmaceutical ingredients and API intermediaries. Abbott had a

patent on Hytrin (Used to treat hypertension). In 1998, Abbott's sales of Hytrin amounted to

$542 million (over 8 million prescriptions) in the United States. Abbotts patent on Hytrin was

nearing its expiry. Abbott projected that Geneva's entry with a generic version of Hytrin

would eliminate over $185 million ofHytrin sales in just six months. Abbott paid Geneva

approximately $4.5 million per month to keep Geneva's generic version of Abbott's

proprietary drug (Hytrin) off the U.S. market, potentially costing consumer s hundreds of

millions of dollars a year. Geneva also agreed not to launch the generic version till another

competitor in the market undertook to do so. Such an agreement was held anti-competitive as

it prevented the entry of competitors.

Tie- up agreements are made for controlling supply of active ingredients also, like

Agreements between FTC and Mylan Laboratories Inc. Complaint charged Mylan and other

companies with monopolization, attempted monopolization, and conspiracy in connection

with agreements to eliminate much of Mylan's competition. The alleged agreements were in

the nature of tying up supplies of the key active ingredients for two widely-prescribed drugs -

Lorazepam and Clorazepate; used by millions of patients to treat anxiety. The FTC's

complaint charged that Mylan's agreements allowed it to impose enormous price increases -

over 25-30 times the initial price level for the drugs. For example, in 1998, Mylan raised the

wholesale price of Clorazepate from $11.36 to $377.00 (per bottle of 500 tab lets) and

Lorazepam from $7.30 to$190.00 (per bottle of 500 tablets). The price increase resulting

from Mylan's agreements allegedly cost American consumers more than $120 million in

excess .Mylan agreed to pay $100 million for disbursement to qualified purchasers of

Lorazepam and Clorazepate.

37

MAGNITUDE OF PATENT POOLING

Patent pooling is normally pro-competitive if it is strictly confined to share complementary

patents. Competition agencies must be vigilant, however, against companies seeking to

combine substitute technologies and thereby reduce horizontal competition. There is a

particular danger that this could happen in the context of settling patent litigation.

Pooling and cross- licensing arrangements occur where two or more owners of different IPRs

license their respective IPRs to each other. In a pooling arrangement, they typically do so by

assigning or exclusively licensing their IPRs to a separately administered entity, which

thereafter controls the licensing of the portfolio and its individual items to those who

contributed the IPRs and, in many cases, to third parties. The terms of such arrangements

may vary. The pool members may have the use of the IPRs royalty- free or at a positive price;

they may split the proceeds according to various formulae; there may be different voting

structures or veto rights. As indicated above, a critical issue in evaluating the competitive

significance of such arrangements is whether the arrangement is horizontal or vertical.

If, for example, two IPR owners control b locking patents (a vertical relationship), they ought

to be encouraged to combine their IPRs by licensing each other or forming a pool. Without

such an arrangement, neither could use the technology, and society would be worse off. On

the other hand, if neither IPR owner needs the other in order to compete at maximum

efficiency (including as to creation of ―next-generation‖ products), then what is the legitimate

purpose of the arrangement? In such a circumstance, the arrangement likely serves only to fix

prices or divide markets. For example, if manufacturers X and Y form a pool, and the pool

licenses X to use the technology only in North and South America and Y to use the

technology only in Europe and Asia, the effect would be to set each of them up as

monopolists in their respective territory, even though, without the pool, each could have

competed world-wide. Similarly, if X and Y license form the pool at a very high per- use

royalty, such an arrangement could ensure that their marginal costs will be so high that each

will be forced to price at the joint monopoly profit- maximizing level.

More complex situations arise when the arrangement is partly vertical and partly horizontal.

For example, if X and Y would have been able to compete with each other, but their products

would not have been quite good, then a trivial improvement entitle parties that otherwise

would be competitors to form a highly restrictive pool that fixes prices at the joint monopoly

38

profit-maximizing level. Conversely, the possibility would be that, the parties could have

produced some product, even though greatly inferior, which would prevent them from

forming a more efficient pooling arrangement. The issue also comes up in challenges to

pooling and cross- licensing. The US Guidelines cite the Singer case for the proposition that

settlement of infringement litigation by cross-licensing IPRs can be challenged if it eliminates

competition among horizontal competitors. Such a challenge would typically have to show

that the relationship among the pool members was horizontal. In other words, the antitrust

challenge would, in effect, have to resolve the patent issues that were the subject of the

infringement litigation. In the infringement litigation, each party typically is contending that

the other was infringing, and that the other could not lawfully be in the market without a

license. If that contention were true, the IPRs would stand in a blocking, and therefore

vertical, position. For Singer to apply, the parties would have to be in a horizontal position,

i.e. at least two pool members must have been in a position to compete without obtaining a

license for the same IPRs being used by the other.

Three distinct but related issues often go under the terms ―breadth‖ or ―scope‖: (a) how easy

it is to obtain the IPR in the first instance, (b) the breadth as such, i.e., how completely the

IPR covers the field as opposed to allowing other competing ways of accomplishing the same

objective or the same way of accomplishing other objectives, and (c) the duration of the IPR.

Any particular resolution of each of these issues, in turn, can affect innovation in two

conflicting ways: (i) it can increase or decrease the expected rewards to an innovator and

thereby affect the incentive to undertake the innovation, and (ii) it can increase or decrease

the difficulty, cost, and risk of innovation by making it more or less likely that someone else

will later assert that the innovation infringes a prior IPR. The tension between these two

effects is sometimes described as a trade-off between subsequent (or secondary) innovators

and primary innovators, but this is something of an oversimplification. A firm that is about to

undertake pioneering research still has to consider the risk that it will later turn out that some

aspect of its research and development will infringe an IPR of some other firm, so that a

patent system in which very broad patents are too easily obtained and enforced can inhibit

pioneering research as well, particularly if it is difficult to identify the existence of such

patents. Conversely, of course, secondary innovators also have an interest in reaping a reward

for their contributions.

IMPLICATION OF ANTI-COMPETITIVE M EASURES – IMPACT ON HEALTH AND PRICE

39

IPR protection in some sectors (notably biotechnology) and in some countries may be so

broad that it actually inhibits innovation. However, there remain valid reasons for

competition agencies rejecting direct remedial measures while engaging in competition

advocacy to ensure patent offices are aware of the anticompetitive effects of overbroad

patents. Though broader patents will typically translate into greater rewards to primary

innovators, they simultaneously tend to increase the costs and uncertainties facing secondary

innovators. Empirical studies have yielded inconclusive results concerning the net effect of

patent breadth on both types of innovation taken together. This might encourage competition

offices to take action to reduce anticompetitive effects of what they might consider

unnecessarily broad patents. Unfortunately, such ex post interference by competition agencies

would tend to reduce innovation by introducing greater uncertainty about possible rewards.

Moreover, there is already a certain degree of automatic fine-tuning being practiced by

competition agencies. This arises through the positive correlation between patent breadth and

likelihood of finding that an IPR holder enjoys a dominant position. In many countries, such

a finding is pre-requisite to the competition agency taking some action against a competitive

restraint, including one linked to IPR.

Both competition agency and patent office lack the knowledge required to determine optimal

patent breadth, but of the two, the patent office seem to be in a better position to make trade-

offs between incentives for primary as opposed to secondary innovation. At the same time,

competition agencies enjoy a comparative advantage in discovering and appreciating the

anticompetitive effects that overly broad patents might entail. Competition agencies s hould

ensure that the patent office decisions about patent breadth are well informed concerning

their possible anticompetitive effects.

CONSEQUENCES OF EFFECT ON SALE OF DRUG

The approach of focusing on the effect of competition in the sale of the drug, rather than the

R&D competition to produce the drug, is the approach taken by the European Commission in

some of the pharmaceutical mergers that were investigated on both sides of the Atlantic. In its

1996 report on the US/EC antitrust co-operation agreement, the Commission describes the

differences in approach as follows:

―In Glaxo/Wellcome case, both Glaxo and Wellcome had similar anti-migraine treatments at

an advanced stage of development and it was considered that the time and cost involved for a

40

competitor in reaching the same stage of development were such that it was essential to

maintain both products in competition with each other. The approaches taken by the

European Commission and the FTC to resolve this problem were different; the FTC

considered a horizontal market for R&D for anti-migraine drugs on its own, while the

Commission looked at the spill-over effects of R&D in the market for the sales of medicines.

The Commission decision therefore provided for the merged company to license one of the

two anti-migraine treatments in development and so retain a potential competitor, while the

FTC required full divestiture of Wellcome‟s R&D for this anti-migraine treatment.‖5

REPERCUSSION OF PRICERISE

Because of merger or patent pooling or cross licensing the companies acquire market

monopoly, as is evident from the above cited examples. The negative impacts of enormously

increased market power certainly affect the price of the pharmaceutical products. Medicines

are essential commodity in terms of prevention and treatment of life threatening diseases,

more so in current situation of spread of both communicable diseases like HIV/AIDS or

tuberculosis, malaria or cardiac ailment. Dearth of supply of appropriate medicine at

affordable prices makes the life of human being highly vulnerable and is exponentially tragic

for the poorer and compromised sections of population. Competition agencies should keep

this fact in mind and handle the anti-competitive practices as seriously as possible. With

poverty, unemployment and other socio-economic challenges in developing and least

developed countries of Asia, Africa and Latin America, situation becomes tougher if essential

elements like medicines are not available in need. State has the obligation of procuring the

drugs at affordable prices for the public health service centers, but sometimes even that

becomes impossible in case of hugely costly medicines like anti-cancer drugs or anti-

retroviral.

CONCLUSION AND SUGGESTIONS

The importance of both sets of policies for encouraging innovation would not attract such

attention, much less cause the convening of a roundtable to address them together, were it not

for the fact that the two policies are often seen to be in conflict. In the United States, for

5Commission report to the Council and the European Parliament on the application of the Agreement

between the European Communities and the Government of the United States of America regarding the

application of their competition laws, COM(96)479final, 8 October 1996, available at http://europa.-eu.int/en/-

comm/dg04/lawenten/en/com479.htm

41

example, the Supreme Court‘s approach for many years was epitomized by its declaration

that ―since patents are privileges restrictive of a free economy, the rights which Congress has

attached to them must be strictly construed....‖ Since the purpose of the antitrust laws was to

prevent monopolies and constrain the exercise of monopoly power, whereas ―the very object

of the patent laws is monopoly,‖ it was thought that the two bodies of law were inherently in

conflict.

United Nation Development Programme (UNDP) recently discussed the impact of interaction

of IP law and competition law on the access to medicine, specifically for the developing and

least developed countries. In the ideal situation of the policy implementation the tools of

intellectual property and competition law must be in perfect balance. To enhance the

consumer welfare, this balance may shift in one way or other according to the socio-

economic status of the nation. Usually in developed countries the balance goes towards the

intellectual property law, but in case of developing and least developed countries the balance

may go more towards the competition policies. Even in a country the attitude towards the

balance may change with the change in socio-economic conditions, like in USA during 1960s

and 1970s competition policy (implementation of anti-trust law) was very aggressive but by

late 1980s a swing in attitude had been seen with a relaxation to prevent in restrictive

practices. Hence there are differences in the implementation of competition policies at

national level, but requirement is felt for the international harmonization in the area of

competition law. United Nations General Assembly adopted the ‗Set of Multilaterally

Equitable Agreed Principles and Rules for the Control of Restrictive Business Practices‘ (UN

RBP Principles) in December 1980. This was a non-binding instrument, later on low and

middle- income countries endeavoured to alter the instrument as a binding one, but the efforts

were in vain. WIPO General Assembly in 2007 had adopted the Development Agenda and

recommended that measures need to be taken to deal with anti-competitive practices related

to intellectual property and technical cooperation needs to be provided to developing and

least developed countries to take such measures. WHO a lso recommended that necessary

action be taken for promotion of competition to increase availability and affordability of

medicine and other health products and also to prevent the restraint of international

technology transfer as well as restrictive trade practices done under the ambit of intellectual

property rights.

42

There are some suggestion to draw balance between IPR and Competition Law which are as

follows:

1. The US approach as also adopted in Canada is that of treating IPRs at par with other

property rights. This seems to be a viable option for India as well since it lends simplicity to

the application of competition laws.

2. Most of the jurisdictions recognize that the existence of IPRs does not necessarily confer

market power. This is a rational presumption and may be adopted by the Competition

Commission of India in dealing with cases involving intellectual property rights. The

legitimate interests of IPR holders must be taken into account since unbridled exercise of

power by the competition authorities may thwart innovation.

3. The premise of IP guidelines could be that competition and IPRs are not at loggerheads.

Rather they complement each other in encouraging innovation, efficiency and consumer

welfare. Such an approach echoes the Schumpeterian view on ―competition on merits‖ and

would augur well for dynamic efficiency.

4. The guidelines could list out the anti-competitive conduct of IP owners under a ―per se‖

category. This would enable the holders of IPRs to exercise their rights in a manner which is

congruent with competition policy. If the conduct which is per se illegal and anti-competitive

is listed out by the Commission in its guidelines, it may lead to reduction in the number of

cases falling foul of the competition laws.

5. The exemption in favour of ―agreements in research and development‖, on lines of EU

exemption may go a long way in encouraging innovation whilst maintaining healthy

competition in the market. Combinations (mergers & amalgamations) usually have grave

implications for ‗innovation markets‘, ‗An innovation market consists of the research and

development directed to particular new or improved goods or processes, and the close

substitutes for that research and development‘. They may pose a threat for subsequent entry

of products by stifling competition at the R&D and product development stage.

6. The definition of market could be bifurcated into markets for goods, services and

technology or innovation. This would reduce the complexity and enable the Commission to

address situations in which IP is used to charge excessive prices for or prevent access to

protected technologies.

43

7. Lastly, the impact of IPRs on the market substantially varies depending upon the legal and

socio-economic contexts in which they apply. Thus, the static-dynamic efficiency rationale

applicable to a developed country does not necessarily hold in low income countries. High

levels of IPR protection may have significant negative distributive consequences in the latter

without contributing to– or even impeding – their technological development. As a result,

competition authorities may legitimately give static efficiency precedence over dynamic

efficiency considerations and challenge, for instance, situations of excessive pricing emerging

from the exercise of IPRs. Therefore, in case of India also it is necessary to identify as to

whether static efficiency precedes dynamic efficiency or vice –versa. In my view, it may be

analyzed and dealt with on a case to case basis. For example in case of competition in the

pharmaceutical sector, both static and dynamic efficiency would matter. Static efficiency

matters as the prices of essential drugs must not be manipulated by those having monopoly

rights so as to reap unprecedented profits at the cost of public welfare. Thus, the scales may

tilt in favour of competition policy. On the other hand, dynamic efficiency is equally relevant

so as to encourage innovation in this sector and in such cases the tilt would be towards

protection of exclusivity of IPRs so that there remains sufficient incentive to invest in R&D.

The challenge in the end is to strike a balance.

THE CURIOUS CASE OF COMPULSORY LICENSES IN PATENTS

- GUNJAN CHAWLA

*

I. INTRODUCTION

The TRIPS Agreement outlines in its Preamble a very crucial objective for its member

countries directed towards recognising the inherent nature of Intellectual Property Rights as

―private rights‖ and at the same time also seek to achieve the underlying ―public policy

objectives‖ of the respective national systems. Article 7 that outlines the ―objectives‖ of the

TRIPS also reiterates the need to strike a balance the rights and obligations of the right-holder

of an IP and the welfare of the society. In order to give effect to this provision, the member-

states have been conferred with enormous flexibility in so far as they adopt their national laws

to ―protect public health and nutrition and promote the public interest in the socio-

economic and technological development‖1. Thus, the above two provisions indicate that in

order to effect the ―balance of rights principle‖ members have been granted a wide space

while they shall incorporate the TRIPS mandate in their national laws.

Patent Rights confers upon its right- holders exclusive monopoly to use, sell, manufacture and

import their product and process patents to the exclusion of a third party until the expiry of

the term of patent. Thus, it provides an incentive for the innovation which is a contribution to

the society in lieu of which they agree to disclose their patent in the public domain once the

term is over and they have reaped the benefits of their labour. However, at times it may be so

that such exclusive rights fail to fulfil the public interest thereby thwarting the very purpose

of its grant or such rights may be used in a manner detrimental to the public interest itself. It is

under these circumstances that the State has the authority to grant ―Compulsory Licenses‖

(hereinafter shall be used as ―CL‖) to parties interested in the utilisation of the patent

invention to serve the public interest and this becomes all the more important when the patent

relates to life-saving drugs, as providing the same to the public is the underlying objective of

the welfare state which pledges tend to the health and wellbeing of the members of its

society. These are such licenses that are issued by the State to a government agency, a

*The author is a Teaching Assistant, National Law University, Jodhpur. The author can be contacted at

chawlagunjal27@gmail.com. 1Article 8, TRIPS Agreement

45

company or any other interested party to use the patent without the patent holders‘ consent 2.

Thus, it enjoins upon a third party the right to work the patent to the advantage of the public

in a manner that best suits and fulfils the purpose of an invention of a life-saving drug. Thus,

this flexibility empowers the States to end the monopoly rights enjoyed by the patent holder

in case of his failure to fulfil the public policy objective and this flexibility becomes all the

more important in the context of third world countries when they are faced with the dilemma

of combating the public health crisis which is at stake due to unaffordable patent drugs 3.

Under these circumstances it becomes important to forgo the patent rights in a drug so as to

give the rights of making generic copies of the same.

II. RATIONALE BEHIND GRANT OF COMPULSORY LICENSES

The concept of compulsory licensing is not an absolutely new concept, but surely it has come

to gain a lot of relevance under the Patent Laws in the present times, especially with the

pharmaceutical groups and generic drug manufacturers as far as the question of ensuring the

availability of necessary drugs for live-threatening diseases to the public and their

commercial agendas are concerned. When these drugs are made available by the

Government, there occurs a considerable reduction in the prices of these drugs as compared

to the price at which they are made available by the patent holders by way of exporting it to

the countries that are in need of the same. The Government gives the rights to manufacture

these drugs and make available to the public to the generic manufacturers in their own

country and this is a big reason why the developing countries are bent upon issuing the rights

of compulsory licenses for patents on pharmaceuticals that are quite expensive for their

citizens.4

Compulsory license („CL‟) is seen as one such tool adopted by the government to

enter the market in order to rectify the problem of market failure by mitigating the rigours of

―abuse of the dominant position by arbitrary refusal to deal or license‖. 5

2To quote, E. Durojaye, ― Compulsory licensing and access to medicines in post Doha era: what hope for

Africa?‖ Journal of Intellectual Property Law,( vol. 18, no. 2, pp. 35, Spring 2011), cited in Md. Zaheer Abbas,

Pros and Cons of Compulsory Licensing: An analysis of arguments, International Journal of Social Science and

Humanity p.1(Vo l. 3, No. 3, May 2013) (available at- http://www.ijssh.org/papers/239-D00013.pdf) 3

Md. Zaheer Abbas, Pros and Cons of Compulsory Licensing: An analysis of arguments, International Journal

of Social Science and Humanity p.1( Vo l. 3, No. 3, May 2013) (available at - http://www.ijssh.org/papers/239-

D00013.pdf) 4Sara M. Ford, Compulsory Licensing Provisions under TRIPS: Balancing pills and patents, p.7 (American

University International Law Review, vol, 15, issue 4, art icle 5, 2000) (available at-

http://digitalcommons.wcl.american.edu/cgi/viewcontent.cgi?article=1278&context=au ilr) 5Mansi, Compulsory Licensing-Legal issues: a critical analysis, p. 4 (NALSAR University of Law, 2009-10)

(available at- http://www.nalsarpro.org/PL/ Projects/Model-Project-Module_2.pdf)

(available at- http://www.nalsarpro.org/PL/ Projects/Model-Project-Module_2.pdf)

46

The rationale behind granting patents is that they shall encourage innovation by providing

incentives to the patent holder in the form of exclusive monopoly rights. However, this grant

is not without its own costs and is accompanied with problems like abuse of monopoly rights

by the patent holder, use of patents to block inventive activity by the third parties, diversion

of productive activities disproportionately towards patentable activities, and the considerable

amount of investment in maintaining a patent system. It is these costs that have resulted in the

usage of the CL policy by Governments around the world and has been accepted as a

―Strategic Compromise‖.6

Thus, when the inventor fails in its endeavour to satisfy public demands the Government

resorts to CL, which is ―an involuntary contract between a willing buyer and an unwilling

seller imposed or enforced by the state‖. 7 The Government however pays the royalty to the

patent holder in lieu of using their patent without their consent. They are an abrogation of an

IP right- an extra ordinary legal instrument- whereby the State allows itself or the third party

to have access to, to produce, use or sell the IP protected product or process without the

consent of the patent holder and hence are mandatory and involuntary compulsory lice nses

granted to prevent the misuse of monopoly rights conferred on the patent holder. 8

III. SCOPEAND APPLICATION OF COMPULSORY LICENSES

A. UNDER THE TRIPS AGREEMENT-

Article 30 under the TRIPS Agreement provides for incorporating limited exceptions upon

the exclusive use of the rights that are conferred upon the right- holder. One such exception is

what has been provided under Article 31 that provides for certain other uses of the patent

without the authorisation of the right-holder. This Article doesn‘t expressly use the term

―compulsory licensing‖ but the same is an implied power conferred upon the governments of

the respective countries. There are certain specific conditions under which the same may be

granted without the permission from the right- holder. In the cases of ―national emergency, or

other cases of extreme urgency or in cases of public non-commercial use (i.e. government

6To quote, Hellen and Eisenberg, Can Patents Deter Innovation? The anticommons in biomedical research, 280

SCI. 698 (1998) cited in, Collen Chein, Cheap Drugs at What Price to Innovation: Does CL of pharmaceuticals

hurt innovation, p.5 (available at- http://www.btlj.org/data/articles/vol18/Chien.web.pdf) 7To quote, J. Arnold, International CL: The rationales and reality, IDEA: The Journal of Law and Technology,

33 (2)(1993) 349, cited in, Radhika Gupta, CL under TRIPS: How far it addresses public health concerning

developing countries, Journal of IPR, vol.15 (NALSAR University of Law, p.2, September, 2010) (available at -

http://nopr.niscair.res.in/bitstream/ 123456789/10211/1/JIPR% 2015(5)% 20357-363.pdf) 8Mansi, Compulsory Licensing-Legal issues: a critical analysis, p.5 (NALSAR University of Law, 2009-10)

47

use),‖ licenses for the use of the patents may be granted by the government, however,

information and some form of notification regarding the same ought to be given by the

government to the right-holder. The existence of these specific circumstances can be said to

have magnified the legitimacy of every complying governments‘ right to resort to CL

whenever it was required by its domestic self- interest.9

The conditions under which the same may be granted are as follows:

Such other use may be permitted only when the proposed user has failed in his

endeavour to get such authorisation after having voluntarily made efforts to obtain

authorisation from the right-holder on such terms and conditions that are reasonable

and just. However, this may be waived in cases of emergency or public non-

commercial use.

Such uses are non-assignable and non-exclusive. Thus, the purposes for which they

have been obtained cannot be further transferred or retransferred to a third person and

are such licenses that don‘t exclude the right-holder from its usage.

The grant of such use shall not be made without the payment of a considerable

amount of remuneration to the right-holder whose are suspended for a certain specific

duration. The same may stand terminated once the purpose for which the same was

granted ceases or is unlikely to recur.

The most important clause under Article 31 is clause (f), which states that such use shall be

authorised for the purposes of supply to the domestic market of such authorising member

state, thereby restricting the use of CL having a good manufacturing capacity. The licensees

are obliged to supply a predominant part to their domestic markets, thereby limiting its

capacity to export the medicines to countries with public health needs. At the same time, it

restricts the countries with low or no manufacturing capacity to derive benefit from this

provision except when the same is necessary to curb anti-competitive practices10.

There are five such uses that are permitted under Article 31 namely: licences for public non-

commercial use by the government; licenses granted to third parties authorised by the

9To quote, J. Watal, IPR in WTO and Developing Countries (Boston0 Kluwer Law International, 2002): at 33-44

cited in, Comment by J. Reichman, CL of Patented Pharmaceutical Inventions: Evaluating the options, p.2

(available at- http://scholarship.law.duke.edu/cgi/viewcontent.cgi?article=2747&context =faculty_sch olarship) 10

Radhika Gupta, CL under TRIPS: How far it addresses public health concerning developing countries, Journal

of IPR, vol.15 (NALSAR University of Law, p.2, September, 2010) (available at-

http://nopr.niscair.res.in/bitstream/ 123456789/10211/1/JIPR% 2015(5)% 20357-363.pdf)

48

government for public non-commercial use; licences granted to remedy a practice which has

been determined after administrative or judicial process to be anti-competitive; and licences

arising from a dependent patent. The TRIPS Agreement does not, however, limit the grounds

to these five and the countries are therefore left with a very broad scope of action in regard to

the grounds on which they can grant compulsory licences. 11 Also, the decisions regarding the

judicial validity of such licenses may be adjudicated upon by the bodies that may be assigned

for the said purpose by the member state itself. With regard to the decision of its termination,

the members are at liberty to specify the conditions under which the same shall stand

terminated.

B. UNDER THE INDIAN PATENT LAW

In India too, the provision for grant of CL has been made in order to restrict anti-competitive

practices and to strike a balance between rewarding the patentees and simultaneously

inventing and making new products especially drugs that are to be made available to a large

population at cheaper and affordable prices. Chapter XVI Sections 82 to 9412

were inserted

under the India Patent Act, 1970 vide the 2002 Amendment and Section 84 specifically

provides for the grant of CL after the lapse of 3 years from the date of grant of patent on an

application (accompanied with the statement about the nature of interest involved) being filed

by an interested person before the Controller of patents on any of the following grounds:

That the reasonable requirements of the public are not being met with respect to the

purposes for which the new patented invention has been devised; or

That it is not being made available to the public at reasonably affordable prices; or

It is not being worked within the territory of India.

Clause 7 of this section further clarifies that the reasonable requirements of the public shall

be deemed to have not been satisfied if any existing trade or industry or the development and

establishment of the same is getting hampered; or the demand of the invention has not met to

an adequate extent or on reasonable terms; or no supply is made to the export market; or such

terms and conditions have been imposed upon the licensee that cover situations of exclusive

11 J. Sulander, The Role of CL in Improving Access to Medicine in the Developing Countries, p.7 ( LW 556

Intellectual Property Law 2001/ 2002) (available at- https://www.kent.ac.uk/law/ ip/resources/ip.../2001.../Diss-

Sulander.doc 12

Indian Patent Act, 1970

49

grant back or package licensing; or if the patent is not being worked in India on a commercial

scale.

Section 83 clause (b) and (f) are of immense importance in the context of CL as far as the

working of the patented invention is concerned as these two clauses make it clear that patents

shall not be granted to enable the patentees to enjoy monopoly for importing the patented

article; and patents are granted to ensure its availability to the public at reasonably affordable

prices. Thus, the term ―has not been worked in the Indian Territory‖ u/s 84(1)(c) excludes

from its ambit the imports of such patented drugs. Thus, CL cannot be granted only for the

purpose of importing the drugs such that the patentees start abusing and monopolising their

exporting rights and derive huge undue benefits. Here, it is important to note that under

Article 27.1 of the TRIPS, importation of the goods are included in the definition that

constitute ―use of patents‖, whereas Article 5B of the Paris Convention allows lack of local

use as a ground for issuing CL. In India, however, there seems to be a difference of opinion as

far as the inclusion of the condition of importation within the ambit of the term ―working of

patents‖ is concerned. Some argue that is should include importation as not every company

shall be able to establish its manufacturing industry in India and this would eventually affect

the prices of the drugs. On the other hand, there is the view that the same should be remain

excluded as India being a hub for generic drug manufacturers it shall keep the opportunity

open for these local manufacturers to collaborate with the patentees for manufacturing it in

India on terms of licenses and thereby reduce the manufacturing cost and the price of the

drug.13

However, before the acceptance of the application for grant of CL, the Controller has to keep

in mind the nature of the invention and the ability of the applicant to work the invention; the

reasons for failure on the part of the patentee to do the same; or unsuccessful attempt by the

applicant to obtain voluntary licenses from the patentee. 14

Section 89 provides that the grant must be made to ensure that the invention is being worked

on a commercial scale in the Indian Territory and the interest of any other person who is

working upon an invention for the time being in India should not be prejudiced. Section 94

13World Intellectual Property Review, Vikarant Rana, Patents and Compulsory Licenses, p.2(India Focus,

September/October 2011) (available at-

http://www.ssrana.in/Admin% 5CUploadDocument%5CArticle% 5CPatents%20and%20Compulsory%20Licensi

ng%20(WIPR%20Sep-Oct% 202011).pdf) 14

Section 84(6), Indian Patent Act, 1970

50

states that the CL may be terminated once the purpose for which it was granted ceases or

doesn‘t recur again.

The Patent Amendment Act, 2005 has inserted Section 92A that provides for CL under

exceptional circumstances for the purpose of exporting the patented invention. It states that

CL shall be made available for the purposes of manufacture and export of patented drugs to

such countries that have insufficient or no manufacturing capacity to address public health

problems, provided that the country who is importing such drugs has notified it consent for

the same. This was included after the conclusion of the Doha Declaration on Public Health.15

However, the Section fails to define what constitutes ―public health problems‖ and as such

provides the exporting country with immense leeway to grant CL to the importing country

even when there are no any emergency situations. This in turn shall adversely affect the rights

of the patentee and allow the generic companies of the exporting countries to make undue

commercial gains.16 Also, this provision confers immense powers upon the Controller to

whom the application for the same has been made to decide upon the ―terms and conditions

of such grant‖ and also doesn‘t prescribe the amount of royalty or remuneration that is to be

paid in lieu for such grant.

As a result of the product patent regime that has been introduced in India, the indigenous

firms shall not be able to produce a drug, even if they manage to develop the process unless

they are granted a CL. India has adopted a stricter CL regime than what is there under the

TRIPS also and gives opportunity to the patentees to manipulate the process by litigation to

prevent an easy licensing of their product. 17

IV. COMPETITION LAW AND COMPULSORY LICENSING

The relation between competition law and CL is quite complex owing to the respective

objectives that both seek to fulfil. While CL for patents in the pharmaceutical sector is

granted to restrict abusive use of monopoly rights, application of competition law in the

pharma sector maintains the balance between incentives for innovation and facilitates

15NUALS Law Journal, Dr. Raju KD, Compulsory Licensing Provisions to Deal with Access to Patented

Medicines in India vol.6(Publication of Student Council, NUALS, Kochi, p.8, 2012) (available at -

www.nuals.ac.in/web/pdf/NUALS_ LAW_%20Journal% 20.pdf) 16

Supra note. 19 17

Sumana Chatterjee, Flexibilities Under TRIPS (CL): A pharmaceutical industry in India and Canada , p.14

(available at- http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1025386 )

51

achievement of public health objectives. 18 The sole purpose behind protection of IPRs is to

prevent and prohibit imitation or copying of the original product and thereby prevent use of

unfair- means increasing fair market competition. Competition law helps in restricting

exclusivity if the same has been used to exclude others from the competition by application

of anti-competitive means. This is what is expressly restricted under Section 83(1)(f) of the

Indian patent law which provides for general principles that shall be made applicable for

ensuring effective working of patented inventions. It restricts the abuse of the patented rights

by the patentee or his assignee to resort to trade practices which unreasonably restrict trade or

adversely affect the transfer of technology. Thus, this provision under the Patent law restricts

anti-competitive practices. In fact the goals of both IPR protection and competition law are

―wealth maximization‖19, where the former encourages investment in innovation and is

therefore incentive oriented; the latter by prohibiting anti-competitive practices ensure equal

distribution of profits among all the producers and manufacturers.

The practices that are considered to be abusive use of IPR‘s in general and patents in

particular are:20

Patent pooling where two or more patentees join in and cross- license the patent so as

to restrict others from acquiring it.

Tie in arrangements or product bundling where in the other product may be coupled

with the patent such that the acquirer is forced to take that other product with the

patent.

Royalty payment after expiry of patent

Restricting the licensee to challenge the validity of patents.

Indulging in exclusive grant back techniques wherein authorship is asked for in

amendments.

Price fixation for the licensee to sell the product.

Accumulation of patents in the form of ―package patents‖.

18Available at-

(https://www.google.co.in/url?sa=t&rct=j&q=&esrc=s&source=web&cd=3&cad=rja&uact=8&ved=0CCsQFjA

C&url=http%3A%2F% 2Fwww.nlujodhpur.ac.in% 2Fdownloads%2Fsymposium_report%2F9.pp s x&e i=Rn4v V

Lr3NY22uASIhoDoAg&usg=AFQjCNHAWuigclut-

LKSnuZQrnDcxFbggw&sig2=fRGCp Qt44OWFI0z45aMmMQ) 19

Pankaj Kumar, The Interface between IPRs and Competition: Indian scenario, (Kurukshetra University,

Dissertation, p.10 (available at- http://www.slideshare.net/pankaj7379/the-interface-between-iprs-and-

competition-law) 20

Research Project, Competition Commission of India, Abhilash Chaudhary, Compulsory Licenses of IPRs and

its effect on Competition,p.11(GNLU)

52

The main object of Competition Law is prevention of anti-competitive practices and ensuring

freedom and equal opportunities of trade to other participants in the market. 21 This makes it

clear that when applied to the pharmaceutical sector, the competition law shall restrict resort

to anti-competitive practices by the patentee by way of increasing the prices of the patented

drugs and making its affordability difficult. It is in this regard that the CL may be granted by

the state to the generic drug manufacturers in the patent pharmaceutical sector to ensure

availability of life-saving drugs at affordably reasonable prices and safeguard public health.

In the case of drugs, the IPR‘s have given rise to fewer competitors and less competitive

markets. However, consumer welfare can only be realised in the case of perfect competition

as therein all the producers charge the same price for same products. In order to balance the

exercise of monopoly rights by the patentee and public interest competition policies have to

be intelligently devised. Thus, one way in which this can be ensured is grant of CL which

shall restrict anti-competitive practices by the companies which tend to damage the interests

of the consumers and competitors also. Under the competition law also, grant of CL is

contemplated under Section 27 where the Competition Commission may grant the same in

order to rectify the situation where exclusivity conferred by the IP has been exploited to

obtain unfair leverage. Under Section 28 also the Commission may provide for transfer of

property rights including the IPR‘s. 22 Although CL helps in engendering competition,

especially in the markets where a single manufacturer abuses his dominant position, in the

long run it may hurt the incentive for innovation and may prove anti-competitive. Thus, resort

to CL must be the last option in order to maintain healthy competition. Only in the cases that

have been provided for under the Indian patent Law under Section 84 and under the TRIPS,

the CL should be granted. It might also have an adverse impact upon the FDI of the country.

Article 40 of the TRIPS Agreement creates provisions for the control of anti-competitive

practices in contractual licensing. This, in turn, is further reaffirmed by the provisions under

Section 31 that provide for other uses of patents without the authorisation of the right-holder.

A combined reading of these provisions indicate that grant of CL in patents for drugs may be

discouraged by the member states in case such licensing in the IPRs restrain competition if it

adversely affects the trade and impedes transfer and dissemination of technology. Thus, CL

may not always be the best method to prevent abuse of monopoly rights and may in fact lead

to anti-competitive practices and ultimately affect the consumers and public interest.

21Section 3, 4 and 6, Competition Act, 2002

22Supra note 16, P.21

53

V. PUBLIC HEALTH CAREAND COMPULSORY LICENSING

The Utilitarian theory of IPR states that protection and promotion of IPR must be for the

purpose of ensuring greatest number of happiness for the greatest number of people. The

underlying justification is a public benefit or social good that can be gained by the IPR

regime that seeks to benefit the creators and innovators in the short term, but everyone else in

the long run. It is in lieu of the monopoly rights conferred upon the creators that they agree to

disclose their work for public use and one the term of their monopoly expires, the creation

falls into the public domain so that it may be exploited by the public. Additionally, in fact, if

the public benefit is diminished as a result of exercise of monopoly rights, such IPR

protection shall be rejected. Thus, in patents as well, the main aim of innovation is to promote

public interest and when the same is considered in the context of promotion and development

of the pharmaceutical industry, the same becomes all the more objective, a therein the only

objective is innovation new medicines and life-saving drugs for the purpose of curing the

diseases and epidemics that are barriers to providing good health to the public. Hence,

securing public health care is the ultimate motive of patents in pharmaceutical sector. One of

the major issues that the world all over is facing is inability of the people to have access to

essential medicines at reasonably affordable prices. To this end the strategy of compulsory

licensing is increasingly being seen as bringing down the price of the drug therapies and

thereby improving access to essential medicines. Hence, CL helps in production of generic

drugs without the permission from the patent holder and helps in increasing the availability of

medicine at considerably lower prices. Moreover, the prices of the medicines are determined

taking into consideration the market realities and hence due to this reason again CL provides

certain very undeniable social benefits in the form of providing access to essential medicines

to a significant part of the population. 23

The right to health is a fundamental right and the States are under an obligation too, to

provide the same. Thus, access to medicines is also indirectly related to and forms an

important aspect of the right to health. Article 8 of the TRIPS is reflects that the guid ing

principle behind implementation of the provisions of the agreement shall be ―protection of

public health and nutrition and promotion of public interest in sectors of vital importance to

their socio-economic development‖. Hence, even this point incidentally indicates that

protection of public health is of vital importance and the same shall be achieved when the

23Supra note. 15, p.11-12

54

essential life-saving drugs are made available to the public easily. This again indicates a

positive relation between grant of CL for pharmaceutical products with the objective of

securing public health care. This has been further reaffirmed by the Doha Declaration on

TRIPS and Public Health of 2002 which confers upon a sovereign nation the authority to

grant compulsory licenses at times of national emergency.24

Survey indicates that there are over 14 million people who die every year due to infectious

diseases and the HIV/AIDS pandemic exemplifies the misery. A years‘ treatment‘s cost is

equal to 30 years income of people in the developing country and only a four to six months‘

salary of those in developed countries. 25It is obviously very difficult for a considerable

section of the society to manage to buy these costly medicines and they are forced to sacrifice

their lives as against the meagre income that they barely manage to earn for themselves.

This might lead us to fear the fact that in case if CL helps in reducing the cost, then the same

shall have its effect the quality of the medicines offered and as such, it is again the public

health that shall get compromised. However, this is one such issue that cannot blame the

process of CL or the generic manufacturers, but it is something that is to be kept in mind by

the governments while they frame the national drug policy and must set policy standards for

ensuring good quality generic medicines. 26 In order to use CL as an effective tool for

reducing the cost of medicines and promote health care, the ways in which it is used must be

clearly defined and CL must be resorted to by the governments only under exceptional

circumstances under procedures established by law. It is only a rational use and

implementation of CL that shall promote technology transfer and help in production of

medicines for securing vital interests of health of the population.

VI. THE NATCO-BAYER JUDGEMENT

Earlier, in 2011, there were two applications filed for the grant of ―voluntary licenses‖. One

was by Cipla for Mrecks‘ anti-HIV drug Isentress, and the other was by Natco from Pfizier to

make and sell copies of the HIV drug. Both of these were sought on the same ground that the

drugs were highly priced making it inaccessible to the patients in India. Thereafter, Natco

24Para 5, Ministerial Conference, Fourth Session, Doha, 9 - 14 November 2001, WT/MIN(01)/DEC/2, 20

November 2001 25

To quote, Myhr K : Comparing Prices of Essential Drugs Between Four Countries in East Africa and with

International Prices, (1 June 2000, p2) cited in, J. Sulander, The Role of CL in Improving Access to Medicine in

the Developing Countries, p.3 (LW 556 Intellectual Property Law 2001/2002)(available at-

https://www.kent.ac.uk/law/ip/resources/ip.../2001.../ Diss-Sulander.doc) 26

Supra note. 17 p. 19

55

Pharma was the first company in India that applied for ―compulsory license‖ in 2008 under

Sec. 92A to manufacture and export to Nepal the generic version of drugs by Roche Ltd. and

Pfizer for treating lung cancer and renal cancer respectively. However, due to certain

technical incongruities, the same was withdrawn27.

It was on March 9, 2012 that the first CL was granted by the Controller of Patents in India to

Natco Pharma Ltd. for the production and sale of Bayers‘ patented drug Sorafeinib

(commercially called Nexaver, priced at 2.8 lakh a month) that is useful in treating liver and

kidney cancer in the Indian Territory at a 6% royalty. Earlier in 2001 when Bayer had filed an

application for registration the same was granted in 2008 in the form of regulatory approval

for marketing the drugs. However, it was then realised that Bayer was not satisfying the need

of the patients as it had not sold the drugs in India in 2008 at all, with only largely

undistributed sale in 2009 and 2010. It was against the decision of the Controller to grant the

CL to Natco that Bayer filed an appeal before the IPAB, which again reaffirmed the dec ision

of the Controller and rejected the appeal for grant of interim stay on the orders of the

Controller.28

A. RATIO OF THE JUDGEMENT

The decision of the IPAB was motivated by its inclination towards the public health needs

and recognition of the right to health and life guaranteed under the Constitution of India. It

referred to Art.8 of the TRIPS that recognises the obligation of the Member states to maintain

national interests. The IPAB placed its reliance on Sec. 84(1) and held that the reasonable

requirement test was not being met as it had not made sale in India and was so highly priced

to be out of reach of the ordinary public. The IPAB made the following observations:29

27World Intellectual Property Review, Vikarant Rana, Patents and Compulsory Licenses, p.2(India Focus,

September/October 2011) (available at-

http://www.ssrana.in/Admin% 5CUploadDocument%5CArticle% 5CPatents%20and%20Compulsory%20Licensi

ng%20(WIPR%20Sep-Oct% 202011).pdf) 28

The Economic Times, Sanjay Vijaykumara and Divya R., Natco‟s CL for selling generic copies of Bayers‟

cancer drug Nexaver upheld by IPAB, Mar 4, 2013 (available at-

http://articles.economictimes.indiatimes.com/2013 -03-04/news/37437382_1_ne xavar-co mpulsory-licence-

leena-menghaney) 29

IPAB Order Sheet, Bayer Corp. v. UOI (OA/35/ 2012/PT/MUM) para.13 (available at-

https://www.pharmamedtechbi.com/~/ media/ Supporting%20Documents/Pharmasia% 20News/2012/September/I

PAB% 20Order%20Bayer% 20Natco%20Sept%20% 202012.pdf

56

Bayer had only supplied the drugs to 2% of the patients as against an eligible 8842.

The fact that it costs 2.8 lakhs a month again fails the test of ―reasonably affordable

prices‖ under Sec. 84(1)(b).

With regard to the interpretation of ―worked in the territory‖ the IPAB referred to the

history of the TRIPS negotiations and held that it meant ―manufacture to a reasonable

extent in the territory if India‖. Bayer had failed to do this and also to grant voluntary

license to anyone under S. 84(1)(c). Though S. 84(1)(c) uses the word ―not worked‖

the Act makes it clear that the grounds of S. 84(1)(a) will arise if the work is not to the

extent provided in S. 84(7)(d).30

The IPAB ordered the payment of royalty by Natco at 7% of the net sale made by

them in India instead of the initial 6% royalty ordered by the Controller. 31

It was held that a combined reading of S. 83 and 84 indicate that it is the patentees‘

duty to show and prove that the patentee has by his own supply satisfied the

reasonable requirements of the public and at reasonably affordable prices. 32

The IPAB thus refused to grant stay at the order of the Controller as the same shall jeopardise

the interests of the public as the right to have access to medicines is a matter of right to

dignity. The Court upheld the grant of license with certain additional conditions upon the

licensee.

B. INTERPRETATION ATTRIB UTED TO “LOCAL WORKING REQUIREMENTS”

The IPAB out-rightly rejected the contention of the Patentee‘s that importing into India

constitutes working of the invention to the fullest possible extent and the same is to be read

with S.83 (a) and (b) and upheld the reasoning given by the Controller. It was held by the

Controller of patents that ‗working‘ doesn‘t only mean working on a commercial sale as this

shall completely negate the authenticity of the provision in S. 84(1)(c). S. 83(b) makes it clear

that mere importation cannot amount to working. A combined reading of S. 83 (c) and (f)

suggests that patentee is obliged to contribute to transfer and dissemination of technology

which can be achieved by either manufacturing the product in India or by granting a license

for the same. Provision u/s. 84(6)(ii) and 90(2) that relates to the capacity of the licensee to

30

Ibid para.31 31

The Financial Express, Patent Appellate Board rules against Bayer in cancer drug case , March 27, 2014

(available at-http://www.ableindia.in/wp-content/uploads/2014/ 03/patent-appellate-board-rules-against-bayer-

in-cancer-drug-case-financia l-express.pdf) 32

Supra note 35, para.30

57

work the invention also excludes imports and necessitates manufacture in India. Thus, it

attributed the same logic to the patentees also.33

C. CRITICAL APPRAISAL OF THEJ UDGEMENT

The first point of incongruity rises from the fact that the IPAB decided to grant CL to

Natco as it had fulfilled the pre-condition of making an attempt to obtain voluntary

license. It is pertinent to note that the Controller had pointed out that the language of

the application for voluntary license was harsh and this raises a serious doubt as to the

nature of communication that can be termed as an ‗attempt‘. Such an ‗attempt‘ backed

by a potential threat of CL may become a bargaining tool in the hands of the

applicants seeking to obtain voluntary licenses to negotiate the terms of licenses on

their own whims and fancies.

The next is with regard to the decision of the IPAB regarding the ‗reasonably

affordable drugs‘. Although, it took into consideration the public interest involved,

but at the same time ignored other relevant consideration including the nature of drug,

need for differential pricing for different sections of the society etc. From a patentees‘

point of view there is enormous ambiguity with regard to the standards that shall go

into ensuring the ‗affordable limit‘ as drug making and innovation is equally and

substantially costly.

The interpretation accorded to ―working of the invention‖ is too restrictive as

manufacturing in India has been made a pre-condition for it and hence raises doubts

regarding the prospects for a patentee who may supply adequately at reasonable

prices.

VII. CONCLUSION

Patent protection, although imperfectly clothed, is an effective in providing an impetus to the

development and invention of new products. As far as pharmaceutical patents is concerned

the shall only work well in the high income countries as there the purchasing power of the

people of the society is high and hence they have an easy access to medicines. Compulsory

licensing thus shall prove to be a saviour for the low income countries. Undoubtedly,

decisions by domestic courts in these countries, especially India, demonstrates their strong

potential to re-shape global health diplomacy and also enforcing their guidelines by holding

the pharmaceutical companies responsible for their corporate obligation with regard to

ensuring access to medicines. Although, the rights of patentees‘ do get prejudiced with such

33NatcoPharma Ltd. v. Bayer Corpn. (CLA no. 1/ 2011) p.40-44 (available at-

http://www.hkindia.com/ images/compulsory.pdf)

58

decisions, however a holistic approach indicates that such decisions help in reaffirming the

right to have access to medicines which is an inseparable aspect of the right to health.

However, at the same time, it is only its narrow and well defined application with necessary

precautions that shall ensure a balance between innovation, investment and competition. The

effective use of compulsory licensing as a legal weapon will certainly assist India in

promoting technology transfer, and India should avoid undermining and underutilizing the

compulsory licensing system just for export purpose or to increase the economies of scale.

Also, if the trend of compulsory license gains momentum and is managed appropriately, it

will attract a significant amount of investments, leading to an exponential increase of FDI in

this sector, putting India up the line of economic prosperity.

A. IMPLICATIONS FOLLOWING THE GRANT OF CL

Just as a coin has two sides to it, the concept of CL is not without its demerits. Although it

provides benefit to the people by safeguarding their health issues by way of supplying life-

saving drugs at affordable prices but its long-terms benefits may not be easy to achieve.

Licences should strike a reasonable balance between the Government (authoriser), the

licensee (the generic drug manufacturing company-public or private) and the IP owner (the

unwilling patentee). The biggest drawback of granting CL is its discouraging effect upon the

patentee who may get demotivated from indulging into inventive activities. The other may be

with regard to the creation of grey market that may subsequently be created due to its local

supply in large quantities. The fact that it helps in generating drugs at affordable prices and

secures healthcare was negated by certain experts from the Biotechnology Industrial

Organisation (BIO), especially in India where the rate of interest or royalty is uncertain,

issuing CL leads to demotion of invention. 34

The producer of generic drugs, on the other hand, may be restrained from exporting its

output, if the supply is predominantly for the purposes of the domestic market. Also, the fact

that CL is accompanied with the payment of adequate amount of remuneration to the patentee

may eventually add on to the price of the medicine. Thus, CL cannot always be seen as the

ultimate resort for the purposes of making available drugs to the people as it may

subsequently discourage investments in India as well as the patent owners shall look for more

business friendly legal environments. The grant of royalties is also nowhere near to the

economic benefits that the patentee is able to reap by exercising his exclusive monopoly

34SuvhiMidha, AditiMidha, CL: Its impact on innovation in Pharmaceutical sector, vol.2 (International Journal

of Application or Innovation in Engineering and Management , ISSN 2319 – 4847, Issue 6, June 2013)

(available at-http://www.ijaiem.org/ Volume 2Issue6/IJAIEM-2013-06-20-056.pdf)

59

rights. In fact economically perceived, the licensee gains advantage without contributing for

their share in the research and development cost of the invention. Moreover, there is a risk of

supply of inferior quality medicines to the consumers as there is no regulator authority to

supervise the production and manufacture of generic drugs.

However, after having undertaken a literature survey as to the implications of CL upon

investment in R&D for developing patented drugs it is clear that CL does reduce the

motivation to innovate and the consequences are graver for the drug industry that has the

responsibility to meet unmet medical needs. The reasons for the same are as follows:35

The process of developing drugs involves gross costs and risks and thus, patenting

drugs becomes all the more essential. Thus, the drug industry shall obviously suffer if

measures like CL are implemented that reduce patent protection and threaten

innovation and investment.

The policy makers are hence faced with a challenge to simultaneously ensure that

patent-weakening schemes that improve access to medicines should at the same time

be such that they cause minimum harm to patent innovation and investment.

B. SUGGESTIONS AND R ECOMMENDATIONS

The conflict of interest that is the necessary evil of grant of CL may be defeated by the

following resolutions:

The grant must be made after elaborate clarifications regarding the conditions on

which the same is granted. Certain parameters must be framed to determine what

constitutes ―reasonable terms of the license and the adequate remuneration‖. The

TRIPS must lay down proper guidelines for the member states to follow in this

regard. The rate of royalty must only be determined after considering the cost and

time of R&D involved.36

The patentee must be afforded a chance to be heard by the Controller and give such

satisfactory reasons that may justify his failure to work the patent as stipulated.

In cases when the CL is granted during national emergency situation, the same must

be granted for a specific duration and the patentee must also be duly informed within

35CollenChein, Cheap Drugs at What Price to Innovation: Does CL of pharmaceuticals hurt innovation , p.19

(available at- http://www.btlj.org/data/articles/vol18/Chien.web.pdf) 36

Deli Yang, CL: For good or for worse, the done deal lies in the balance, p.5 (JIPR vol. 17, January 2012)

(available at- http://nopr.niscair.res.in/bitstream/ 123456789/ 13414/ 1/JIPR% 2017(1)%2076 -81.pdf)

60

a specific duration. The fact that he should be informed ‗as soon as may be

practicable‘ is quite vague and leads to confusion. 37

The generic companies must be discouraged from exploiting the process and using it

merely for the purpose of generating revenue.

The threat of arbitrage must also be avoided, wherein a patented drug is imported to a

market where it is priced low but then again it is re-exported to the market where it is

priced high without the consent of the patent holder.

A national pricing authority should be constituted so as to avoid excessive pricing,

which shall work on the basis of scientific and economic calculations. 38

It shall be appropriate if a list of threatening diseases is recognised that pose an

increased threat to public health and the same shall be eligible for automatic CL under

the law.39

There must be a certain international system that should be evolved to coordinate the

grant of in cross-border situations which shall monitor the conditions of fairness to

both the licensors and licensee. There shall also be a system of filing complaints

before a designated body so that the disputes may be resolved.

In fact the scheme of Cl shall really be beneficial to all only when the concept of

differential pricing is also followed so as to provide access to medicines to different

sections of the society.

Most importantly CL shall not help unless issues such as healthcare infrastructure, disease

diagnosis and medical insurance are also tackled as a generic version of the drug also (e.g.

Nexaver that is priced at 80,000) would be beyond the reach of poor Indians suffering from

cancer or any other fatal disease. 40

Thus, it can be said that CL does affect the investment in innovation to a certain extent,

especially the countries that don‘t have manufacturing capacities and as such they have to

depend upon the resources from developed countries. Under such circumstances the

restriction of CL shall demotivate the patentees to invest in the R&D in these countries. It is

37Ibid.

38NUALS Law Journal, Dr. Raju KD, Compulsory Licensing Provisions to Deal with Access to Patented

Medicines in India vol.6(Publication of Student Council, NUALS, Kochi, p.8, 2012) (available at -

www.nuals.ac.in/web/pdf/NUALS_ LAW_%20Journal% 20.pdf) 39

ibid 40

Bhawna Sharma, RishuSrivastava, CL: Compromise or necessity,50 (Legal Era, May 2012) (available at-

http://www.ssrana.in/Admin% 5CUploadDocument%5CArticle% 5C2012-06-07-Co mpulsory%20License-

Compromise%20or%20Necessity(Legal%20Era)% 20in% 20India.pdf)

61

important that CL must only be granted when all the remedies to ensure public health care

and maintaining investment in innovation have been exhausted. In fact the same should be

resorted to after framing such policies that shall balance both public health needs and

investment. The adverse effects on investment can be controlled and limited by framing such

CL policies that are to be applied in a manner that the very rationale and basis for the grant of

same is not challenged and it continues to tend to the needs of the public to have easy access

to medicines without compromising the need for investment in innovating and patenting new

and useful drugs.

CRITIQUE OF EXTRATERRITORIAL JURISDICTION AND EFFECTS

DOCTRINE

-RAGHUVEER SINGH MEENA*1

1. ABSTRACT

The aim of this paper is to study the „Effects doctrine‟ which comes into picture when the

matter involved is of extraterritorial jurisdiction. The objective behind the same is to

understand the problems which are faced by the markets in various countries to prevent anti-

competitive practices.

The scope of this paper is very vast as almost every country uses the doctrine to prevent anti-

competitive practices by other countries, which affect their markets directly. The scope of the

paper is limited to a comparison of the laws in US, EU and India, by understanding various

other aspects which are used by the Competition authorities such as the Competition

Commission of India („CCI‟) in India.

Even though we have come far enough to deal with anti-competitive practices, the only

solution to such issues will be bilateral agreements with other countries. Hence this paper is

focusing on the fundamentals of concept called effects doctrine to provide a better overview

of the same.

I. INTRODUCTION

In a world where businesses and individuals are increasingly operating in a global scenario,

the issue of the extraterritorial application of national laws is assuming progressively greater

importance to deal with new issues where markets are affected by these extraterritorial

practices. Traditionally, the exercise of jurisdiction by a state was generally limited to

persons, property and acts within its territory.

In this paper the researcher is studying the evolution of the ‗Effects Doctrine‘ in the US, the

EU and India to understand the concept of Effects Doctrine and extra-territorial jurisdiction

efficiently. As in the globalised world, it‘s easy to draft laws to regulate markets but when it

* 5th

year B.A. LL.B. (Hons.) student of National Law School of India University, Bangalore. The au thor can be

contacted at raghuveersinghmeena@nls.ac.in.

7Drexl, supra note 4, at 115.

63

comes to the practical implementation, the real problem arises. In addition, the researcher is

also dealing with the powers and procedures followed by the CCI to deal with such cases.

II. OVERVIEW OF EXTRATERRITORIAL JURISDICTION

To keep pace with the perpetual evolutionary process of changing, communal competition

authorities must adopt regulations to deal with such issues which directly have an impact over

their markets. To prevent such practices, nations are entering into bilateral agreements with

other nations and groups such as the Organization of Petroleum Exporting Countries

(‗OEPC‘), in this constantly developing world. 2 These agreements make it easy for countries

to resolve such issues and provide better protection to their markets without getting involved

in cumbersome legal and political processes. 3

This is a matter of public international law where there are limits imposed upon the state

jurisdiction and subsequently upon the country‘s ability to implement its laws outside its

jurisdiction over undertakings which are overseas. It can be said that there are two

fundamental elements to a state‘s jurisdictional competence.4First, a state frames laws with

the help of its legislative, executive and judicial bodies to lay down general rules. This is also

knows as subject matter jurisdiction of the state. 5Second, it becomes an issue of enforcement

of these general rules, where sometimes even coercion is used by the authorities. 6 This is

called enforcement jurisdiction of a state. 7

Subject matter jurisdiction is considered as part of public international law as this concept

provides power to the state to regulate its citizens within its territory. Under laws such as

taxation or corporate law, even corporate entities which are registered in a country will be

considered as citizens. Due to trans-border transactions and events taking place at so many

different levels, it has been tried by various scholars and judicial bodies to even include the

acts which are originating outside but ending within the territory of that particular state under

2Einer Elhaugeet al, GLOBAL COMPETITION LAW AND ECONOMICS, 152 (2007).

3Id, at 154.

4Elhauge, supra note 1, at 155.

5Joseph Drexl, THE FUTURE OF TRANSNATIONAL ANTITRUST - FROM COMPARAT IVE TO COMMON COMPETITION

LAW, 112 (2003). 6Id.

13Id.

64

the definition of subject matter jurisdiction. Even certain connections are considered as acts

being completed within the territory of a country. 8

To include anti-competitive practices within the principles of territoriality and nationality, the

definitions of the concepts have been widened in recent decades through various judicial

decisions in the US and the UK. Examples of these practices can be, taking over a competitor

or charging predatory prices within the territory of the state concerned to apply its law, or

because an agreement will have been made between a foreign undertaking and firm

established within the state in question. 9Such practices are considered as anti-competitive

practices and these examples show that they have direct effect on the concerned country‘s

economy.10

In these cases, it is easy to apply subject matter jurisdiction over an individual who is outside

the territory of the state, but the fundamental problem here is about enforcement of its laws in

the territory of the other state. To prevent such practices, states have incorporated regulations,

which block other states from enforcing their laws in their territory. India itself faces the

problem of enforcing its judgments in the territory of other states, but as said earlier, there are

a lot of jurisdictional issues involved in such cases. 11

The issues of enforcement bring lot of issues along with it. It has been seen in the past that

even though one state has a subject matter jurisdiction in relation to an individual in other

state, but it becomes contentious once the enforcement comes into picture without the

permission of that state. Here enforcement is not just about imposing penalties but also

includes all other acts such as service of summons, investigation privileges etc. 12

The fundamental problem for the competition authorities is collection of information of the

act which took place outside its own jurisdiction. 13 The problem here is that laws which were

framed in the 19th century to deal with issues are not well equipped to deal with issues at

present where the entire globe is inter- connected and transactions are taking p lace at various

8Tran Van Hoa, COMPETITION POLICY AND GLOBAL COMPETITIVENESS IN MAJOR ASIAN ECONOMIES, 245

(2003). 9Id.

10Kerrin Vautie ret al, INTERNATIONAL TRADE AND COMPETITIVE POLICY: CER, APEC AND WTO, 103 (1997).

11Id.

12Doern, National Institutions in a Global Market, COMPARATIVE COMPETITION POLICY, , 25 (2001).

19American Banana Case, 148 F.2d 416 (2nd Cir. 1945).

65

levels and sometimes even in more than one jurisdictions. Hence, all these laws must be

modified to deal with current issues. 14

Bilateral agreements and other treaties have tried to resolve this problem up to a certain

extent. For example, India is signatory to the Hague Convention on the Taking of Evidence 15

,

and hence India assists in collecting evidences for any issue which occurs in the territory of

any state signatory to the Hague Convention. Similarly, private international law becomes

important when it comes to the enforcement of foreign judgments in any territory.

Sometimes, it comes under enforcement of foreign judgments, especially in the matter of

currency conversion, e.g. Miliango case.16However, cooperation on evidence and the

enforcement of judgments is often not provided by one state to another where the former

takes exception to an attempt by the latter to affirm its law extraterritorially, and most legal

systems contain restrictions on the disclosure by competition authorities, of confidential

information.17

III. DIFFERENCE IN APPROACH OF THE USA AND EU

A. APPROACH BY USA

The Effects Doctrine in the USA has developed through legal interpretation of antitrust laws

provided by the courts in cases dealing with commercial law jurisprudence. This was to put

an end to activities which were taking place outside the USA but were st ill affecting its

market and economy. The first instance of ‗Effects Doctrine‘ came into picture in 1909 when

American Banana Case18was brought to the court. In this case all the acts which were found

to be violative of laws in USA were committed outside its territory, where the Costa Rican

government was influenced to monopolize the banana trade. Unfortunately, in absence of

clear laws regarding enforcement of laws in jurisdiction outside US‘s territory, court rejected

the matter saying they have no power to impose their laws over another country or a citizen

of another country.19

14

Lennart Goranson, Concepts, Issues and the Law in practice: The Efficient and Effective Competition,

Authority COMPETITION LAW TODAY, 601 (2008). 15

Id. 16

Miliangos v. George Frank Ltd, [1976] AC 443. 17

Elhauge, supra note 1, at 178. 18

American Banana Co. v. United Fruit Co ., 148 F.2d 416 (2nd Cir. 1945).

27Timberlane Case, 549 F.2d 597 (9th Cir.1976).

66

Later on, in the case of American Tobacco20, issue of anti-competitive practices came before

the court. This time the court said that the interpretation of Anti- Trust Act is so vague that

every other matter of extraterritoriality can be rejected from even admitting into the court.

Here the matter was about monopolizing the tobacco industry. Hence, in this case also the

matter was not dealt with Effects Doctrine and subsequently was re jected.21

Later on, with time, Supreme Court of the United States became more flexible about the

territoriality principle. In the Sisal case22, the Supreme Court of the United States interpreted

the rules more flexibly and hence, they exercised the jurisdict ion in this case where the

defendant was outside the US. The explanation behind it was that even though the

agreements were entered into outside USA by foreigners, they have the power to exercise

jurisdiction over performance and intention of the parties, which was within USA.

Subsequently, the Alcoa case23

came to the Supreme Court of the United States where the

action was taken by USA against ALCOA (the Aluminium Company of America) because

the defendants had entered into an agreement to conspire so that trade can be monopolized.

This was considered as unlawful under the Sherman Anti- Trust Act, Sec. 4 and

15U.S.C.A.24

This was the first case where the ‗Effects Doctrine‘ was used to pass a decree.

This gave a new start to the courts to apply this doctrine in matters affecting the USA‘s

markets directly from the territory outside its jurisdiction. 25

With time, all these judicial precedents started laying down several different conditions to

apply the Effects Doctrine. The case which brought all this together was the Timberlane

case26. In this case, the Court came up with the list of the tests which can be used when there

is any kind of dilemma about the application of the Effects Doctrine. This was to assert that

the practice was anti-competitive and was affecting the market of the concerned nation. The

Court expressly said in the case that they have the power to exercise jurisdiction over matters

which take place outside its jurisdiction but to prevent any kind of flaw on their part, these

three tests are as follows27

:

20United States v. American Tobacco Co., 221 U.S. 106 (1911).

21American Tobacco Case, 221 U.S. 106 (1911).

22United States v. Sisal Sales Corporation, 274 U.S. 268 (1927).

23United States v. Aluminum Co. of America, 213 US 347 (1909).

24 Sec. 4, U.S.C.A.

25Andrew D. Mitchell, Broadening the Vision of Trade Liberalisation: International Competition Law and the

WTO, 24(03) KLUWER LAW INTERNATIONAL, 358 (2001). 26

Timberlane Lumber Co. v. Bank of America , N.T. & S.A., 549 F.2d 597 (9th Cir.1976).

67

First requirement was that it should have some effect whether direct or indirect over

American trade and business (or for this matter over any other nation which follows

these rules to exercise their jurisdiction).

There cannot be every other matter regarding anti-competitive practices being dealt

by the court. The injury felt by USA must be potentially large which can be brought

under the category of cognizable one. In addition, there must be infringement of

antitrust laws.

There must be sufficient reason with the courts in USA to exercise their jurisdiction

outside their territory. Hence the anti-competitive practice must be large enough to

affect even the international comity and fairness.

B. APPROACH BYTHE EUROPEAN UNION

The position in the European Union (‗EU‘) is slightly complex with regard to applicability of

extraterritorial jurisdiction principles. In EU, the Treaty of Rome and the competition law of

European Commission (‗EC‘) does not say much about extra territorial jurisdiction. Still, the

EC has adopted it to maintain the pace with the developing world and to deal with such issues

of anti-competitive practices.28 The EC uses three legal concepts to deal with issues of

extraterritoriality, namely, the implementation doctrine, the economic entity doctrine, and the

Effects Doctrine. This was developed by implementing Articles81 29 and 8230 of the EC in

the matters of extraterritoriality through judicial decisions. 31

But in EU, the Effects Doctrine is still not recognized by the European Court of Justice

(‗ECJ‘), hence there is always a doubt whether this doctrine enjoys the same status as other

doctrines. But, at the same time, courts have established in several cases over a period of time

that this non-recognition will not bar the courts to exercise their subject- matter jurisdiction

over an undertaking which is outside the EU territory. 32 It has been said by the courts that the

Effects Doctrine will be applicable in cases to deal with anti-competitive practices, to provide

28Elhauge, supra note 1, at 192.

29 Article 81, European Community Law (EC).

30 Article 82, European Community Law (EC).

31Massimo Motta, COMPETITION POLICY: THEORY AND PRACT ICE, 338 (2004).

32Id.

68

safety to EU consumers. They also said that the effect of such anti-competitive practice on

the economy must be reasonably foreseeable, immediate and substantial. 33

It may be said that despite non-recognition of the doctrine, the Commission and Courts have

assumed power over extraterritorial matters with themselves. 34

In the Wood Pulp Case35

, the

matter was about American, Canadian and Finnish wood pulp producers coming together and

forming a price cartel outside the jurisdiction of the EC and subsequently charging EC

members with predatory prices. The reason for exercising jurisdiction over the defendants

was that they were doing business in the EU through their agents, branches and subsidiaries

situated in the EU. They charged inflated prices from the customers which lead to the loss of

60% in wood pulp market.36

Later, when the case went to appellate court, Advocate-General Darmon said that Effects

Doctrine should be recognized by EC law.

He specifically said that Effects Doctrine is the most reliable rule which laid down the criteria

of substantial, foreseeable and direct effect. 37 This doctrine was again discussed in the

Gencor case38 where the issue was about the merger of two South African Companies. In this

case, the court discussed the application of merger regulations and international law to

principles of extraterritorial jurisdiction. 39 The Gencor case40reiterated the three components,

namely, immediate, foreseeable and substantial effect while deciding the case.

Hence, it has been observed by the researcher that both USA and EU developed their

mechanism to implement Effects Doctrine through cases and interpretation of anti-trust laws.

India has its CCI in nascent stage and we need a lot of changes and better implementation of

Competition law. The next chapter will be dealing with CCI and how Effects Doctrine is

applied in India.

IV. PROCEDURES AND POWERS OF CCI (APPROACH BY INDIA)

33 Motta, supra note 30, at 336.

34The 6

th Report on Competition Policy, 1977.

35A. Ahlstrom Osakeytio v. Commission Mkt. Rep . (CCH), 491 (27th September 1988).

36Wood Pulp Case, 491 (27th September 1988).

37Wood Pulp Case, 491 (27th September 1988).

38Gencor v. Commission, [1999] E.C.R. II-753.

39Gencor Case, [1999] E.C.R. II-753.

40Gencor Case, [1999] E.C.R. II-753.

69

CCI in India assumes its powers of extraterritorial jurisdiction under Sec. 32 41 of the

Competition Act, 2002 (‗Act‘). Unlike Sec. 1442 of its forerunner Act i.e. Monopoly and

Restrictive Trade Practice Act, 1969, (‗MRTP‘) it provides some extraordinary powers to the

Commission to investigate and pass such orders as it deems fit when it finds any anti-

competitive agreement or misuse of dominant position or combination such as merger which

constitutes a violation of the provisions of the Act or the party to such anti-competitive

practice are outside the territory of India. 43

The competition laws in neither, the USA nor the UK gives its competition authorities such

tremendous power in an unequivocal manner. Sec. 32, in very clear words gives these two

powers to the CCI even if the anti-competitive practice has taken place outside the territory of

India or the party to such agreement is outside India. Before the 2007 Amendment Act44, CCI

had power to only conduct an inquiry in such cases but the 2007 amendment of the Act made

the Commission more dynamic in all respects. It broadened the scope of its powers which

lead to stringent anti-competitive practices.45

If the provisions of Indian Competition law are compared with the EU competition laws or

US competition law, it is clear that the Indian Competition Commission is stronger than the

competition authorities of EU or USA. The reason behind this may be that we have learnt

from their mistakes and made the necessary amendments. The other reason can be that

Article 81 and 82 of European Community Law or the concerned provision of US

competition law does not specifically authorize the commission to exercise such jurisdiction.

Such exercise of extraterritorial jurisdiction in the US or the EU is judicially created power of

these competition authorities and is based on three doctrines such as implementation doctrine,

economic entity doctrine and Effects Doctrine as was explained in the last chapter. 46

Before the Act there was no provision in the MRTP Act which discerns the extraterritorial

jurisdiction of the competition authority. However in 1996, one case came before the MRTP

commission which brought up the issue of extraterritorial jurisdiction of the Commission for

41Sec. 32 of the Competition Act, 2002.

42Mitsuo Matsushita, Competition Law and Policy in the Context of the WTO System, Vo lume 44 DE PAUL LAW

REVIEW 1097, 1109 (1995). 43

Id. 44

The Competition (Amendment) Act, 2007. 45

The Competition (Amendment) Act, 2007. 46

Motta, supra note 30, at 116.

70

the first time. The Alkali Manufactures Association of India (‗ AMAI‘)47, whose members

included the major Indian soda ash producers, filed a complaint claiming that ANSAC has

violated several provisions of MRTP Act, 1969.48

Analysis of various factors such as Effects Doctrine and judicial precedents of US and EU

courts was done.49 But at that time, the doctrine in India50 was at a nascent stage and hence

the Commission could not take action against foreign cartels or the pricing of exports to

India51, nor could it prevent imports. 52Hence, the need for a specific provision in the statute

itself was felt, and later on the new Act came up with such provisions. 53

A. PROCEDURE FOLLOWED BY CCI

After the amendment of 2007 in the Act, the Commission has both inquiry power as well as

power to pass an order against the anti-competitive practices. The wordings of Sec. 3654

before amendment lead to the assumption that the legislature were not of the view that the

Commission should follow procedure laid down in the Code of Civil Procedure,

190855(‗CPC‘)as clause 1 of Sec. 36 in very clear words exempts the Commission from the

procedure laid down in Code of Civil Procedure. 56

Para 12 of General Regulation57 2 of 2009 provides the mode of filing of information or

reference.58

The commission shall within sixty days form and record its opinion of the

existence of prima facie case of the contravention of the provisions of the Act. 59

The commission may, if it thinks necessary, call the primary conference for the formation of

opinion on the existence of prima facie case. Direction of investigation to the Director

General shall be deemed to be the commencement of the inquiry under Sec. 26 60 of the Act.

The report of the Director shall contain his findings on each of the allegations made in the

47Alkali Manufacturers v. American Natural Soda Ash , (1998) 3 Comp LJ 152 MRTPC.

48The Alkali Manufactures Association of India (AMAI) Case, (1998) 3 Comp LJ 152 MRTPC.

49The Alkali Manufactures Association of India (AMAI) Case, (1998) 3 Comp LJ 152 MRTPC.

50Sec. 14 of the Monopoly and Restrictive Trade Practice Act, 1969.

51The Alkali Manufactures Association of India (AMAI) Case, (1998) 3 Comp LJ 152 MRTPC.

52The Alkali Manufactures Association of India (AMAI) Case, (1998) 3 Comp LJ 152 MRTPC.

53The Alkali Manufactures Association of India (AMAI) Case, (1998) 3 Comp LJ 152 MRTPC.

54Sec. 36 of the Competition Act, 2002.

55The Civil Procedure Code, 1908.

56P. J. Lloyd et al, PROMOTING COMPETITION IN GLOBAL MARKETS- A MULTI-NATIONAL APPROACH, 1015

(1999). 57

The Competition Commission of India (Genera l) Regulations, 2009 (No. 2 of 2009). 58

Motta, supra note 30, at 336. 59

Andrew T. Gu zman, Is International Antitrust Possible, Vo lume 73 NYLU REV 1501, 1505 (1998). 60

Sec. 26 of the Competition Act, 2002.

71

information or reference as the case may be, together with all evidences, documents,

statements or analyses collected during the investigation. 61

Sec. 1962 of the Act gives the Commission, power to inquire into certain agreements or

misuse of dominant position of the enterprise. Sec. 26 of the Act read with Para 21 of the

Competition Commission (General) Regulations, 200963 gives the procedure for the inquiry

in such matters.64

Except in the case where the inquiry is to be conducted against government or public officer,

neither the General regulation, 2009 nor the CPC makes it mandatory to give a notice to the

defendant.65 So it is upon the wish of the Commission or the party to give notice to the

alleged violator of the Act. However Order V of CPC and Para 22 of General Regulations,

2009 of Competition Commission gives the mode of service of summons, notices and other

documents.66

Though the regulation does not give any procedure for the examination of the parties or

witness but for this purpose, sub-Sec. 2 of Sec. 36 of the Act67 gives the Commission the

same power as the Civil Court under CPC.68 The substance of such examination shall be

reduced to writing by the members and shall form part of the record.69 If the party or his

pleader or such authorized person is unable 70 or does not answer any material question which

the Commission thinks is necessary to answer71, the Commission may pronounce its order72

against such party, if the commission thinks fit.73

B. POWERS OF CCI

61

Lloyd, supra note 55, at 500. 62

Sec. 19 of the Competition Act, 2002. 63

Lloyd, supra note 55, at 245. 64

William E. Kovacic, Extraterritoriality, Institutions, and Convergence in International Competition Policy,

Vo lume 77 CHI-KENT L. REV., 260 (2001). 65

Lloyd, supra note 55, at 246. 66

Lloyd, supra note 55, at 146. 67

Brendan Sweeney, Globalisation of Competition Law and Policy, Volu me 15 MELBJIL, 48 (2004). 68

Id. 69

Order I of the Code of Civil Procedure, 1908. 70

Maria Johansson, General Counsel, U.S. Federal Trade Commission, „Extraterritorial Jurisdiction in

Competition and Anti-trust Matters‟, Vo lume 97 ASIL PROC., 319 (2003). 71

Lloyd, supra note 55, at 145. 72

Johansson, supra note 68, at 309. 73

FodBarneset al, Evidence Remedies: Lessons from the Decision of the Cat in Tesco Plc v. Competition

Commission, 08(04) COMPETITION LAW JOURNAL, 329 (2009).

72

The amended Act has empowered the Commission not only to inquire into such anti-

competitive practices but also to pass such orders as the Commission deems fit. Now if after

inquiry under Sec. 19, 20, 26, 29 and 30 of the Act, the commission finds there is no

contravention of the provisions of the Act, then it shall approve by order, such agreement or

combination.74

If the Commission finds that there exists any anti-competitive agreement or abuse of

dominance or combination which causes or is likely to cause appreciable adverse effect on

the Indian competitive market, it shall direct the person or enterprise or group of person or

enterprise to discontinue and not to re-enter such agreement or abuse of dominant position

irrespective of the fact that the concerned act has been taken place outside. 75

Sec. 2776 and Sec. 3177 of the Act give certain remedial measures which can be taken by the

Commission after the completion of the inquiry procedure. Sec. 27 talks about the orders by

the Commission after inquiry into agreements or abuse of dominant position whereas Sec. 31

talks about the orders of the Commission on certain combinations. 78

While the Commission exercising its extraterritorial jurisdiction under Sec. 32 of the Act

imposes any penalty under Sec. 27, 31 or others provisions of Chapter VI of the Act, and the

party upon whom penalty has been imposed does not comply with such order of the

Commission then Sec. 3979 of the Act gives the commission power to proceed to recover such

penalty in such manner as may be specified by the regulations. 80

Now, while enforcing its order under Sec. 32 of the Act Commission may face two situations.

First, the party against whom the order has been passed is ready to comply with the order of

the Commission, and second, the party against whom the order has been passed is not ready

to comply with the orders of the Commission. 81

Where the Commission imposes any monetary penalty against such party for the

contravention of the provisions of the Act, and the party is ready to comply with the orders of

the Commission, the penalty shall be paid. The party who has to make payment shall give the

74 Johansson, supra note 68, at 309.

75Richard Whish, COMPETITION LAW,745 (5

thedn., 2003).

76Sec. 23 of the Competition Act, 2002.

77Sec. 31 of the Competition Act, 2002.

78 Johansson, supra note 68, at 315.

79Sec. 39 of the Competition Act, 2002.

80 Johansson, supra note 68, at 306.

81T. Ramappa, COMPETITION LAW IN INDIA, POLICY, ISSUES AND DEVELOPMENTS, 56 (2006).

73

notice either through the Commission or independently to the party in favour of whom the

order has been passed.82

V. CONCLUSION

India is at its nascent stage in terms of having rules and regulations for its own Effects

Doctrine. Section 32 of the Act has been a major step taken by the Indian Government where

CCI is especially empowered to conduct an inquiry into anti-competitive practices which

have adverse effect on India, irrespective of the fact that it has taken place outside the

territory of India. Despite this, the problem is about enforcement of its decisions in other

territories. To take the benefits of these new rules and regulations, India will have to enter

into bilateral agreements so that the anti-competitive practices can be prevented and the

orders of the courts in India can be enforced easily.

The researcher on the basis of his research suggests that the Commission is at an infancy

stage and therefore, it should adopt the comity principle which has been recognized and

adopted by most strong competitive and antitrust authorities of the world. The researcher also

suggests that the Government of India should enter into more bilateral agreements for the

reciprocal enforcement of the judgments.

82Id.

OVERLAPPING JURISDICTION OF REGULATORS IN INDIA: A NEVER

ENDING BATTLE?

-KRITIKA SETHI &AKSHITA AMIT1*

ABSTRACT

In the regulation of transactions, in almost every jurisdiction in the world, several regulators

operate concurrently to determine whether such transactions comply with the multitude of

laws. India, being no exception to this rule, has a host of regulators that must grant approval

to these transactions. This paper sets out to identify the various regulators in the Indian legal

sphere such as Securities and Exchange Board of India („SEBI‟), Insurance Regulation and

Development Authority („IRDA‟) etc. and critically analyse their overlapping jurisdiction. In

light of the Financial Sector Legislative Reforms Committee, a nuanced research has been

undertaken with regard to the often overlapping competence of SEBI and Competition

Commission of India („CCI‟). This brings out the fundamental rationale behind the existence

of a multitude of regulators – a sector wise expertise (telecom, electricity etc) vis-à-vis an

overarching expertise in maintaining the integrity of the market for investors and commercial

entities alike. Given that there has been widespread critique of India‟s complicated and often

un-navigable regulatory landscape, the authors have further examined the legislative

changes that have been made in the recent past to harmonise the statutes and other laws to

usher in a regime of consistency in the applicable laws. Finally, the analysis contained in this

paper seeks to offer a solution to the regulatory conundrum that has been considered a

hindrance in attracting investment from both India and abroad across several sectors.

I. INTRODUCTION

India adopted the Liberalisation, Privatisation and Globalisation (‗ LPG‘) Policy in 1991 by

opening up its economy to the world. A plethora of structural adjustments were made to

regulate the newly opened economy. Market based economy was presumed to e nsure

efficiency in the economy by virtue of its consequence of optimum allocation of resources.

There was an unanticipated shift from a government controlled closed economy to market

controlled open economy. Various market reforms were imperative to make the move

5

th year B.A. LL.B. (Hons.) students of NALSAR University of Law, Hyderabad. The authors can be contacted

at kritikasethi4@gmail.com and akshita.amit@gmail.com respectively.

75

successful. This included sector specific regulators. Various pre-1991 laws were rendered

futile. One of such laws was Monopolies and Restrictive Trade Practices Act, 1969 (‗MRTP

Act‟). It was unsuccessful in adapting to the changing economic environment in the country.

A high level committee was established under the chairmanship of Shri S.V.S. Raghavan to

evaluate the MRTP Act. It recommended a new law on competition, in line with the

international developments in the area of antitrust law. Compe tition Act, 20022 was enacted

to commensurate with the changing times. There was a jurisprudential shift from thwarting

monopoly, restrictive and unfair trade practices to promotion of competition in the market

and consumer welfare. The implementation of the same was stalled due to its provisions and

rules, formed there under, being challenged on constitutional grounds. 3

This writ in the

Supreme Court was disposed of without answering the points of contention and leaving open

all the relevant question in light of the government‘s proposed amendments to the Rules.

Post 1991, various sector specific regulators were brought in the picture. The first and the

most important of them being the Securities and Exchange Board of India constituted in

1992. Other regulators like Competition Commission of India, Telecom Regulatory Authority

of India (‗TRAI‘), etc were later established.

This article focusses on the overlapping of these regulators‘ jurisdiction, in particular SEBI‘s

and CCI‘s jurisdiction. It attempts to clear the confusion on which of the two has to be given

preference over the other in case of a conflict. It further delves into how they exercise control

in the cases of creeping acquisitions. Before exploring this, it is imperative to comprehend the

different regulators present in the economy and their scope of operation.

A. SECTOR SPECIFIC REGULATORS AND GENERAL ANTITRUST REGULATORS

SEBI

SEBI was established in accordance with Securities and Exchange Board of India Act, 1992.

Its jurisdiction is limited to the securities market. Its objective is to ―protect the interests of

investors in securities and to regulate and promote the development of the securities

market‖4.Its powers were enhanced periodically to allow it to deal with the various scams that

2 No 12 of 2003.

3BrahmDutt v Union of India, AIR 2005 SC 730.

4 Object clause of the SEBI Act, 1992.

76

were unearthed. The Harshad Mehta scam5, the Ketan Parikh scam6etc. showed lacunae in the

law and, accordingly, SEBI was given more teeth to prosecute such happenings in the future.

Further, the Act provides that the act shall be applicable in addition to any other law in force

at a particular time7

which implies that the powers of SEBI co-exist with and cannot over-ride

other regulators in the market. Several regulations have been framed under the SEBI Act for

regulating different aspects of the securities market.

TRAI

TRAI was established in accordance with the Telecom Regulatory Act, 1997. The regulatory

authority was established with an aim to protect the interests of the investors and consumers,

and to regulate the telecommunication industry in the country. 8The Act provides that the

provisions of the act shall be in addition to any act which devolves power on the Telegraph

Authority to perform any role, function or authority. 9 Therefore, TRAI has a very specific

role to play under the Act.

IRDA

The IRDA was established as an autonomous body in accordance with the recommendations

of the Malhotra Committee in 1999. 10 It was established under the IRDA Act, 1999 with an

aim to regulate the insurance sector, protect the interests of the investors and to promote the

development of the insurance industry. 11 IRDA, as a regulatory authority would co-exist with

other regulatory authorities in the market. 12

CERC

Central Electricity Regulatory Commission (‗CERC‘) is the regulatory authority for the

electricity sector. It was established in 2003 under the Electricity Act. It has been entrusted

with the task of maintaining a competitive environment, preventing anti- competitive

5 R. B. Jain, The Craft of Political Graft in India: An Analysis of Major Scams, INDIAN JOURNAL OF POLITICAL

SCIENCE, Vo l. 55, No. 4, Oct 1994. 6Id.

7Section 32 of SEBI Act, 1992.

8Long title of the TRAI Act, 1997.

9Section 38 of TRAI Act, 1997.

10 BSCAL, Malhotra Committee Recommendations, BUSINESS STANDARD, April 22, 1998, available at:

http://www.business-standard.com/article/specials/malhotra-committee-recommendations-

198042201099_1.html 11

Long title of the IRDA Act, 1999. 12

Section 28 of the IRDA Act, 1999.

77

agreements, abuse of dominant position in the electricity sector. 13 This is in clear overlap

with the jurisdiction of the Competition Commission of India which has been entrusted with

the task of maintenance of competition in the market in addition to the promotion of

consumer welfare in the market. To add to the confusion, Section 174 of the act contains a

non-obstante clause which gives the act an over-riding effect over any other legislation which

is in derogation of the Act. Further, the Act specifies that the provisions of the Electricity Act

shall be ―in addition to, and not in derogation of any other law in force‖14.

Similar is the case with the Competition Act, 2002, which provides for a non-obstante clause

under Section 60 of the Act in addition to a non- derogation clause under Section 62 of the

Act.

Therefore, India follows a system of sector specific regulators which have been given powers

to regulate that specific sector. This is in contrast to the Competition Act, 2002 which is a

general antitrust legislation which aims to promote competition among all the sectors of the

economy. Therefore, there is a considerable overlap between the jurisdiction of various

regulators in the country, especially between the general antitrust watchdog and the specific

sector regulators as exemplified above.

II. OVERLAP OF LEGISLATIONS

In the past there have been instances of overlap of the application of different legislations in a

particular situation where both the legislations had a „non- obstante clause‟ in it. The courts

in India have applied various principles in such cases, inter alia, including specific legislation

prevails over general legislation, 15

newer legislation prevails over older legislation16

etc. The

Hon‘ble Supreme Court had opined that as a principle of interpretation, ‗lex specialis‟

prevails over a general legislation as the special legislation governs only the specific sector.

The rationale behind the principle that newer legislation prevails over older legislation is that

the legislature is assumed to aware of the existence of the laws and hence, a ‗non-obstante

clause‘ in the latter enactment implies an intention on their part on the application of the

latter legislation over the former. 17

13Section 60 of the Electricity Act, 2003.

14Section 175 of the Electricity Act, 2003.

15Allahabad Bank v. Canara Bank , [2000]2SCR110,

16KSL and Industries Ltd. v Arihant Threads Ltd ., (2008)9SCC763; Bank of India v Ketan Parekh,

AIR2008SC2361. 17

Bank of India v Ketan Parekh, AIR2008SC2361.

78

At the same time, the Hon‘ble Supreme Court has observed that the ―interpretation which

makes the textual interpretation match the contextual‖ must be accepted.18 When the

aforementioned principles are not applicable, then a harmonious interpretation of the two

legislations is looked for. CERC and CCI‘s jurisdiction overlaps to a considerable extent on,

say for e.g., anticompetitive agreements in the electricity sector. Does this mean that in the

future in case of a dispute over appropriate forum for adjudication of a dispute, pertaining to

anticompetitive agreement in the electricity sector, CCI‘s jurisdiction will be overridden by

CERC.Is this not an inconsistency in the system of laws that a particular sector has its special

watchdog while others have a general antitrust watchdog? A logical corollary would be

having a sector specific competition regulator and a general competition regulator for the left

space. But such a sector specific competition regulator would mean division of the present

day CCI into SEBI, IRDA, RBI with their sector specific competition regulation powers and

a general CCI which would scrutinise the remaining competition law issues only. The sector

specific regulators may be adept at issues pertaining to the sector and not the antitrust law per

se. This may further lead to a mockery of the competition law, in totoin case any

inconsistency prevails in the adjudication of these regulators. A major problem would be the

ranking of these regulators in scale of hierarchy for determining the binding value of their

orders inter se.

The above extension of the CERC example sounds absurd but seems probable after

scrutinising the line of action of the Legislature by giving competition regulatory powers to

the sector specific regulators. The recent addition to the list is Petroleum and Natural Gas

Regulatory Board which was established under the Petroleum and Natural Gas Regulatory

Board Act, 2006, post the enactment of the Competition Act, 2002. Further, the act has

endowed the Board with wide powers.

As of now, no conflict has arisen. It becomes problematic only when a conflict arises and this

issue is worsened by the presence of the non-obstante clause in the various legislations, as

noted above.

A. SEBI VERS US CCI

18Reserve Bank of India v Peerless General Finance and Investment Company Limited [1987]2SCR1.

79

The emerging area of overlap, as explained above, has the potential to become a hotbed of

disputes. Let‘s understand the dispute of overlapping of jurisdiction between two regulators-

CCI and SEBI in merger transactions and the consequences that follow.

SEBI and CCI are the two regulatory authorities whose approval is necessary for any merger

or acquisition or amalgamation to fructify in India. CCI has wider jurisdiction as it can probe

any combination19 which took place outside India but has an appreciable adverse effect on

competition in the relevant market in India. 20 A combination refers to any amalgamation,

merger or an acquisition. 21

Relevant Market has been defined under Section 2(r) of the

Competition Act, 2002 to comprise of relevant geographical market and relevant product

market. Relevant Geographical market refers to the area in which the conditions of

competition are homogenous and distinct from a neighbouring area.22Relevant Product

market refers to the market consisting of all the products or services which are considered to

be substitutes of the product in issue. 23

B. CCI‟S APPROVAL

Application has to be filed with the CCI only if one of the various thresholds given in Section

5 of the Competition Act is satisfied. If it is, then the application has to be filed within 30

days of the approval of the proposal relating to any combination by the Board of Directors or

execution of any agreement to that effect. 24Prior to 2007 amendment, it was voluntary on the

part of the enterprise to disclose the combination to the CCI. Now it has been made

mandatory under the Competition (Amendment) Act, 2007. 25The application has to be filed

with the CCI in Form I or Form II as provided under Regulation 5 of the Competition

Commission of India (Procedure In Regard To the Transaction of Business Relating To

Combinations) Regulations, 2011 [Hereinafter referred to as Combination Regulations].Form

II needs to be filed only when the parties to the horizontal combination have a combined

market share of 15% or more in the relevant market or the parties to a vertical combination

have a combined market share of 25% or more in the relevant market. Most of the

combination proposals have been cleared by the CCI in Phase I investigation. However, there

19Section 5 of the Competition Act, 2002.

20Section 32 of Competition Act, 2002; DhanrajPillay v M/s. Hockey India, 2013 CompLR 0543 (CCI).

21Section 5 of the Competition Act, 2002.

22Section 2(s) of the Competition Act, 2002.

23Section 2(t) of the Competition Act, 2002.

24Section 6(2) of the Competition Act, 2002.In the case of Thomas Cook (India) Ltd acquiring stake in Sterling

Hotel Resorts India) Ltd, Combination Registration No.C-2014/02/153. 25

S.5, 6 of the Competition Act, 2002.

80

have been cases wherein CCI has ordered Phase II investigation as it was of a prima facie

opinion that the same may have appreciable adverse effect on competition in the relevant

market in India.26

Under the Combination Regulations, any acquisitions of shares or voting rights which leads

to the acquisition of less than 25% of shares or voting rights in the acquired enterprise,

directly or indirectly, provided that the acquisition was solely for the purposes of an

investment and did not result in any acquisition of ‗control‘ 27, has been exempted from filing

a merger notification with the CCI. 28

C. SEBI‟S APPROVAL

Approval has to be sought from SEBI, under the SEBI (Substantial Acquisition of Shares and

Takeover) Regulation, 201129. Here, the trigger point is acquisition of 25% or more shares or

voting rights in the target company by the acquirer individually or with persons acting in

concert.30If the threshold is reached, then a public announcement of an open offer has to be

made by the acquirer to the shareholders of the acquired company. 31Such public

announcement has to be made on the date of acquisition of shares or voting rights or control

over the acquired company. 32 Such an announcement has to be conveyed to the stock

exchanges on which the shares of the acquired company have been listed and such

information shall be disseminated subsequently by them. 33

Further, a draft of the offer letter has to be filed with SEBI by the acquirer enterprise as

provided under Regulation 16 of the SAST Regulations. This is required to determine the

offer price.

The acquirer is required to complete the acquisition under the agreements signed, in

furtherance of the same, within a period of twenty six weeks from the expiry of the offer

26

Vidya Krishnan, Sun Pharma-Ra.nbaxy deal in CCI crosshairs, LIVEMINT , July 29, 2014. Available

at:http://www.livemint.com/ Companies/Pwftv xqaZ0vojwb 8GzW EdK/Sun-Pharma Ranba xy-deal-in-CCI-

crosshairs.html?utm_source=copy; Holcim- Lafarge merger and PVR- DLF Utilities Limited. 27

As defined in Exp lanation to Section 5 of the Competition Act, 2002. 28

Regulation 4 of the Combination Regulations. 29

Hereinafter referred to as SAST Regulations. 30

Section 3 of the SAST Regulations. 31

Section 3,4,5(1)of the SAST Regulations. 32

Section 13(1) of the SAST Regulations. 33

Section 14(1) of the SAST Regulations; Umakanth Varottil, Investment Agreements In India: Is There An

"Option"?,NUJS LAW REVIEW, Vol. 4, 2011.

81

period.34 The term ‗offer period‘ has been defined under the SAST Regulations to mean the

period from the date an agreement to acquire shares of the target company was entered into,

to the completion of the transaction, as envisaged under the agreement, by payment of

consideration to the shareholders who have availed the open offer. 35

The timeline of public announcement in different kinds of acquisition is different but all of

them have to comply with the twenty-six months period condition as aforementioned.

D. PENALTIES

To comprehend which regulator has to be given preference over the other, it is important to

be cognizant of the consequences in case of a breach of the provisions, i.e. the penalties that

can be imposed by the respective regulators. Penalties under the Competition Act are usually

levied as a percentage of the turnover of the enterprise. 36‗Turnover‘ has been defined in a

manner to include the value of sale of goods and services. 37 This has led to an ambiguity as

the definition does not specify whether it is the relevant turnover or the total turnover on

which the enterprise has to be penalised.

In Musique Diffusion Francaise SA v. Commission,38 the European Court of Justice held that

turnover and its proportion are the basis on which penalty is imposed. 39 The term ‗turnover‘

means the turnover of the enterprise with respect to the relevant product and not the total

turnover.40In Belaire Owner‟s Association v. DLF Ltd,41 penalty of 7 % was imposed on the

total turnover of the group and not just on the turnover of the relevant product market which

it was found to be abusing its dominance in. 42In MCX Stock Exchange Ltd. v. National Stock

Exchange of India Ltd.43

, a fine of 5% of the average turnover was imposed on NSE for

abusing its dominant position.44 The Court had, further, held that neither section2(y) nor

27(b) of the Act provide the scope for interpretation of the term ‗turnover‘ to mean turnover

of the relevant product.

34Section 22(3) of the SAST Regulations; JitheshTilak, Regulating M&As An Insight Into Competition Laws in

India, INTERNATIONAL BUSINESS LAWYER, 2004. 35

Section 2(p) of the SAST Regulations. 36

S. 27 of the Competition Act, 2002. 37

Section 2(y) of the Competition Act, 2002. 38

1983 ECR 1825. 39

Id. 40

Id. 41

[2011] 104 CLA 398. 42

Id, ¶ 13.6. 43

2011 Comp LR 0129 (CCI). 44

Id, ¶ 42.3.

82

Failure to do so may result in imposition of a hefty fine. Thomas Cook (India) Ltd was fined

to the tune of INR 1 crore for engaging in various purchase activities before securing CCI‘s

approval.45 In this case, the CCI had later approved the proposed combination but it was

penalised for carrying out the activities before obtaining its approval.

Further, the Commission may order that the combination shall not take effect if it is of the

opinion that the proposed combination will have or is likely to have appreciable adverse

effect on competition in the relevant market in India.46 The consequence of the same is that

the enterprise will be dealt with as if the combination never existed and shall be penalised by

the concerned regulatory authority in accordance with the statute that it has contravened.

Failure to comply with the SEBI guidelines may result in several detrimental consequences. It

may include divestment of shares acquired in contravention of the regulations 47, transfer of

shares or any amount raised by a directed sale of shares to the Investor Protection and

Education Fund48, declaring null and void any transfer of shares acquired in contravention of

the regulation49

, debarring an accused from accessing capital markets or dealing in the

securities market.

Therefore, both SEBI and CCI can impose harsh penalties. The penalties that can be imposed

by CCI are harsher as under the Competition Act, the combination can be declared to be void.

But such penalties are leviable due to an inadvertence on the part of the acquirer or the target

company, as required by the particular set of facts under the aforementioned laws in

informing the regulators. Now consider a situation where the transaction triggers approval

from CCI and SEBI. SEBI has given its approval whereby it has to complete the transaction

within the period of twenty-six months from the date of entering into the agreement. But

CCI‘s approval is still awaited as it has got two hundred and ten days to get back on any

application notification.50The time can be stalled when it asks for additional information to

ascertain appreciable adverse effect of the agreement on competition. If the acquirer goes

forth with the agreement, it will be penalised by CCI for gun jumping as the transaction was

implemented before the approval was granted by the CCI. This is irrespective o f their opinion

45 PTI, CCI imposes fine on Thomas Cook, Sterling Holidays, THE HINDU, June 29, 2014. Available at:

http://www.thehindu.com/business/Industry/cci-imposes-fine-on-thomas-cook-sterling-

holidays/article6158129.ece 46

Section 31 of the Competition Act, 2002. 47

Section 32(1)(a) of SAST Regulations, 2011. 48

Id, Section 32(1)(b). 49

Id, Section 32 (1) (c). 50

S. 6 of the Competition Act, 2002.

83

on the appreciable adverse effect on competition. 51CCI has penalised the enterprises in

various cases like Thomas Cook Insurance Services (India) Ltd‘s acquisition of Sterling

Holiday Resorts (India) Limited 52, Jet Airways (India) Limited - Etihad Airways PJSC

merger53, where they did not notify the CCI about their transaction, under the belief that they

were exempted under the target exemption. 54 It is interesting to note that CCI approved both

the transactions in Phase I, after notification was filed before it. On the other hand, if it waits

for CCI approval and does not comply with the obligations under the agreement in a timely

manner, it will become time barred 55 and it will have to go over the deal all over again. This

is one probable situation that may arise under the timeline of different laws applicable to such

deals.

In such a case, the acquirer is in a fix as he can neither go forth with the agreement nor

maintain status quo. What should the acquirer do which would minimise the damage suffered

by him at the costs of the multiple sector approval regime in India? Keeping in mind the

applicable penalty provisions of both the regulators, SEBI‘s penalty seems to be causing

lesser damage. Therefore, CCI‘s approval cannot be overlooked over SEBI. But there is

another side to this story. The imposition of penalty by any regulator on a company listed on

the stock exchange will affect the price of its stocks on the market, thereby, adversely

affecting the deal, in toto.

The intention has always been to reconcile the difference, if any, that exists in the timeline of

notification and approval. With such an intention, the time period for the CCI to revert with

its order on any combination notification, has been proposed to be reduced from two hundred

and ten days to one hundred and eighty days56

in the Competition (Amendment) Bill 201257

which was introduced in the Parliament in 2012 has now lapsed due to dissolution of the

Parliament. 58

51Shweta Shroff Chopra, Sangeetha Mugunthan, Merger control in India: overview, PRACTICAL LAW, June

2014. 52

Combination Registration No.C-2014/ 02/ 153, available at:

http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/C-2014-02-153R.pdf 53

Combination Registration No.C-2013/ 05/ 122, available at:

http://www.cci.gov.in/May2011/OrderOfCommission/CombinationOrders/Order% 20191213.pdf 54

Section 5 of the Competition Act. 55

Section 22(3) of the SAST Regulations. 56

S. 13 of the Competition (Amendment) Bill 2012. 57

Bill No. 136 of 2012. 58

The Competition (Amendment) Bill, 2012, PRS Legislative Research. available at:

http://www.prsindia.org/billtrack/the-competition-amendment-bill-2012-2571/

84

This was one hypothetical situation that was discussed, now let‘s analyse the take of these

regulators on creeping acquisitions.

III. CO-OPERATION INSTEAD OF CONFLICT: THEWAY FORWARD

The Financial Sector Legislative Reforms Committee Report59 by the Ministry of Finance,

Government of India, identifies the same complications due to the multiplicity of regulators

in India. Several aspects of the same transaction are spread over several regulators‘

jurisdictions without any of them analysing the full picture. Another aspect of this

multiplicity is that consumer protection, the most important concern of any person associated

with the market, is forgotten. Every financial regulator in India, by way of its parent statute,

has been given the power to penalize the company or market intermediary, but not award

compensation to the investor/consumer. The FSLRC Report envisages a ―twin peak‖

approach- that there be one financial regulator to regulate transactions and another parallel

regulator concerned solely with investor protection and compensation. 60

In the event that replacing the multiple regulators with a single authority is unfeasible (as it

might be in the Indian landscape today), an approach that allows co-operation and co-

ordination is the next best alternative. The most patent conflict in jurisdictions is perhaps

between SEBI and CCI- both being financial regulators with no particular sectoral mandate.

The jurisdiction of the two often overlaps as any transaction involving securities will have an

effect on market forces and vice versa. The study and analysis below highlights the

jurisdictional overlap and how the co-operation and co-ordination approach is the best way

forward.

A. OVERLAPPING J URISDICTIONS: SEBI AND CCI

SEBI and CCI have often engaged in regulating transactions that have an adverse impact on

the market or on investor protection. There is however one fundamental difference between

SEBI‘s understanding and that of CCI is that the reasons for the regulation of such staggered

transactions. While SEBI is more concerned with investor protection; CCI concerns itself

more with the effect of such acquisitions on the market forces.

B. SEBIS UNDERSTANDING

59Infra at 71. Hereinafter ― FSLRC Report‖.

60 FSLRC Report, at 131-133.

85

Under the SAST Regulation issued by SEBI, any acquisition of shares by an acquirer already

holding 25% or more of the voting rights such that the acquisition amounts to 5% or more of

the voting rights would trigger Open Offer Obligations. 61 The rationale behind the same is

that when an exit option must be provided in the event of an en masse acquisition, the same

should also be provided in the event of a gradual acquisition of control of the Company with

a larger view to protect investor interests. 62In addition to open offer obligations, there are also

varied disclosure norms that have to be complied with.

C. COMPUTING THRESHOLD LIMITS

Clarifying the computation of threshold limits relevant to the regulation, the SEBI issued an

Informal Guidance to Akash Optifibre Limited (―AOL‖) in 2012. 63

The central issue therein

was that the promoter held 30.05% of the shares (of a total of 14,29,24,871 shares,

4,29,49,225 were held by the promoter). Thereafter, there were changes in the shareholding

pattern due to conversion of fully compulsorily convertible debentures into equity shares and

an open market purchase of 65,46,224shares. SEBI then clarified that the calculation shall be

made on a denominator as it exists on the relevant date that the acquisition is being made. As

on the date that the Foreign Currency Convertible Bonds (FCCBSs) were converted to equity

shares, the same would directly be attributed to the total shareholding of the company and the

percentage would be on the new number of shares. After a computation is made on every

stage of the acquisition, each of these percentages would be added to examine the creeping

acquisition in the limit.

In the AOL guidance, SEBI concluded that there was an acquisition in three instances of

0.21%, 3.03% and 1.28% each; therefore, there was a total acquisition of 4.52% in total. The

promoters were then advised that they could acquire another 0.48% stake in the company

without triggering obligations under the SAST Regulation. This represents a computation of

the gross acquisition.

D. UNDERSTANDING SEBI‟S SPHERE OF J URISDICTION

61Regulation 3(2) of the SAST Regulation.

62Public M&As in India: SAST Regulation Dissected A detailed analysis of Securities and Exchange Board of

India, NISHITH DESAI & ASSOCIATES. Available at:

http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Papers/Public% 20M% 26As%20in%20In

dia%20-% 20Takeover% 20Code%20Dissected.pdf 63

SEBI document number CFD/DCR/TO/ OW/25627/ 2012.

86

Any acquisition of shares, irrespective of the value of the transaction will be subject to

SEBI‘s jurisdiction, so long as the relevant percentages mentioned in the regulations are

breached. The SAST Regulations, although applying only to public companies does not make

any other qualifications with regard to its application. There is no qualification as to the value

of the deal or the turnover of the Company.

E. CCI‟S UNDERSTANDING

Under Section 6(1) of the Competition Act, 64 certain transactions have an adverse impact on

the market and are void. Further elucidated in the Combination regulations, more specifically

in regulation 4,65 certain transactions that do not have an adverse impact on the market are

exempt from the rule.

The CCI also recognizes that the adverse impact on the market can happen only if the person

acquiring the shares already has a significant stake in the company. Therefore, any

shareholder with less than 25% shareholding is incapable of affecting market forces.

However, if a person acquires shares above the 25% would have to report the same to the

CCI. As per the earlier norm, 66 an acquisition of even 1% over the 25% threshold would be

actionable.

However, CCI has amended the Competition Act in 2013 whereby Section 1A of the

Schedule to the Act would reflect that certain acquisitions over the threshold would be

exempt from the reporting requirement. Pursuant to the newly inserted Section 1A- 67

1. Any share acquisition over the threshold but less than 5% (in terms of voting rights or

number of shares) need not be reported.

2. This exemption is not available if either before or after such acquisition the acquirer

holds 50% or more of the shares.

64

Competition Act- An overview, NISHITH DESAI & ASSOCIATES. Available at:

http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research%20Articles/The_Competition_Act_Overvie

w.pdf. 65

Rela xation under Combination Regulations, available at http://www.deloitte.com/assets/Dcom-

India/Local%20Assets/Documents/Regulatory%20alerts/2013/ RA-03-2013.pdf. 66

Schedule I of the Combination Regulations. See Generally Provisions Relating to Combinations,

COMPETITION COMMISSION OF INDIA. available at:

http://www.cci.gov.in/sites/default/files/advocacy_booklet_document/combination.pdf. 67

AshishSinha, CCI eases compliance needs for M&A deals, THE FINANCIAL EXPRESS, April 6, 2013. Available

at: http://www.financialexpress.com/news/cci-eases-compliance-needs-for-m-a-deals/1098432.

87

In essence, an acquisition of 5% or less after the initial 25% would be exempt from CCI

approval compared to the more stringent norm earlier. The manner of computation under the

Competition Act is still unclear however, experts claim that CCI is likely to adopt SEBI‘s

manner of computation of gross percentages.

F. UNDERSTANDING THE UPP ER THRES HOLDS

Prior to the Amendments made by the CCI, approval was to be sought from the regulator

even though SEBI had no such stipulation. The only upper threshold recognized by SEBI is

that of minimum public shareholding of 25%. 68 Therefore, if the obligations under the SAST

Regulation are met; (in terms of disclosure, or open offers), an acquisition of upto 75% can

be made. However, if an acquirer, either acting solo or in concert with other entities crosses

the 50% threshold, CCI approval will have to be sough even for the smallest proportion of

shareholding to be acquired.

As per the understanding today with regard to CCI and SEBI approval the flowing is the

scheme:

Percentage of Shares to be

purchased

SEBI

CCI

Acquisition resulting in

control of less than 25%

voting rights/quantum of

shares.

No approval or obligations. No approval or obligations.

Acquisition of 5% or less of

shares over 25% threshold.

No approval or obligations.

No approval or obligations.

Acquisition of more than 5%

over 25% threshold limit.

Open offer and disclosure

obligations triggered.

Notice to be filed after

payment of fees (INR

50,000).

Acquisition of 5% or less

No approval required.

Notice to be filed after

68

SEBO Order in the matter of Monotype India limited, Document number WTM/PS/22/CFD/JULY/ 2014.

88

over 25% threshold but

amounting to less than 50%

of the total (pre or post

transaction).

payment of fees (INR

50,000).

Acquisition of 5% or less

over the 75% threshold.

Prohibited under the

Minimum Public

Shareholding norms.

Transaction possible only for

a private company.

Understanding Competing Jurisdictions

While there has never been a direct conflict between the understanding of CCI and SEBI, the

only deal so far that required clarification from both SEBI and CCI on the same transaction is

the Jet- Etihad deal. Herein, the acquirer, Etihad Airways, based in Abu Dhabi sought to

purchase a 24% stake in Jet Airways, based in India. 69

While the threshold is such that there

need not be approval sought from either regulator, there was concern that the acquisition was

being made by ‗persons acting in concert‘- essentially that the current promoter group led by

Naresh Goyal was acting in concert with the acquirer group, Etihad. The Central Government

then sought clarification from both SEBI and CCI regarding the notion of control in their

respective regulations. The central concern here was that effective control of the board of Jet

was being transferred to Etihad given that the latter could appoint 3 directors to the 12

numbered directorial board of Etihad. After amendments proposed by both regulators were

made, the transaction was allowed to proceed. 70

From the current regulatory scenario in India, it becomes patent that various regulators are at

par as long as they function within the sphere of their own competence. If there is need for

regulatory approval from multiple agencies, the Government, and more FIPB are reluctant to

grant exemptions.

IV. CONCLUSION

India has adopted a multi-sector regulatory system in which there are multiple regulators for

different sectors which have different jurisdiction. The multiplicity of regulators is a more

69Jet-Etihad deal: Sebi seeking further clarity from CCI, finance and civil aviation ministries , BUSINESS TODAY,

March 12, 2014. Available at: http://businesstoday.intoday.in/story/jet-etihad-deal-in -sebi-air-

pocket/1/204196.html 70

Kanika Chaudhary & Nidhi Singh, Skies over Control, LUTHRA & LUTHRA LAW OFFICES. Available at:

http://www.luthra.com/admin/article_images/Skies -under-Control.pdf

89

comprehensive method of understanding each sector and aspect of a deal. Allocating the

jurisdiction of different sectors to different regulators leads to a holistic coverage of that

particular sector. At the same time, this entails securing approvals from different sectors if

such sectors‘ jurisdiction is invoked in a particular transaction. This, further, entails increased

amount to be spent in obtaining the approval in addition to an increase in the time required

for securing such an approval. However, this also makes the Indian market more inaccessible

to an investor, especially those that have no knowledge of the Indian framework. The

multiplicity of approvals makes the process expensive for most players. The Financial Sector

Legislative Regulation Committee chaired by Justice B.N. Srikrishna71had suggested a super

regulator for the Indian markets, to which, RBI chairperson Raghuram Rajan had replied: “If

it ain‟t broke, don‟t fix it!” 72

The timeline for approval from different regulators is also different, making the financing of

a transaction further difficult. For e.g. if SEBI has given approval and CCI‘s approval is

awaited, then the company cannot go forward with any transaction in pursuance of the

combination, thereby, entailing penalties on account of delay. On the other hand, if it goes

forward with the transaction, then CCI may take an action on account of taking a step

forward without securing the requisite approval from CCI. A co-operation between the

regulators as has been evidenced with regard to creeping acquisitions makes the regulatory

framework easier to manoeuvre without there being an outcry for a unified regulator. Another

step for the seamless integration of the regulatory system is a co-ordinated set of fines

whereby exemptions be granted to market pla yers if another regulatory agency is the cause

for delay. This measure would ease the already slow capital market process in India and

thereby, ‗Make in India‘, the flagship programme of Modi Sarkar a success.

71FINANCIAL SECTOR LEGISLATIVE REFORMS COMMITTEE, Ministry of Finance, Government of

India. available at: http://finmin.nic.in/fslrc/ fslrc_inde x.asp 72

Raghuram Rajan, Financial Sector Legislative Reforms Committee Report (FSLRC) – what to do and when?,

available at: http://www.rbi.org.in/Scripts/BS_SpeechesVie w.asp x?Id=900