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EXCESSIVE PRICING UNDER COMPETITION ACT AND PATENT’S RIGHTS

Abstract

In the first instance, patent laws and competition laws appear to be at odds. While one law appears to give some sort of monopolistic status to a patent holder by granting rights such as the right to sell, price, and grant license of use for the patented technology, the other law tries to restrict the same. However, from a broad perspective, both the competition and patent laws aim to promote innovation, technological advancement, and benefit consumers, competition, and the economy. This paper examines a patent holder’s right to price his patented technology and the abuse of dominance relating to such a right. It tries to identify and highlight the issues faced by the competition authorities and provides for possible solutions.

Keywords: excessive pricing, abuse of dominance, competition act

Introduction

The goal of competition policy is to guarantee that the market operates fairly, with market access not being obstructed or made too difficult. Anti-competitive practices include a variety of activities such as a dominant company’s abusive exclusionary behaviour, refusal to provide certain goods or grant licenses on market conditions, charging excessive prices, vertical arrangements between suppliers and distributors, and other agreements among firms that lead to market distortion.

Patent rights and competition have a close relationship. At first appearance, they appear to be at odds. Patent law complement competition policies as it aims to prevent the copying or imitation of patented goods. Thus, it contributes to fair market behaviour. Contrarily, competition regulations may limit the rights of a patent holder by disallowing him from misusing his rights. Thus, patent laws may appear to establish and protect monopoly power, while competition laws aim to prohibit it. However, this ostensible dispute has been refuted‌. Firms that take part in innovation compete against one another to develop new products and new procedures for manufacturing existing items in order to obtain the exclusivity that a patent provides. Both systems ‌work in tandem because both of them strive to promote innovation, industry, and competition.

In conclusion, too much or too little patent and competition protection can lead to trade distortions. As a result, a balance must be sought between the two bodies of laws. The goal should be to minimise patent rights abuses without jeopardising the reward offered by the patent system.

Abuse of Dominance: Excessive Pricing

Explanation (a) to Section 4 of the Competition Act, 2002[1] defines dominant position as a status enjoyed by an enterprise in which it operates independently of the competitive market forces or adversely affects its competitors or consumers in the relevant market. In a truly competitive market, no single firm possesses market dominance, especially in determining the product’s price. However, perfect market circumstances are more of an economic “ideal” than a reality.

It should be noted that position of dominance is not per se bad and illegal but its abuse is illegal and subjected to penalty[2] under Section 4(1).[3] Where TAM Media Research had 100% market share, the said enterprise was not penalised as no abuse of dominant position was made by the enterprise.[4] There can be no abuse of dominance without a dominant position. Therefore, as a preliminary step, the dominant position of an enterprise in a relevant market must be determined. The Act also contains a comprehensive list of actions that are considered an abuse of dominant position and are forbidden under Section 4(2).[5]

The different types of abuse of dominance can be better understood through case laws. In Uber India Systems Private Limited v. CCI,[6] the SC held that Uber’s per-trip losses were prima facie evidence of abuse of dominance through predatory pricing. Having a superior financial position and access to better resources gives a dominant position to an enterprise,[7] as it gives the enterprise a competitive edge in the relevant market. Factors like the sound financial position of an enterprise and a greater number of buyers are indicators of a dominant position.[8] The CCI remarked in XYZ v. REC Power Distribution Company Ltd.,[9] that establishing a denial of access required demonstrating an “anticompetitive effect/distortion in the market in which the denial occurred.” In the Napp Pharmaceutical case,[10] it was held that Napp had abused its dominant position by overpricing its drug in the community segment compared to its sale price in the hospital segment, where it was sold at an excessively low price.

The Commission may investigate any suspected violation of Section 4(1) of the Act using powers granted by Section 19 of the Act. Section 19(4) provides a comprehensive list of elements that the Commission must consider when investigating any claim of abuse of dominance.[11] Market share, size and resources of the company, size and importance of competitors, customer dependency, entrance obstacles, and societal obligations and expenses in the relevant geographic and product market are some of these aspects.

If the Commission determines that there is a prima facie case of abuse of dominance, it directs the Director General or DG to conduct an inquiry and submit a report.[12] Under the Code of Civil Procedure, the Commission has the same powers as a Civil Court, including powers such as summoning and securing attendance of any individual and questioning him under oath, etc.[13] To investigate, the Director General is endowed with civil court powers and the ability to conduct searches and seizure.[14]

The Paradox: IPR and Excessive Pricing

At the highest level of analysis, IPR and competition policies are compatible since they both seek to foster technological advancement ultimately to benefit consumers. Companies are more inclined to innovate when they are at least partially protected. Further, when there is a lot of increased competition, they are more likely to innovate. The problem is that even perfectly legal IPR use might limit competition in the short run, resulting in a trade-off between the benefits of increasing competition and the benefits of further innovation. Such a trade-off is almost certainly outside the purview of patent office mandates. It is also intrinsically difficult for competition authorities to find out. Competition agencies that take a solely short-term perspective of competition could exacerbate the problem.

Both competition agencies and patent offices lack the knowledge necessary to determine appropriate patent breadth, but patent offices appear to be in a better position to make trade-offs between primary and secondary innovation incentives. Meanwhile, competition authorities have a comparative advantage in detecting and appreciating anticompetitive effects caused by too broad patents. Thus, competition agencies should see and scrutinize that patent office judgments about patent breadth are well-informed about the potential anticompetitive effects of their products.

Jurisdictions, including India, have adopted legislation to protect IPRs as well as prevent abuse of IPR. In India, Section 3(5)(b) of the Competition Act states “nothing contained in this section shall restrict the right of any person to restrain any infringement of, or to impose reasonable conditions, as may be necessary for protecting any of his rights which have been or may be conferred upon him under the Patents Act, 1970 (39 of 1970).”[15] Thus, under the Competition Act, 2002, a patentee’s right is safeguarded. The rigours of Section 3 of the Competition Act relating to anti-competitive agreements do not apply to the legitimate use of IPRs. However, a patent holder cannot put such conditions on the use of his patented technology, which is unreasonable and would jeopardize competition.

In the Department of Agriculture, Cooperation & Farmers Welfare v. M/s Mahyco Monsanto Biotech (India) Limited case,[16] the CCI held that the “agreements entered into by Monsanto with the sub-licensees appeared to be causing appreciable adverse effect on competition in the Bt cotton technology market” and that the “termination conditions are found to be excessively harsh and do not appear to be reasonable as may be.” The prima facie finding of the CCI in this case was because Monsanto was dominant in the relevant market and it had abused its dominance by charging excessive prices. In the Ericson case,[17] the CCI made a similar finding holding Ericsson liable for abuse of its market power by seeking royalties which had no connection with the patented invention, thus taking part in discriminatory behaviour.

However, the CCI missed a key point in both these cases- a patent holder has an essential right of pricing his patented technology. The opposite party was held to be guilty of exploitative pricing methods, however, CCI ignored the critical fact that the right to prevent others from creating, using, or selling the patented product entails the right to set the price under Section 48 of the Patents Act, 1970.[18] Thus, in the Ericson case, the Delhi HC observed that a patent holder has an essential right to price his patented technology. Setting a preferred price is a patentee’s right to avoid infringement of his patented technology.[19]

The U.S. jurisdiction is slightly inclined in favour of the patent holder. The right of a patent holder to fully use his or her patent is recognised, with only market demand acting as a constraint.[20] In United States v. General Electric,[21] the U.S. SC held ‌GE could licence its patents to a competing company and establish the price at which the end products would be sold. The licence might be issued “within the specifications of his invention for any royalty or under any condition the performance of which is reasonably within the reward which the patentee is allowed to gain by the grant of the patent… One of the most valuable aspects of a patentee’s exclusive right is the ability to benefit from the price at which the object is sold.”[22]

Unlike the United States, the European Union’s competition regulators have the authority to interfere when a company abuses its market power by engaging in excessive pricing. An illustration of abuse is given under Article 102(2)(a) of the TFEU as “directly or indirectly imposing unreasonable buying or selling prices or other unfair trade circumstances.”[23]

However, assessing whether a pricing is unfair or abusive, especially in patent cases, is intrinsically problematic. Charging excessive prices in itself is not unlawful, it is an important element of the free-market system that attracts businesses, innovation and economic growth.[24] Competition laws do not adequately define what is to be considered excessivepricing[25] and reasonableness of prices is not a sufficient test.[26] Even officials of regulatory authorities have expressed doubt over the agency’s ability to determine excessive pricing.[27] Furthermore, it was held that “…in the absence of the cost data it will be difficult, neigh impossible, to term the price charged is unfair being excessive solely on the basis that it is higher than the price charged by the competitors…”[28] In the case of United Brands v. Commission,[29] it was held that a price is excessive and tantamount to abuse if it “has no reasonable link to the economic worth of the commodity supplied.” The economic value of the product might be evaluated using the cost of production.[30] In the Roche case,[31] the CCI observed, while forming prima facie, that the “initial high prices can be attributable to being the reward for innovation.”

Suggestions and Recommendations

At this juncture, it should be noted that in the U.S. jurisdiction excessive pricing is not considered anti-competitive. Consequently, businesses can charge a price as high as possible for their patented technology. This is due to their inability to define and construct a mechanism to determine excessive pricing. Concerns that antitrust laws against excessive pricing can disincentivize innovation are another reason for such freedom.

The CCI has to resolve three key issues:

  1. Can a patent holder price his patented technology as high as possible as a right under the Patents Act, 1970?
  2. What is to be considered excessive pricing under the Competition Act, 2002?
  3.  How to determine if a price charged is excessive?

Keeping in mind the above observations, the researcher recommends:

  1. Firstly, the pricing in essential products such as pharmaceuticals should be regulated by the government. The government should fix prices of essential goods based on the international market conditions. A balance should be achieved where the consumers can get the essential products and innovation is also promoted.
  2. Secondly, in the non-essential sectors, businesses should be given the option of pricing their products as high as possible similar to the U.S. jurisdiction.
  3. Thirdly, excessive pricing may be defined as a sudden, unjustified, and unreasonable increase in price when the supply is limited or an increase in price with an intention of making the product unavailable to certain individuals or groups of individuals. 
  4. Fourthly, competition authorities should not determine excessive pricing solely on the grounds that the price charged is more than the competitors or there was a sudden increase. Excessive pricing should be determined on factors such as demand of the product, profit earned by the business, substitutability, cost borne by the business on R&D. The competition authorities should also investigate any other possible antitrust behaviour as many times excessive pricing is a consequence of such behaviour. However, this list is not exhaustive.

Conclusion

In the first instance, IPR seems to confer a monopolistic status or position of dominance upon a patent holder. A patent holder reserves all the rights such as granting licenses and selling his patented product. However, the competition laws come to the rescue here and prevent a patent holder from abusing these rights or position of dominance. Thus, only fair use of IPR is permissible under the Competition Act.

The easiest form of abuse of dominance with respect to IPR is charging excessive prices. While the right to pricing is intrinsic and essential, an unreasonably high price, especially with respect to essential goods, can adversely affect consumers, competitors, and the overall economy. However, absolute denial of this right will lead to a decrease in research & development and innovation. Pricing is a source of profit and attracts businesses to innovate. Furthermore, if the right to pricing is denied, the only way a patent holder may defend his rights is by refusing a license allowing a third party to utilize the patent. It would be perfectly legal for a patentee to seek injunctive relief to do so. The patented technology, in such a case, will never reach the market, causing greater harm to the goal of consumer welfare than simply high pricing. Besides, competition authorities also need to resolve the issue as to what is exactly excessive pricing. The absence of a proper definition, indicators, and mechanisms to determine excessive pricing will only lead to confusion. An absolute arithmetic formula is impossible and foolish to formulate and apply.

From the above discussion, it is also clear that there will always be a trade-off between IPR and competition policy. The need of the hour is a harmonizing force that would protect IPRs and promote competition. However, IPR and competition laws may appear to be at odds, both legislations seek to promote scientific advancement and bring benefit to consumers and the economy.

Author’s Name: Kiran Singh
College Name: Chanakya National Law University, Patna


[1] Competition Act, 2002, § 4 exp. (a), No. 12, Acts of Parliament, 2003 (India).

[2] US v. Aluminum Co. of America, (1964) 377 U.S. 271.

[3] Competition Act, 2002, § 4(1), No. 12, Acts of Parliament, 2003 (India).

[4] Prasar Bharti (Broadcasting Co. of India) v. TAM Media Research Pvt. Ltd., (2013) SCC OnLine CCI 23.

[5] Competition Act, 2002, § 4(2), No. 12, Acts of Parliament, 2003 (India).

[6] Uber (India) Systems (P) Ltd. v. CCI, (2019) 8 SCC 697.

[7] 1 S.M. Dugar, Guide to Competition Law 557 (7th ed., 2017).

[8] National Stock Exchange of India v. CCI, (2014) Comp LR 304.

[9] XYZ v. REC Power Distribution Company Ltd., (2016) SCC OnLine CCI 21.

[10] Napp Pharmaceutical Holdings Limited v. Director General of Fair Trading, (2002) CAT 1.

[11] Competition Act, 2002, § 19(4), No. 12, Acts of Parliament, 2003 (India).

[12] Competition Act, 2002, § 26, No. 12, Acts of Parliament, 2003 (India).

[13] Competition Act, 2002, § 36, No. 12, Acts of Parliament, 2003 (India).

[14] CCI, Provisions related to Abuse of Dominance, https://www.cci.gov.in/sites/default/files/advocacy_booklet_document/AOD.pdf.

[15] Competition Act, 2002, § 3(5)(b), No. 12, Acts of Parliament, 2003 (India).

[16] Department of Agriculture v. Mahyco Monsanto Biotech (India) Limited, (2016) SCC OnLine CCI 93.

[17] Telefonaktiebolaget LM Ericsson (PUBL) v. Competition Commission of India, (2016) SCC OnLine Del 1951.

[18] Patents Act, 1970, § 48, No. 39, Acts of Parliament, 1970 (India).

[19] Flynn Pharma Ltd. v. Competition and Markets Authority, (2018) CAT 12; Yogesh Pai, Nitesh Daryanani, Patents and competition law in India: CCI’s reductionist approach in evaluating competitive harm, 5(2) J. Antitrust Enforc. 299, 299-327 (2017).

[20] Yogesh Pai, Nitesh Daryanani, Patents and competition law in India: CCI’s reductionist approach in evaluating competitive harm, 5(2) J. Antitrust Enforc. 299, 299-327 (2017).

[21] United States v. General Electric Co., 82 F Supp 753 (DNJ 1949).

[22] Id.

[23] Treaty on the Functioning of the EU, Part III, Chap. 1, § 1, Art 102(2).

[24] Verizon Communications., Inc. v. Law Offices of Curtis V. Trinko, LLP, (2004) 540 U.S. 398.

[25] Pacific Bell Telephone Co. dba AT&T v. linkLine Communications, Inc., (2009) 555 U.S. 438.

[26] OECD Report, Excessive Prices, DAF/COMP/WP2/WD(2011)65 https://www.ftc.gov/sites/default/files/attachments/us-submissions-oecd-and-other-international-competition-fora/1110excessivepricesus.pdf

[27] Id.

[28] HT Media Limited v. Super Cassettes Industries Limited, (2014) SCC OnLine CCI 120.

[29] United Brands v. Comm., (1978) ECR 207.

[30] Id.

[31] Biocon Limited v. F. Hoffmann-La Roche AG, (2017) SCC OnLine CCI 21.