This article is written by Rebecca Navgire, pursuing Diploma in Advanced Contract Drafting, Negotiation, and Dispute Resolution from LawSikho. The article has been edited by Anahita Arya ( Senior Associate, LawSikho) and Dipshi Swara (Senior Associate, LawSikho).
Table of Contents
Introduction
The world in which we live seems to be in constant flux. Everything that is considered new today becomes old and outdated in a blink. In this fast-changing and highly competitive scenario, every organisation and in fact, every country seems to be in a rat-race to attract consumers either by offering new and innovative products and services or by improving the quality of the existing ones and reducing related costs to maximize economic benefits.
With modernisation playing such a significant role in every country, developed or developing, knowledge and technology have attained paramount importance. Creation, acquisition and/or adoption of new technology have become an absolute necessity for all countries, as well as for all large and medium-sized organisations wishing to procure or retain a competitive edge in the market.
A new version of an old Chinese proverb goes like this; “Give a man a fish and you feed him for a day. Give a man a fishing rod, and he feeds himself and his family for as long as the rod lasts. Help a man develop the knowledge and means to improve the fishing rod and to design and produce new ones, and he may feed himself and his society for years to come.”
Clearly, the key component of economic development, for all economies, is leveraging technological knowledge. In this regard, the developed countries have made notable progress in the development of innovations, and thus have managed to attain a monopoly over innovative technology. However, the developing and least developed countries, due to the lack of resources to create and the availability of a vast pool of foreign technology for exploration and exploitation, obtain such technology from the developed ones, giving rise to the concept of technology transfer and technology diffusion.
The transfer of exclusive rights pertaining to technology requires a legal agreement between the owner of the exclusive rights and the person or entity acquiring such rights. Such agreement depends on a number of factors out of which a few will be discussed in this article in the light of intellectual property rights (IPR) and Competition Law.
While IPR entitles the holders to prevent unauthorised use of the protected technology and to exploit it as per their wish, these exclusive rights do not exempt IPR from the intervention of Competition Law. The two areas of law thus interact to create the current competitive dynamics in the marketplace.
Let us dig deeper into this interplay between IPR and Competition Law and find out if this relationship actually controls abuse while regulating in the market.
What is technology transfer?
Technology Transfer has become the heart of the international business. It may occur between countries, industries or even between research laboratories and their clients and involves the specific transfer of products, processes or people.
The transfer of technology can be achieved through contractual agreements between the source of the technology and the recipient for the transfer of:
- Tangible knowledge: Information expressed in physical objects and codified in blueprints, plans, technical articles including licensing and management arrangements, technological assistance agreements, purchase of machinery equipment and assemble apparatus, recruitment of foreign specialists.
Illustration: Company A agrees to transfer [*] machinery to Company B.
- Intangible knowledge: In the form of skills, expertise, techniques, experiences and knowledge through technical assistance, know-how, turnkey projects.
Illustration: Company X agrees to transfer its [*] know-how to Company Y.
Methods of technology transfer
Agreements have been the major source of Technology Transfer. As per the United Nation Conference for Trade and Development (UNCTAD) Draft Transfer of Technology Code, transfer transactions are of the following types:
- The assignment, sale and licensing of all forms of industrial property, except for trademarks, service marks and trade names.
- Know-how and technical expertise in the form of supply of services.
- Necessary technical knowledge for the installation, operation and functioning of plant and equipment.
- Necessary technical knowledge to acquire and use machinery, equipment, intermediary goods and raw materials by purchase, lease or other means;
- The provision of technological contents of industrial and technical co-operation arrangements.
Technology transfer primarily takes place through the following:
- Technology transfer agreements,
- Non-Disclosure Agreements (NDA),
- Patent licensing (both voluntary and compulsory),
- Know-how supply agreementsForeign Direct Investment (FDI),
- Joint ventures,
- Knowledge agreements,
- Licensing agreements,
- Management agreements,
- Turnkey agreements.
Technology Transfer Agreement
A Technology Transfer Agreement (TTA) sets out the terms and conditions for the transfer of technology in writing and creates legally binding rights and obligations of the parties. As with the other types of contracting and sales agreements, a TTA mainly consists of the following:
- Consent of the parties,
- Exchange of technology or technical information,
- Predetermined financial consideration.
Essentially, a supplier or licensor assigns or licenses registered industrial and intellectual property rights, technical assistance and know-how to a licensee under a TTA. The licensee can then manufacture and distribute the products in a defined territory using the licensed technology.
A TTA can be for domestic transactions in case the licensor and licensee are based in the same country. When both the parties are in different countries the International Technology Transfer Agreement can be used.
Negotiation of Technology Transfer Agreements
The negotiation of TTAs involves several legal processes and laws that govern the transfer and hence is considered to be an extremely complex process.
While negotiating a TTA, both parties must be mindful of the fact that each party has its respective interests that they will bring to the table. A successful negotiation depends on knowing what that interest is as well as understanding the needs and aspirations of both parties.
Important clauses under the Transfer of Technology Agreement
Sample clauses
Below are a few sample clauses that can be seen in a TTA:
- Technology
An organisation’s strategy, objectives, resources and capabilities can dictate the extent of a technology transfer. A contract must specify how and to what extent knowledge will be transferred. Moreover, there should be a clear explanation for what is not included in the license. Provisions like this should be drafted very precisely, without ambiguities or uncertainties. Generally, the transfer of technology may include:
- Technical knowledge
- Hardware or goods
- Knowhow
- Field of use limitation
Sample clause:
This technology is developed and invented by Licensor in the course of the execution of a research project [*]. Licensor owns all rights, title, and interest in the Technology as well as all intellectual property rights vested therein.
- Grant of license
This clause specifies the scope and extent of the licensee’s rights and any limitations on those rights. Clear and proper grant language allows the licensee to clearly understand what he or she is entitled to do.
Sample clause:
Licensor hereby grants to Licensee a non-transferable, nonexclusive, royalty-free right to manufacture, use and sell the Licensed Products under the Licensed Patents for research and development in the Territory.
- Representations and warranties
The representation and warranties clause states that the technology conveyed is free of all liens, security interests, and other encumbrances, and the licensor is the rightful owner of the licensed technology under the provisions of the contract. A typical licensor’s representation will be that all technical information delivered by the licensor under the clauses of the agreement is accurate and complete; and that the licensor has the power and authority to execute, deliver, perform the terms of the agreement and that all licensed patents and patent applications under which rights have been granted have been secured.
Sample clause:
Licensor hereby warrants and represents to Licensee the following:
- Licensor has full legal right, power and authority to execute, deliver and perform its respective obligations under this agreement.
- The execution, delivery and performance by the Licensor of this agreement do not contravene or constitute a default under any provision of law applicable or of any agreement, judgement, order, injunction or other instruments.
- All licenses, consents, authorization and approvals, if any, required for the execution, delivery and performance by the Licensor of this agreement have been obtained.
- The licensor is the exclusive owner of the licensed technology and such ownership is free from all kinds of encumbrances.
- This agreement constitutes a valid and binding agreement of Licensor, enforceable against Licensor, in accordance with its terms and applicable law.
- Governing law
There is no doubt that the choice of law is the most controversial and complex clause in TTAs. In most international TTAs, parties from different legal systems are involved. Therefore, it must be decided by the parties in such cases – what law will govern the enforcement of the contract and which court shall be called upon if a dispute arises. A governing law determines the rules of interpretation, validity, and performance of the contract, as well as the consequences and corresponding obligations upon a breach of the contract.
Sample clause:
This Agreement shall be governed by the laws of [*] and shall be subject to the jurisdiction of the courts at [*].
- Indemnification
If the licensor is not adequately compensated, the Licensee will engage in illegal or improper uses of the intellectual property, resulting in legal actions. If the intellectual property is not properly protected or for some reason third parties alleged infringement, the licensor will normally have to indemnify the other party.
Sample clause:
Subject to the terms of this section, licensor/licensee hereby agrees to indemnify, defend and hold harmless the other party and its officers, directors, agents, attorneys, accountants and affiliates from and against any and all losses, claims, obligations, demands, assessments, penalties, liabilities, costs, damages, reasonable attorneys’ fees and expenses (“Damages”) asserted against or incurred by the other party by reason of or resulting from a breach by Licensor/Licensee of any representation, warranty or covenant contained herein, or in any agreement executed pursuant thereto.
- Arbitration
If there is a dispute between the parties, this clause specifies the procedure to be followed. In case of any dispute between the parties, this clause will serve as the predetermined way to resolve the matter; parties can settle it through an arbitrator without going to court. Arbitration is a type of Alternative Dispute Resolution (ADR) used to resolve disputes between parties.
Sample clause:
During the term of this agreement, at any time a dispute, difference, or disagreement arises in respect of this agreement, its meaning and construction hereof, such dispute, difference, and disagreement shall be referred to a single arbiter agreed by the parties, or if no single arbiter can be agreed, then an arbiter or arbiters shall be appointed in accordance with the rules of the [*] and such dispute, difference or disagreement shall be settled by arbitration in accordance with [*] and a court with jurisdiction can enter judgment on the award rendered by the arbitrator.
- Notices
There will be designated principal contacts, addresses and modes of delivery for handling correspondence, faxes, telephone calls, notices, royalty payments, technical assistance, training, patent administration, etc in a contract.
The agreement must specify the language to be used for communication if the parties speak different languages.
Sample clause:
All notices given under this agreement must be in writing and shall be deemed to have been duly given when delivered by:
(i) Hand;
(ii) Reliable overnight delivery service; or
(iii) Facsimile transmission.
IPR, Competition Law and Technology Transfer
IPRs protect the creations of the mind and ensure that the creators earn benefits from their creations. Some of the protection tools under IPR are trademarks, patents, copyrights, etc.
Competition Law can be defined as the set of laws that regulates the competition in the market. These laws ensure that both the producers and the consumers have access to an ethical market that fosters real competition.
Any TTA that violates a consumer right by imposing unreasonable conditions or such conditions other than essential to protect the IPR is considered anti-competitive.
Following instances of TTAs may be called anti-competitive:
- Patent pooling wherein two or more companies come together and cross-license the technology relating to a particular technology to each other so as to restrict others to acquire it.
- Tie in arrangements to tie a product with another product that is patented so that the acquirer has to get the other product also from the patentee.
- Prohibiting licensees from using technology from rival companies.
- Prohibiting licensee from challenging the validity of intellectual property rights.
- Price-fixation for the licensee to sell the licensed product, etc. These types of clauses imposed in the technology transfer agreements by the intellectual property right holder or licensee are called anti-competitive for the market, hence shall be void.
Objectives of IPR and Competition Law : Conflicting or complementary?
The inherent conflict
In today’s technology-driven society, IPR and Competition Law prima facie appear to have conflicting objectives.
IPR consists of a bundle of legal rights conferred on the holder that allows them to exploit their innovation commercially. During its period of exclusivity, the holders can exploit the IPR as per their wish and are rewarded for the effort invested in creating it. Essentially, IPR grants a monopoly right to the holder for a limited period of time as well as a right to pursue enforcement of these rights through the courts where an unauthorised use occurs.
However, the transfer of IPR, particularly where competitors are involved, can affect competition negatively, especially when prices are fixed, the output is limited or markets are consolidated, partitioned or foreclosed. Hence, even though the IPRs are not abusive of the dominant position, they do form a legitimate upper hand in the market.
This is where Competition Law steps in to ensure that there is absolute fair competition in the market. It aims to prevent anti-competitive conduct, regardless of whether it is coordinated or conducted unilaterally.
Dominance over a specific area of a market can be earned by any enterprise through monopoly power, this is not per se violation of antitrust law but abuse of this position is illegal and has a detrimental effect on the market. An enterprise tends to become dominant if the relevant market is narrowly defined and it ceases to be so if it is defined widely.
Though, the basic concept of competition is the main driving force of both IPR and Competition Law, contextually, ‘competition’ has different interpretations within the legislations. IPR encourages fierce competition among the innovators and simultaneously curbs that competition in a number of ways so that at the end of the specified period the rights are transferred to the public domain. Whereas, Competition Law prevents abusive practices in markets, sustains competition, and ensures access to good quality and reasonably priced products and/or services to the consumers and at the same time preserves the right to compete in the markets.
How are they complementary then?
The inherent conflict between IPR and Competition Law stems from the fact that the IPR seeks to provide protection and monopoly benefits to the creator while Competition Law seeks to eliminate any cartels or monopolies in the market.
In spite of this, if we look closely at the objectives of both laws, it becomes evident that they have much in common, particularly the objective of balancing the interests of right holders, consumers and the society at large. While IPR seeks to grant a monopoly, Competition Law maintains that innovation should be encouraged while preserving competitiveness in the market.
IPRs actually spur technological innovation, which eventually contributes to the dynamic growth of the economy. This is also the core objective of the competition policy. Thus, it is clear the two laws are rather complementary to each other in certain respects.
Now, let’s take a look at how different countries have devised their laws to counter the complexities surrounding IPR and Competition Law.
IPR and Competition policy under various International Conventions
Paris Convention
Article 10(b)(2) of the Paris Convention defines unfair competition as “any act of competition contrary to the honest practices in industrial and competition matters”.
The free play of market sources offers little hope of fair competition. Paris Convention identifies acts that are confusing, misleading, discrediting competitors or involving disclosure of confidential information, free riding and comparative advertising as unfair competition. This list of unfair competition continues to grow as new cases are added and handled in various countries.
In order to prevent such unfair competition, a certain amount of regulation is required.
Trade-Related Aspects of Intellectual Property Rights
While negotiations for the TRIPS agreement were underway, many countries had raised concerns about the regulation of unfair competition and the abusive power of IPR holders.
According to Article 40, certain licensing practices or conditions pertaining to IPRs which restrain competition may adversely affect trade and impede the transfer and dissemination of technology. The members may adopt measures to prevent or control anti-competitive practices that constitute abuse of IPRs under Article 40.2. These practices include exclusive grant backs, clauses that prevent validity challenges, and coercive package licensing, although this list is not exhaustive. Anti-competitive agreement practices are generally permissive under Article 40 (particularly) rather than prescriptive
There is also the compulsory licensing policy under the TRIPS agreement which is a statutory measure intended to avert concentration of IPR in the hands of the right holders who refuse to part with the right without an ostensible reason or do so in consideration of commercial gain that deviates from the existing market practice. In other words, it is a mechanism by which the state can affect the non-voluntary transfer of copyright from its owner to anyone who is willing to republish such work to the public without having to pay any royalty to the original owner. Article 31 permits the grant of compulsory licensing under certain circumstances such as national emergency or other conditions of extreme urgency or insufficient exploitation of the patent in the country.
IPR and Competition policy in Europe
The European Union (EU) prohibits licensing agreements that restrict competition. These agreements may, however, have benefits that outweigh the restrictions they have on competition. TTAs now have a greater degree of certainty due to the new ‘block exemption’ regulation and guidelines. This exemption ensures that the TTAs comply with Competition Law.
In March 2014, the European Commission adopted a Technology Transfer Block Exemption Regulation (TTBER), replacing a 2004 text. It clarifies how EU Competition Law (in this case, Article 101 of the Treaty on the Functioning of the EU) applies to certain categories of licensing agreements and the criteria used to assess these agreements. Like its predecessors, it is accompanied by guidelines that provide guidance on the application of the rules.
The TTBER exempts licensing agreements between companies that have limited market power (i.e. the market share of under 20 % for agreements between competitors and 30 % for agreements between non-competitors), and that fulfil certain conditions. These are deemed to have no anti-competitive effects or that, if they do, the positive effects outweigh the negative ones and thus do not contravene EU antitrust rules.
Furthermore, following the COVID-19 outbreak, to cope with the impact of the crisis the European Commission adopted:
Communication from the Commission is a temporary framework for assessing antitrust issues related to business cooperation in response to situations of urgency stemming from the current COVID-19 outbreak.
By not only giving guidance, but also providing adequate certainty and comfort to individual initiatives in situations of extreme urgency, this enables the Commission to offer exceptional guidance and assistance. The enforcement of laws remains a top priority, especially in times of crisis, since this is vital for recovery. As a result of the economic downturn caused by the pandemic, a smaller number of operators may emerge and concentration may increase, and maintaining competition between remaining operators and preventing cartelization of the market or abuse of dominant positions is essential now more than ever.
IPR and Competition Policy in India
Our country has seen rapid development in technology advancement over the past few decades, whereas the IPR and Competition regulations in India are still in the development stages. India, like some other developing countries, does not follow the same development policies as the developed nations; instead, it focuses on maximizing its technological advantages.
Provisions of various laws such as the Patents Act 1970, the Trademarks Act 1999, the Design Act 2000, etc. are incorporated into the TTAs. Also, initially, India had a very conservative approach to international technology transfers, imposing a number of restrictive regulations. However, the regulatory environment has been more liberalized in the recent past to allow more international technology transfers. Though, national IP legislation to deal with issues that arise from international technology transfers is still not in place.
As far as regulating competition is concerned, in India, the Monopolies and Restrictive Trade Practices Act, 1969 (MRTP) was the first legislation to restrain the abuse of market power. In 2009, MRTP was replaced by the Competition Act, 2002 (Act).
Section 3(1) states: “No enterprise or association of enterprises or person or association of persons shall enter into any agreement in respect of production, supply, distribution, storage, acquisition or control of goods or provision of services, which causes or is likely to cause an appreciable adverse effect on competition within India.”
Section 3(5), offers a blanket exception for IPR, to show that it does not interfere with the policies of IPR. The said Act, however, deals with the abusive use of dominant positions that infringe IPR in Section 4. In this way, the Competition Law complements IPR instead of conflicting with it and actually works in conjunction with IPR, rather than competing with it.
The government has also opened technological transfer offices (TTO), and educational institutions. BIRAC under National Biopharma Mission has roped in FITT, IIT-Delhi to facilitate research, development, collaborations and technology commercialization in North and parts of the central region of India. Towards this, FITT has established an Innovation Technology Transfer Office (i-TTO) which will provide requisite services to incubation centres, innovators, entrepreneurs, start-ups, industries and academia.
Mission Statement of i-TTO
- To support and promote the technology transfer ecosystem in India.
- To enhance academia-industry collaboration.
- To protect and manage the Intellectual Property Rights resulting from R&D efforts.
- To create mechanisms for commercialization of IP through different modes.
In addition, among the various leading cases that showed the path to the issues relating to Competition and IPR policies are Aamir Khan Production vs. The Director General, 2010 and Kingfisher vs Competition Commission of India, where it was held that cases pertaining to IPR and competition issues can be dealt with by the Competition Commission of India (CCI). The CCI is a quasi-judicial body established under the Act which is responsible for enforcing the provisions of the Act.
Microsoft Case
This is one of the landmark cases in relation to this issue of competition and IPR policy during the TRIPS regime. In 1998, Microsoft was accused of abusing its monopoly power by tying its operating system and web browser and selling them together. Because of this, other web-browser competitors could not compete since Windows operating system users already had Internet Explorer (the browser Windows tied with its operating system). It was argued that Internet Explorer was an entirely separate entity since a separate version is found for each operating system.
The court found that Microsoft had distorted its dominant position in order to crush other operating systems and that Microsoft committed monopolization, tying, and antitrust violations under the Sherman Antitrust Act sections 1 and 2.
In response, Microsoft appealed the decision and it was then decided that two components should be separated, one for the Internet browser and another for the operating system.
From the above case, it is clear that the role of IPR is to protect the rights of the creator and owner, while the role of Competition Law is to control the market. With limited choices for customers, there is always the risk of a particular product gaining hegemony, disrupting the economic competency of the market. It is not necessarily the hegemonic position granted by IPR that is in breach of Competition Law; it is the use of that position that is. And, by creating a harmonious balance between the two laws, they can be understood as having the same objectives.
Conclusion
In a nutshell, IPR is a right or a reward that the State grants to the inventor to exploit the right commercially for a limited period of time whereas the Competition Law is a legislation that is seen as a rigid shackle over the market. However, despite the fact that these laws appear to be contrary in nature, it turns out that they are in fact complementary, and back each other up when one is abused.
Over the years, changes in the legislation have resulted in two laws that have a common objective but have different ways to achieve it. It all boils down to the fact that IPR’s dominant position per se does not violate the Competition policies, but how that position is abused does.
Hence, this article concludes that objectively, both laws seek to prevent dominance abuse in the respective markets and share the same objective that is the promotion of consumer welfare and efficient allocation of resources.
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