This article has been written by Ananya Jain.

Introduction

Considering the outbreak of COVID-19, caused by a virus for which a vaccine was sought. We saw that even when a vaccine has been approved, there is still a dearth of vaccine supply in the market. The reason being, each manufacturer requires approval for the commercial production of such vaccines. To overcome the commercial hindrances, Governments and International Organisations need to reach a consensus to ensure that the system is ready to ensure the adequate availability of vaccines. As we know, all these innovations are subjected to patent applications which lead us to the question that, whether such patent exclusivity will create roadblocks in providing benefits to the world as a whole? 

The Indian Patent Act, 1970

The Indian Patents Act, 1970 neither provides for nor restrains the creation of patent pools. However, Section 102 acts as an enabling provision for the creation of a patent pool in the public interest, which is managed and controlled by the government. Moreover, Aurobindo Pharma Limited and MedChem, an Indian drug manufacturing company, have joined the Medicines Patent Pool, for extending their manufacturing of medicine for the treatment of HIV/AIDS. 

It makes securing a license from other members of the pool easier and cost-efficient. Furthermore, Section 68 and 69 of the Patents Act, 1970 provide for licensing and assignment of a patent by embodying the terms and conditions to make such transmission legally valid. These Sections also pave a way for patent pooling as cross-licensing between patent holders or licensing to the third party is the rationale for creating a patent pool. But there are concerns regarding the conflict between the Competition Act, 2002 and Patent Pooling, as the said Act disallows any types of agreements or licences which have an appreciable adverse effect on competition within India. 

Such a problem arises when the members of the pool decide not to provide a licence to any third party and have fixed the excessive royalty and quota at the same time. 

In respect of the above dilemma, Section 140 of the Patents Act lists out certain restrictive conditions to be kept in mind while getting into a licensing agreement or a contract in relation to lease, sale or licensing of a patented article. Thus, it can be deduced that the Patents Act, 1970 has certain ingrained provisions to address the issues and problems arising out of patent pools. Therefore, it is important to delve into the provisions of the Competition Act and examine the conflict between both the legislations, by providing legal validity to the creation of patent pools. 

Competition Commission of India’s advocacy booklet enunciates patent pooling as a “restrictive practice, which will not constitute being a part of the bundle of rights forming part of an IPR”. CCI goes a step further and describes the situations where patent pools are held to be anti-competitive. 

This would essentially take place where the pool consents to not allow licenses to any third party, fixes high royalty fees and quota for the same. Therefore, in order to understand the interplay between the Competition Act and Patents Act, the benefits and concerns with regard to Patent pools need to be addressed. 

Pro-competitive effects of patent pools

Enhancing efficiency

The creation of patent pools will lead to the assembling of not only required patents but also complementary patents, which will ensure efficient production of goods. When talking about the pharma industry, the increased efficiency will be witnessed, as the pooling will enable outreach to medicinal as well as technical know-how to make the drug most effective and increased access to poorer countries as well. 

For instance, two firms or more may own certain IP assets that are not sufficient individually to manufacture a specific product and therefore hold each other up, preventing the production to happen as each firm needs the other firm’s complementary IP rights in order to have a working technology. 

In such a situation, the two companies would be blocking each other’s patents, effectively preventing markets and consumers from the beneficial introduction of an innovative product/service. Furthermore, allowing the individual licensing of the patent owned by pool members will actually work towards welfare-enhancing, as it might lead to lowering of prices by the competitors to attract consumers. (it doesn’t restrict you from licensing your own patent, independently or among the pool members) Thereby, keeping prices in the ‘competitive pressure’ will help in maintaining a healthy competition in the market, which is one of the objectives of the Competition Act, 2002. 

Reduction in litigation and transaction costs

A considerable reduction in patent litigation would be beneficial as it saves time and money. Also, uncertainty caused by litigation with regard to patent rights could also be avoided. Patent pools can reduce or eliminate the need for litigation over patent rights because such disputes can either be easily settled or avoided through the creation of a patent pool. Further, a definite reduction in transaction costs is observed as the licensees need not enter into multiple licensing agreements with multiple patent holders; just one licensing agreement with one patent pool would suffice. 

Clearance of blocking patents

The phenomenon of cross-licensing among the members and non-members of the pool will reduce the instances of two companies blocking each other’s patents, which in turn devoid the customer of the best service/product. In a scenario where one patent is “mutually blocking” or results in infringement of the other patent, the creation of a patent pool will be an effective solution for clearing blocking patents. So, the main advantage of a patent pool is that it acts as a “one-stop shopping” centre wherein interested third parties can obtain licenses and collect all the required patents rather than obtaining licenses from various patent owners individually.       

Competition concerns with regard to patent pooling

Anti-competitive practices 

the concern with patent pooling arises when there are restrictive licensing policies, due to which independent licensing by the pool members is not allowed. This might lead to a concentration of market power, which might further lead to excessive pricing by the pool. 

Moreover, a report by the US Department of Justice and Federal Trade Commission cautioned that such pools may act as an entry barrier to the new firms in the market. 

The possible solution as pointed out by the experts is that patent exclusivity provided by the pools should be in accordance or limited to the grant of restrictions by the law. Therefore, a licensing agreement should not consist of any additional restrictions, leading to eliminating or restricting the competition in the market. 

In Summit vs. VISX, the Federal Trade Commission found out that the licensing agreement harboured unauthorized restrictions and therefore such a pool is anti-competitive. 

Additionally, Article 40 of the TRIPS Agreement talks about provisions relating to anti-competitive practices in licensing arrangements. Herein, to prevent or control the anti-competitive practices, the member states can adopt legislation accordingly. Also, member states can obstruct the licensing agreements and curb such anti-competitive practices by declaring them illegal. 

Pooling competing patents

Another competition concern with regard to patent pools is, if a pool is created comprising substitute or competitive patents, such a pool might have an adverse effect on the competition or no competition will exist anymore between them. Eventually, this will lead to price-fixing, quotas and market monopoly. It is also said that the creation of such pools raise competitive concerns as they amount to horizontal agreements, eventually, jointly monopolizing the market.

The chilling effect of the Competition Law on patent pools

From the above analysis, it is clear that patent pooling often elevates competition issues. Looking at the Indian scenario, the Competition Act, 2002 prohibits various IPR licensing agreements that are reckoned to be of anticompetitive nature. Further, Section 3 of the said Act prohibits agreements “which causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India. It identifies two kinds of anti-competitive agreements, horizontal and vertical. 

Horizontal Agreements are arrangements between enterprises at the same stage of the production chain and are generally between two rivals for either fixing prices or for limiting production or sharing markets. Vertical Agreements are between enterprises at different stages of the production chain, as an arrangement between the manufacturer and a distributor. Section 3(3) defines horizontal agreements, here, the presumption is such agreements have an AAEC and hence void. Nevertheless, the provision to this subsection provides an exception for joint ventures, only if such an agreement increases efficiency in providing goods and services. 

Furthermore, Section 3(5) of the Competition Act carves an exception for IP holders during the exercise of IPRs, providing that “reasonable conditions” as may be necessary for the protection of IPR would not amount to anti-competitive agreements. Moreover, the term “reasonable conditions’ used in the section hasn’t been defined in the Act. The advocacy booklet released by the Competition Commission of India interprets it as, “the unreasonable conditions that come with an IPR will attract Section 3 of the Competition Act.” 

The booklet also specifies that those licensing agreements which are likely to have an adverse effect on prices, quality, quantity and variety of goods and services, will attract provisions of the Competition Act for the reason that they fall outside the ambit of ‘reasonable conditions’ specified for IPRs. 

Therefore, a test of reasonableness cannot completely subdue the rights of an IP holder. In corollary, it can be reasonably concluded that, if and when, conditions which are declared unreasonable under Section 140 of the patents act, are to be prima-facie considered as unreasonable under the competition Act as well, hence, Section 3(5) can come to rescue and may validate the creation of patent pools. 

Further, the CCI has identified certain practices which are anti-competitive in nature; it includes patent pooling as an ‘anti-competitive practice’, and doesn’t fall within the ambit of exclusion granted under Section 3(5) of the Competition Act. The booklet also talks about conditions under which patent pooling becomes anti-competitive. 

The practice where firms in a pharmaceutical industry come together to pool their patents and decide not to license their pooled patents to any third party and agree to fix quotas and prices at the same time. This reduces healthy competition in the market as pool members tend to earn supra-normal profits and lock the technology thereby monopolising the market. 

Another issue to be pondered upon is ‘jurisdiction’. As observed, Section 3(5) of the Competition act confers its jurisdiction to IPRs granted under the Indian legislation. The issue arises in a patent pool where the patents are granted under a foreign statute. The experts suggest that, in this scenario, the Indian Competition law should be applicable to measure the AAEC under Section 3(1) & 3(4) of the Competition Act, 2002. Nevertheless, considering the objective of the Competition Act, 2002 to promote healthy competition and restrict only anti-competitive practices, the practice of patent pooling is deemed to be encouraged and restrictive laws are supposed to be liberally interpreted in India. 

Here are a few suggestions to achieve equilibrium between Patent Pools and Competition Law: 

• The government regulated patent pools to be constituted under the existing laws. 
• Guidelines need to be issued listing out the ‘restrictive practices’ or anti-competitive conduct of IP holders. This would help the IP owners avoid unnecessary litigation and empower them to exercise their rights concurring with competition law and policy. 
• The definition of ‘relevant market’ provided in Section 2(r) of Competition Act, 2002 to be branched into (i) market for goods and services, (ii) technology and innovation. This will lessen the confusion and aid the CCI to handle situations where misuse of IP has taken place with regard to, excessive pricing or blocking patents or restraining access to a protected technology. 
• IP and competition law should be presumed to be complementary rather than contradictory. They both should promote innovation, efficiency and public welfare. 
• As we know, a strict level of IPR protection may have negative repercussions leading to deter innovation or technological development. Therefore, both static and dynamic efficiency need to be taken into account in view of competitiveness in the pharmaceutical sector in India. With regard to static efficiency, it is to be ensured that prices of essential drugs aren’t affected by way of monopolisation leading to supra-normal profits by overlooking consumer welfare. On a similar scale, dynamic efficiency is pertinent to boost innovation in the pharma sector and in such a scenario, the inclination will be towards patent exclusivity to ensure there are requisite incentives to invest in research and development. Ultimately, the herculean task is to strike a balance between patent exclusivity and consumer welfare. 

References

Statutes

1. Indian Patents Act, 1970
2. Competition Act, 2002

Books

1. IRINA HARACOGLOU, COMPETITION LAW AND PATENTS-A FOLLOW ON INNOVATION PERSPECTIVE IN THE BIOPHARMACEUTICAL INDUSTRY, EDWARD ELGAR PUBLISHING LTD, 2008, 51-54. 

Articles

1. 1. Basheer, S., 2007, “India’s New Patent Regime: Aiding ‘Access’ or Abetting ‘Genericide’?”, International Journal of Biotechnology, Vol. 9, No. 2, pp. 122-137.
   2. Bhat, P.I., “The Role of Collective Bodies in the Protection of Intellectual Property Rights in India”, Journal of Intellectual Property Rights, Vol. 14, May 2009. 
   3. Clark, J. Piccolo, B. Stanton, K. Tyson, Patent Pools: A Solution to the Problem of Access in Biotechnology Patents? US PTO, 5 December (2000). 
   4. Barpujari I, Facilitating Access or Monopoly: Patent Pools at the Interface of Patent and Competition Regimes, Journal of Intellectual Property Rights, Vol 15,  2010, pp 345-356. 
   5. Josh & Tirole, Efficient Patent Pools, The American Economic Review, vol. 94, n.3, June 2004.
   6. Pai & Daryanani, Patents and Competition Law in India: CCI’s reductionist approach in evaluating competitive harm, Journal of Anti-trust Enforcement, 2017, 5.
   7. Srinivas, K.R., 2006, “TRIPS, Access to Medicines and Developing Countries: Towards an Open Source Solution”, Working paper no. 248, Indian Institute of Management, Bangalore.

---

LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: