This article has been written by Anjali Baskar, currently enrolled in Lawsikho’s 1 Year Diploma in IP, Media, and Entertainment Laws.
It has been published by Rachit Garg.
Table of Contents
On 5th October, 2021, the Union Minister of State for Commerce and Industry, Som Parkash, made an announcement with respect to how the Union Government would work towards boosting IP ecosystems, so that innovation and R&D would increase, contributing to the economy and the idea of a “self-made India”. Intellectual property (IP) refers to the human mind having a unique idea and executing it, inclusive of symbols, names, and images. The right conferred upon the creator is intangible and prohibits others from deriving the advantages of such a non-corporeal asset. IP is divided into 2 sectors: copyright, which grants protection over literary, musical, dramatic and artistic works, and industrial property, which looks at the more technical aspects like patents and designs. IPR ecosystems comprise more of the latter, such as trademarks and geographical indications. Its relationship with competition law is quite a tumultuous one, at least at the surface level, due to the fact that their objectives are diametrically opposite to one other.
The philosophy behind IP is to maintain “boundaries”, so that competitors gain exclusivity over their innovations; whereas competition rules dictate that there should be restrictions on horizontal and vertical restraints, in order to increase competition and avoid concentration of power in one industry. The reason why IP encourages monopoly is because creators use their intellect, skill and efforts to make something new, and thus they should be able to earn commercial benefits from those. They can only gain such recognition if their work is not allowed to be used by someone without authorisation or claimed by others as their own. Though this might protect original creations from monetary exploitation, it may lead to non-competitive practices such as monopoly. Example: Monu has created an invention, which has helped many people. He generates plenty of commercial benefits from such work, but he starts exploiting his creation in such a way that he abuses his dominant status, which leads to market power. At this point, the underpinnings of competition law cannot allow such unfair trading practices, which are inherently derogatory to consumer welfare.
These are parameters laid down with respect to the standard working and operational procedures in an industry, depending on the specific manufacturing sector. This concept mostly applies to the rule of patents. When an invention has a valid patent subsisting on it, it is hard to differentiate between several effects vis à vis the market while it is incorporated into the industry standard. The reason why people demand more products that are in accordance with the invention is because it comes with some technical benefits, such as convenience and efficacy. Although the patent holder doesn’t get royalties based on this demand, it is hard to ascertain whether the public demands that particular product on a stand-alone basis or only because of its compliance with the standard. This confusion creates inequity between producers in the market, motivating them to work harder to gain an edge over their competitors. People with patents at times use unfair practices to get illegitimate returns by extending their reach to a related market which has already been leveraged, rather than a leveraging one where they are supposed to utilise. This is known as patent misuse, which competition law as well as IP law tries to reduce.
The whole point of IP protection is to ensure that a person gets justly enriched, and once they stop following that, it is not about recognition anymore. Competition Rules also dictate that a person cannot be following unfair trade practices to enrich themselves. In Polaroid Corp. v. Eastman Kodak Co., the US District Court stated that the patentee can only benefit from their contribution towards the invention and not from other factors. In order for the court to ascertain this, the burden of proof is on the plaintiff to show that they had the marketing prowess to generate valid sales, such as evidence of sales staff and set distribution channels. Elasticity of demand depends on external variables. If demand for the product is relatively inelastic, this increases the credibility of the invention as it stands amongst one or both of the leveraging and leveraged markets.
The relationship between an organisation which sets the industry standard and the patent holder included into such a standard is carefully watched by patent authorities, because it can lead to antitrust liability if they have internal negotiations or if two separate patentees combine their negotiating power. Members of such standard-setting organisations tend to negotiate as a single entity for a patent license and this demand for better industry standards comes as a by-product of the request. In Sony Electronics, Inc. v. Soundview Technologies, Inc., another US District Court case, an organisation refused to acquire a license for a patent supposed to abide by industry standards. The members of the organisation seemed to justify their actions in favour of the standard set, rather than their own personal gains. The court held that antitrust claims would not be dismissed because they had tried to manipulate the market to drive licensing fees.
The Free Riding Problem in Economics
The influence of economic theories of tangible property is evident in IP-related judicial decisions. These judgments usually involve two conflicting ideas: the notion that IP is actual property and the principle that the right-holder mainly utilises its social value, rather than a more tactile benefit. Some argue that if IP is considered equivalent to real property, they also carry the risk of being mismanaged if the property is transferred to the wrong hands. Thus, IP law, like property law, should also aim to minimise externalities and account for transaction costs.
Patentees think that they have absolute rights after becoming the owner, but since patents do not arise from a vacuum isolated from the flow of history, this results in them appropriating resources others have put their skill into developing. Thus, even those who excessively analyse any instance of unauthorised use of their patented entity or skill don’t realise that they may leech off of others’ efforts as well without paying them or asking for permission. This results in shifting from the main object of IP, which is recognition for one’s application of intellect, to obsessively trying to find out ways to eliminate the free-rider problem.
Some patent holders also wrongly think that if they acquire a patent to recognize a new invention, they can start exploiting it for monetary benefits even if laws stay silent or do not explicitly deem that product as valid. The solution is to not only give the benefit of exclusivity in exchange for what these private parties produce, but also to lay down specifically what the rights entail and how they can utilize the rights to seize maximum social gain from their invention.
Adopting Ramsey optimal pricing mechanisms would allow IP owners to fix rates that attract more customers, which would result in conceptualizing, executing and commercializing more expressions of novel ideas. Trademark law has also evolved from the initial object of avoiding consumer confusion to allowing owners to restrict varied uses of their registered marks, even if customers won’t associate the product with them or if search costs have risen. Trade secrets are now considered more of a property right and are governed by contract laws informally, instead of rights that maintain business ethics standards. There should be a balance maintained between absolute protection of rights, which actually hinders creativity and disincentives people, and the other extreme which lets others unjustly get enriched. Thus, law has also become useful in removing the free-riding problem for copyright right-holders, by increasing the terms of protection for copyright, making more works eligible for copyright protection and giving broader rights to control who uses their work.
The Climate Change Struggle
The major problem is that patent law, even in the U.S., is very restrictive towards inventions related to green technology, which is an additional problem stacked on top of the fact that inventors are finding it hard to catch up to the climate change crisis. This is mainly because unlike copyrights and trademarks, patent law does not recognise the defence of fair use. This is especially pertinent in this context because mass expansion of technological advancements would reduce the insufficiencies and balance the increasing demand in the market. Patent recognition allows the owner to exclude others from using their product, even if its contents are public information. The law also allows owners to refuse to license to people and sue them for infringement if they go ahead anyways. Some argue that this clashes with antitrust philosophy intending to prevent a patentee’s full market control over their inventions, as discussed earlier.
This is related to the “Green Patent Paradox”, where useful and timely devices which try to mitigate long-term implications of global warming and the greenhouse effect are not able to come to fruition and be effectively applied, because owners of existing patents are not willing to license their products to create something better for society. To combat this problem, compulsory licensing would be necessary. This gives the general public the authority to use any patented invention for the good of society in exchange for a license fee to the owner. Some US statutes like the Atomic Energy Act allows for the government to grant licenses for nuclear and atomic patents, even if the government is not the actual patentee, to enhance public development. Parallels can be drawn to the public health sector, where there has been debate for the past two years as to whether the TRIPS Agreement should be waived for the greater social good so that developing countries can get equitable access to medicines and vaccines, especially with the havoc the 2nd wave wreaked, even on developed countries.
Cultural Influences and Social Factors
Team owners have spent a lot of time and efforts in preventing people from viewing sports matches without buying a ticket or from a rooftop, but the free-riding problem exists as the games are not copyrightable per se as the athletic performance of players falls outside the ambit of what we consider “property”. Copyright only exists in the recording or broadcasting of the games, which the public is careful not to do. The nature of copyright law is such that it encourages collaboration from the get-go, and treats each co-owner as an entity getting independent rights, except in a commissioning agreement. Patent law is much more flexible surprisingly, given its many other restrictions in regards to the criteria of what qualifies as an invention. Example: Yvonne and Indya did not work together on a patent. They can still file a joint patent application before the concerned office. If Yvonne refused to join the application or cannot be reached, they can still be considered co-owners.
Copyright law would have made Yvonne ask for consent from Indya before deriving profits from their patent and both would’ve had to actively contribute to developing the invention for them to acquire the status of joint owners. Even though traditional knowledge and GIs do protect cultural expressions to an extent, most cultural products, like music, dance, healing practices, language, cuisine, do not satisfy the agency and originality tests, which are present in virtually all IP-recognised works. Since they are practiced and modified as a result of social interaction, no one knows how it originated or who “owns” the most recognised form of an ancient tradition. Some argue that even if logistically we found a way to protect them and trace the owner (by considering all members of that community as joint owners), it would result in financial burden and loss of social and cultural exchange of ideas. On the flipside, there is no commercial benefit in transferring a tangible religious product within the same society across generations.
This area is often entrenched with antitrust probing, because national IP and pharma regulations, especially in the EU, are not compatible with common market goals. Fixed costs can include regulatory compliances like conducting clinical drug trials to minimise the degree of error. Thus, after patenting the drug, the inventor does not incur much variable costs and even altering molecule composition of drugs if needed is easier, just like tech industries. To recover fixed costs, the patentee usually charges a hefty fee over the marginal amount. Product patents on the molecule is the kind of patent most relevant to the pharma field and acts as a barrier to entry against competitors in the market. Unlike other fields, there is no way to invent around the molecule or cast doubt on the patent’s execution capacity here. Government regulation in pharma is extensive and relates to intervention in entry and price. Apart from this issue, “originator” medicines have more hurdles to cross to be authorised for sale as compared to generic drugs.
IP laws also make sure that originator drugs do not shift to the status of generic drug for a long time after its entry, but provide them with some market power. At this point, IP clashes with national price regulations, especially within the EU, because they want to limit market power of originators as much as possible. Instead of balancing rights, the EU has adopted an approach wherein IP can be exhausted to allow free movement of medications beyond borders, even if prices are different across different member states. Applying competitive law to the pharma industry degrades total and consumer welfare, because the fixed costs of development are more than the variable ones. This is because patent strategies delay generic entry and authorities have identified compromissory patent agreements between originator and generic firms to circumvent increased examination and limitations.
Thus, from this article, we can observe that there are two elements needed for the success of IPR ecosystems: collaboration and competition. The word “ecosystem” obviously comes from biology, where nature indicated that healthy competition is important even in the food chain. Too many deer would lead to overgrazing, leading to an imbalance in the ecological surroundings, and thus a few wolves need to breed in order to bring back stability. Even though IP and competition are contradictory concepts, some creators have managed to strike a balance between collaboration and competition. If we go a couple of decades back, JVC competed against their own VHS technology because they allowed other companies to utilise them at a cheaper rate, which led to more hardware being invented complementing this technology, beating Sony’s Betamax even though Sony was the first mover in the market and technically superior when introduced. In fact, natural monopolies are not as harmful as artificial monopolies, because it is caused by one entity bringing something new to the market that no one else has done. A name that comes to everyone’s mind in this case is Apple, because they were able to create a convenient and better customer experience while pioneering competition at the right time between application providers and their applications, enabling them to put price pressure on others in the same market.
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