Anticompetitive agreementsAssessment framework
What is the general framework for assessing whether an agreement or concerted practice can be considered anticompetitive?
Under the Competition Act 2002 (CA02), any agreement in respect of the production, supply, distribution, storage, acquisition or control of goods or the provision of services that causes or is likely to cause an appreciable adverse effect on competition (AAEC) within India shall be void. Specifically, horizontal agreements that fix prices, limit or control production or supply of goods or services, share markets or sources of production or result in bid-rigging are presumed to be anticompetitive. This presumption is rebuttable, though it is quite difficult to do so. Efficiency-enhancing joint ventures are not subject to the presumptive rule that is otherwise applicable to horizontal anticompetitive agreements.
Vertical restraints, including tie-in arrangements, refusal to deal, resale price maintenance (RPM) arrangements, exclusive supply and exclusive distribution agreements are prohibited only if they cause or are likely to cause an AAEC in India. The Competition Commission of India (CCI) considers the following factors while determining whether an agreement causes or is likely to cause an AAEC:
- creation of barriers to entry;
- market foreclosure;
- removal of competitors;
- benefit to consumers;
- improvement in production or distribution of goods or services; and
- promotion of technical, scientific and economic development.
The above provisions relating to anticompetitive agreements do not apply to reasonable and necessary conditions or restrictions imposed for the protection of IPRs that have been registered under identified IPRs in India. Moreover, agreements exclusively relating to the export of goods or services are also exempt from the scope of anticompetitive agreements.Technology licensing agreements
To what extent are technology licensing agreements considered anticompetitive?
Technology licensing agreements may be considered anticompetitive if they cause or are likely to cause an AAEC in India.
Restrictive terms in technology licensing arrangements are likely to be examined as vertical restraints under the CA02. Absent market power, restrictions in technology licence agreements are less likely to raise concerns. When the licensor enjoys significant market power, the restrictions it imposes in licensing agreements, regardless of whether the underlying technology is protected by IPRs, may be susceptible to scrutiny by the CCI. For instance, any attempt by a licensor to determine or influence the pricing decision (for the licensed IP) of the IP licensee may be scrutinised as a potentially anticompetitive RPM.
Licensors may also impose territorial or customer-specific restrictions as part of a licensing arrangement (ie, by forbidding the sale of the licensed product to a set of customers or territory). Such territorial or customer-specific restriction may be scrutinised as potentially anticompetitive ‘exclusive distribution’ or an anticompetitive ‘refusal to deal’. A licensor may also restrict licensees from dealing with any competing licensor, a restriction that may be examined as a potentially anticompetitive ‘exclusive supply’ arrangement. Any attempt by the licensor to make the grant of the IP licence conditional on the IP licensee purchasing the IP licensor’s other products, services or licences would be treated as a potentially anticompetitive tie-in arrangement.
Unlike in the US and the EU, where refusal to deal is usually examined as unilateral conduct, in India, a refusal to grant a licence altogether or the imposition of unreasonably restrictive licensing terms may be examined as a potentially anticompetitive vertical restraint. For instance, in Shamsher Kataria v Honda Siel (Case No. 3 of 2011) (Autoparts case), the CCI viewed certain automobile companies’ refusal to license their diagnostic (software) tools and repair manuals to independent repairers and workshops as an anticompetitive (vertical) refusal to deal.
Importantly, the CA02 provides a limited carve-out allowing owners of IP duly registered under an identified IP statute in India, including restrictions accompanying their licensing arrangements, which are both reasonable and necessary to prevent the infringement of their existing IP rights. In the Autoparts case, the automobile companies under investigation were unable to benefit from this limited exception as many were unable to adequately demonstrate either that their IP was registered in India, or that the restrictions in question were both reasonable and necessary for protecting their IP rights (presuming they were validly registered).
Finally, restrictive conditions or the imposition of unfair royalty rates in technology agreements, where the licensor has sufficient market power to be held dominant, may be scrutinised as an abuse of dominance under section 4 of the CA02. The limited carve-out for IP holders under the CA02 is not available for such unilateral conduct.
In sum, the CCI may examine licensing practices that lead to anticompetitive restraints, refusals to license, and unfair and discriminatory licensing. The CCI recently held that a restriction imposed by the manufacturer on a distributor of smartphones not to engage with its competitor to contain the leaking of IP and technical know-how of the manufacturer to be a reasonable restriction (Tamil Nadu Consumer Products Distributors Association v Vivo Communication Technology Company, Case No. 15 of 2018).
The validity of terms and conditions under a licence agreement were examined by the CCI in the Ericsson cases. Key takeaways from CCI’s prima facie order include:
- the licensor cannot charge different royalty rates or offer different commercial terms to licensees belonging to the same category;
- the royalty rates charged by Ericsson had no linkage to patented product since the technology resided only within the chipset ,but Ericsson calculated its royalty on the retail price of the entire phone; and
- a licensor may not impose onerous clauses on the licensee.
Similarly, while initiating an investigation against Monsanto Inc, United States (Monsanto), the CCI reached a preliminary view that it had charged 'unfair' royalty rates since its trait value (a kind of recurring royalty fee) was a percentage (16 to 18 per cent) of the maximum retail price (MRP) of the seed packet, which is determined in advance of each crop season.
In M/s Atos Worldline India Pvt Ltd v M/s Verifone India Sales Pvt Ltd and Anr (Case No. 56 of 2012), the CCI held that Verifone (manufacturer of point of sale (POS) terminals) imposed unfair and discriminatory conditions on service providers while granting licences for its software development kits to operate POS terminals. It observed that the practice of restricting the licensee from using any third party to develop or assist in developing any software using the licensed software, without first obtaining prior permission from Verifone, was unfair and discriminatory. The CCI’s decision was recently upheld by the National Company Law Appellate Tribunal.
Co-promotion and co-marketing agreements
To what extent are co-promotion and co-marketing agreements considered anticompetitive?
Co-promotion and co-marketing agreements may raise both vertical and horizontal anticompetitive concerns. A vertical relationship is created when the owner of the patented drug (owner) grants another entity (partner) the right to distribute, sell or market the product by way of the co-marketing agreement. If such an agreement incorporates vertical restraints contemplated in section 3(4) of the CA02 (such as tie-in arrangements or RPM), concerns would also arise.
Co-marketing or co-promotion arrangements also create a horizontal relationship between the contracting parties, since the owner typically retains the right to manufacture, distribute, sell and market its product while it grants similar rights to manufacture, distribute, sell and market to the counter-party. In such a case, the owner and the partner become competitors in the downstream market for manufacture, sale, distribution and marketing, as the case may be. Accordingly, any provision in the agreements that results in directly or indirectly fixing prices, limiting production or supply, market allocation or sources of production or any form of bid-rigging will be presumed to be anticompetitive. For instance, a non-compete clause in a co-marketing agreement that restricts the partner from selling any other pharmaceutical product that is similar to the subject of the co-marketing arrangement is likely to be viewed as an agreement (between entities engaged in the same level of trade) to limit the supply of the product in the market, and will be presumed to cause an AAEC under the CA02. Similarly, a non-compete clause that essentially precludes the partner from selling the subject products to a particular kind of customer (eg, hospital dispensaries) or certain markets (certain regions within India) is likely to be viewed as a horizontal arrangement to allocate markets, and will be presumed to result in an AAEC under the CA02. While the CCI is yet to reach a finding on horizontal anticompetitive concerns arising out of co-promotion or co-marketing agreements, the parties to such agreements will have the opportunity to present counter evidence to rebut the presumption of AAEC usually associated with anticompetitive horizontal agreements.
It has been reported that the CCI is currently investigating Novartis, Abbott, Emcure and USV for possible collusion in the sale of Vildagliptin (an anti-diabetic drug). It has been alleged that Novartis, the patent holder and drug manufacturer, has engaged in price-fixing through co-marketing arrangements with Abbott, Emcure and USV. Abbott had challenged the CCI’s prima facie order before the Delhi High Court, stating that the document submitted by the National Pharmaceutical Pricing Authority was inaccurate and that the email purportedly submitted by one of Abbott’s employees was forged. The Delhi High Court did not find merit in the contentions and dismissed the writ petition. However, no other orders in the matter have been passed by the CCI and it is difficult to ascertain the status of this investigation.Other agreements
What other forms of agreement with a competitor are likely to be an issue? How can these issues be resolved?
Agreements between actual or potential competitors, including buyer-seller agreements (between entities that otherwise compete), that directly or indirectly result in fixing prices, limiting supplies and allocating markets (by division of geographic areas or customer base) are prohibited on the basis of the presumption that they cause an AAEC in India. Implementing firewalls to prevent the exchange of confidential and sensitive business information (which would make it difficult to fix prices or coordinate supplies) may mitigate, but not eliminate, the risk of scrutiny by the CCI for potential anticompetitive conduct.
Apart from co-marketing agreements, agreements in the nature of ‘pay-for-delay’ or reverse settlement agreements (where patent-holding pharmaceutical companies enter into private agreements with generic companies to delay the entry of generics for a consideration) are likely to raise concerns under the CA02. It is likely that the CCI will see a pay-for-delay arrangement as an anticompetitive agreement between competitors to restrict the supply of goods in the market. However, the CCI will also likely examine the application of the limited IP carve-out under section 3(5) of the CA02 to such agreements. Even while the patent holder may have entered into a pay-for-delay agreement with a generic company during the term of the patent (which, under the Indian Patents Act 1970, gives exclusive rights to the patentee for, inter alia, making, using and selling the patented drug), the possibility that the CCI will consider the pay-for-delay arrangement a reasonable and necessary condition for protecting IP rights under section 3 of the CA02 appears to be low.
Similarly, the CCI may also examine settlement agreements between patent-holding pharmaceutical companies and generic companies to settle patent infringement proceedings. Agreements to settle such patent infringement litigation may be viewed as anticompetitive agreements to limit or restrict the supply of products under section 3 of the CA02 if they have been entered into either with the objective of, or result in, the delay or thwarting of the entry of a potential competitor in the market. Such delay or restriction on the entry of a competitor would effectively extend the benefit of the patent protection beyond the statutory lifespan of the patent and hence not benefit from the limited carve-out provided under section 3(5) of the CA02.
In these cases, much as in the US and EU, the CCI is likely to focus on whether the purpose of these agreements or settlements is to delay the entry of a generic drug in the market, which would otherwise have competed with, and been available at, a fraction of the cost of the patented drug. In this respect, in August 2014, it was reported that the CCI was likely to review a patent deal between Hoffmann-La Roche and Cipla in respect of lung cancer drug, Erlotinib, as well as one between Merck Sharp and Dohme Corp (MSD) and India’s Glenmark Pharmaceuticals Ltd on the antidiabetic drug, Sitagliptin. The same report also mentioned that the CCI would investigate the market impact of ex parte injunctions secured by Novartis AG and MSD against a dozen local drug makers, blocking them from launching copies of the diabetes drugs Vildagliptin and Sitagliptin. However, apart from an investigation into an alleged cartel arrangement between Novartis and its co-marketing partners, Emcure, USV and Abbott, in respect of a diabetes drug, there has since been no further report or order from the CCI on these issues.Issues with vertical agreements
Which aspects of vertical agreements are most likely to raise antitrust concerns?
Vertical restraints are not, per se, anticompetitive, unless they cause or are likely to cause an AAEC in India. The CA02 identifies an inclusive set of vertical agreements such as tie-in arrangements, refusal to deal, RPM arrangements, exclusive supply and exclusive distribution agreements, which would be anticompetitive if they cause or are likely to cause an AAEC in India.Patent dispute settlements
To what extent can the settlement of a patent dispute expose the parties concerned to liability for an antitrust violation?
Antitrust issues arising out of the settlement of patent disputes have yet to be considered by the CCI. However, settlements of patent infringement litigation between parties may be reviewed by the CCI to examine whether the object or effect of the agreement is to delay or thwart the entry of a potential competitor in the market, to the detriment of consumers.Joint communications and lobbying
To what extent can joint communications or lobbying actions be anticompetitive?
Joint communications or lobbying actions by way of a trade association or otherwise, to the extent that they relate to industry-wide issues such as government policies, taxes, etc, and not individual conduct, are unlikely to raise anticompetitive concerns. However, communications or actions that would facilitate any form of collusive practice (eg, on prices, territory of sales or the introduction of new products) are likely to be examined under the provision on cartels.
Specifically, in the context of the pharmaceutical industry, in a large number of cases involving various chemists’ and druggists’ associations, the CCI found the obligation imposed by trade associations on pharmaceutical companies to pay mandatory product information service charges at the time of launching any new products to be anticompetitive to the extent they result in output restrictions, limitation of supply and price-fixing (Varca Druggists case (MRTP 127/2009/DGIR), Sandhya Drug Agency case (Case No. 41 of 2011), Mr Nadie Jauhri v Jalgaon District Medicine Dealers Association (Case No. 61 of 2015)).
Similarly, the following have been identified as anticompetitive conduct to the extent that they were found to limit supplies in the market and have the effect of determining prices:
- requiring new stockists to obtain a no objection certificate from the association before being eligible to be appointed to a pharmaceutical company (Belgaum Chemists & Druggists (Case No. C-175/09/ DGIR/27/28-MRTP), Santuka Associates (Case No. 20 of 2011), Vedanta Bio Sciences, Vadodara v Chemists and Druggists Association of Baroda (Case No. C-87/09/DGIR) and Madhya Pradesh Chemists and Distributors Federation v The Himayalan Drug Company and ors (Case No. 64 of 2014);
- fixing industry-wide minimum trade margins (Peeveear Medical Agencies (Case No. 30 of 2011); and
- giving instructions to boycott pharmaceutical companies or stockists for non-compliance with the associations’ norms (In re: Bengal Chemists & Druggists Association (Suo Moto Case No. 2 of 2012), Arora Medical Hall (Case No. 60 of 2012)).
However, in All India Tyre Dealers’ Federation v Tyre Manufacturers Association (MRTP case: RTPE No. 20 of 2008), the CCI held that trade associations may adopt measures that are necessary to protect the interests of its members, as long as they are not in contravention of the CA02. The CCI found that the discussion around low prices, increase in input costs, petition for levy of anti-dumping duties, blacklisting importers and export realisation, among the members of the tyre manufacturers' association, fell within the realm of legitimate lobbying conduct, as they were not undertaken with the aim of determining the individual conduct of any of its members.Public communications
To what extent may public communications constitute an infringement?
Public communications that are aimed at or facilitate collusion, for example, of prices or production quantity, are likely to be examined under the provision dealing with cartels. For instance, announcements by an enterprise indicating a possible increase in its price, followed by other players in the market, may indicate collusion and invite scrutiny. The CCI, however, will have to prove that the public announcement of prices indeed led to an agreement among all competitors to fix prices. However, public announcements, joint press statements or press releases setting out common and legitimate industry concerns (eg, in respect of a government policy) are unlikely to be considered anticompetitive. In the Dry Cell Batteries cartel (Case No. 2 of 2016), the coordinated prices were communicated through press releases. One of the cartelists would issue a press release announcing an increase in price, which would be immediately followed by price increases by the other cartelists.Exchange of information
Are anticompetitive exchanges of information more likely to occur in the pharmaceutical sector given the increased transparency imposed by measures such as disclosure of relationships with HCPs, clinical trials, etc?
The current Indian Medical Council (Professional Conduct, Etiquette and Ethics) Regulations 2002 prohibit any form of relationship between pharmaceutical enterprises and HCPs. However, in practice, the interaction between pharmaceutical companies, device manufacturers or their agents and HCPs has always been opaque. It would, therefore, be difficult to determine the likelihood of anticompetitive information exchanges between pharmaceutical companies and HCPs.
Recently, the Government of India required all clinical trials to be compulsorily registered with the Clinical Trial Registry India. However, it is unclear whether disclosure in relation to clinical trials would facilitate any information exchange between pharmaceutical companies. In addition to these regulations and rules, there are several other regulations that require pharmaceutical companies to disclose confidential information to third parties.
Such information exchange would not in itself constitute a contravention under the CA02. The CCI held in In Re: Alleged Cartelization in Flashlights Market in India (Suo Motu Case No. 1 of 2017) that the mere exchange of information between competitors did not constitute enough evidence to conclude that the parties were acting in a concerted manner contrary to the provisions of the CA02. Rather, such evidence has to be considered in conjunction with other evidence (such as contemporaneous increases in prices) to establish a contravention.
Notably, the CA02 does not expressly exempt conduct undertaken in compliance with any other regulation (other than the relevant exemption for IPRs). Therefore, if the information exchange between pharmaceutical companies mandated by other regulations results in any collusive conduct, the enterprises may still be liable under the provisions of the CA02.
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24 April 2020