The Phantasm of Reasonability under Competition Act – Is 3(5) serving its purpose?

Introduction 

Intellectual Property Rights and Competition Law have been described as contradictory aspects. The origination of the former can be seen as to promote innovative monopolies whilst the latter one was incorporated to restrict them. However, this is not the correct proposition to say so in every context. The Raghavan committee that was formed to strengthen the competition law in the country acknowledges that the IPRs endanger competition while the Competition Law engenders the Intellectual property. During the exercise of a right, if any anti-competitive trade practice or conduct is visible to be detrimental to consumer interest or the public interest, it ought to be assailed under the Competition Policy/Law.

In this blog, the authors attempt to make a case that there is no requirement of section 3(5) and the proposed section 4A of The Competition Act because the CCI follows the Rule of Reason approach where the cases are decided by evaluating the pro-competitive features of a restrictive business practice against its anti-competitive effects and then decide whether the act should be prohibited or not. Moreover, it is worth to mention that the practice of commission shows that it follows the doctrine of reasonability in all cases and has not limited its scope to cases of section 3(5).

In the light of the argument mentioned above, the interpretation of section 3(5) as done by the Delhi HC in the Monsanto case requires to be reconsidered as the intention of the legislature could not have been merely non-implication of competition act only on reasonable conditions as reasonable conditions, in any event, can never be anti-competitive.

Jurisdictional tussle and current controversy

It is amply clear from the available text present on the inter-relation between the IP laws and Competition law that Intellectual property has enough potential to trigger dynamic competition in the market economy. However, to ensure the liveliness of inventions and innovations, the Competition Act, 2002 under Section 3(5), has provided a reasonable blanket for exempting the intellectual property owner from any anti-competitive issues.

The legislation intended while drafting the Act to reconcile both the laws and protect the IP owners from the anti-competitive allegations. Moreover, recently in the Monsanto case, it was observed that the jurisdiction of CCI is not excluded merely by virtue of Patents Act in the matters related to Patenting and other relevant anti-competitive issues arising out of them. Therefore this judgement has again escalated the debate between the IP laws and Competition law concerning the reasonable exemption provided under Section 3(5) of the Act.

The authors have attempted to explore whether section 3(5) is tantamount to saying that there is per se a presumption that such reasonable restrictions are always non-anti-competitive? Also, while going through the literal interpretation of section 3(5) of the Act as done by Delhi HC, the authors have attempted to argue that whether there is any utility of section 3(5) at all considering the competition regime already incorporates those principles even without such provision in other cases.

The prevailing dichotomy of “Reasonability” under Section 3(5)

As stated above, section 3(5) and now with section 4A, can set off any reasonable conduct coming up in the competition aspect. However, the CCI, as well as CLRC report, has made it clear that section 3(4) and 4 follows a reason-based approach while adjudicating any matter coming up in front of it. Under the rule of reason analysis, all factors are taken into account, especially an agreement’s potential effect on the market. These two sections do not contain any significance as in the majority of the cases, the CCI is resolving the matters regarding determining the reasonability of a condition with the help of the ROR approach. Thus, it is not possible to find any conditions which are anti-competitive in nature but considered to be reasonable under the Act.

In the case of Shamsher Kataria, CCI elaborately dealt with the provision of IPR exemption under Section 3(5) of the Act. The commission restated that the availability of the exemption under section 3(5) will be subjected to the terms of reasonability imposed by the intellectual property holder.

The exception of Reasonability, is it only available for section 3(5) agreements?

Reasonable conditions under section 3(5) elucidate that there must have a logical nexus between the conditions imposed on a third party by an IP owner such as a patentee and the object of preventing infringement of the IP right. However, we examine here whether the reasonable conditions imposed can be anti-competitive if not protected under section 3(5)?

Even though the Act purports to prohibit every restraint of trade, it has been applied to prohibit only unreasonable restrictions on trade. However, certain restraining agreements are inherently or per se unreasonable. Posner says that under this thorough inquiry, only those agreements that are found to interfere with the competition unreasonably should be struck down.

It was held in the Intel Case that any reasonable business practice could not be said to be unfair. The Act covers only those practices which are preventing the healthy competitive behaviour of the market economy. In the BCCI Case, it was mentioned that if the impugned restrictions impede competition without having any reasonable justification for protection of the legitimate interest of the sport, the same would fall foul of competition law. Also, in Maharashtra State Power Generation co. Ltd., the Opposite Parties, strongly justified the requirement of the alleged practice, which are to be carried out by them fairly and transparently. However, the Commission noted that the justifications provided by CIL to adopt the new mechanism are not reasonable on any basis whatsoever.

Therefore, it would be correct to say that the reasonable conditions imposed not limited to IPR agreements, but in the usual business, terms are also not considered to be anti-competitive in nature. However, the unreasonable restrictions which might have adverse appreciable effect on the competition in the market should be restricted.

Non-requirement of Section 3(5), 4(A) and Legislative Intention

After the analysis, as mentioned above, it is prudent to infer the following:

  • That since allegations under section 3(4) and 4 are always determined on the rule of reason approach, the reasonability of the conduct in the market has always been a relevant factor to ascertain anti-competitive agreements. The commission has always considered reasonable conditions as non-anti-competitive agreements and vice versa. In such a scenario, there is no explicit need to have provisions like section 3(5) or proposed section 4A.
  • It is a settled position of law across the jurisdictions that IPR agreements should not be anti-competitive. Hence, terms while protecting the same shouldn’t be unreasonable. If the conditions imposed by the patentee are unreasonable, the same would be anti-competitive per se. There is no such possible scenario where though the terms imposed are unreasonable, but the agreement is not anti-competitive.

If the mere intention of the legislature behind the enactment of section 3(5) is of excluding the jurisdiction of the commission with regards to ‘reasonable conditions,’ there is no need of the existence of such provision since the reason-based approach decides the agreement on the ground of reasonableness only. If the conditions imposed by any entity are reasonable, the same will not amount to anti-competitive conditions. Thus, the absence of section 3(5) would not affect the application of the Act to the agreements pertaining to patents in any manner since the reasonability of the agreements is always taken into consideration.

Moreover, when the HC in the Ericsson Case, ruled that that the patents act is a special enactment even in the context of anti-competitive agreements, the narrow interpretation of non-application of the competition Act only in the ‘reasonable agreements’ that are already exempted considering (i) that the reasonable conditions can’t be anti-competitive, or in any event, (ii) AAEC (ROR) test requires the same, the interpretation of the HC is expected to be reviewed.

The legislature certainly wouldn’t have put section 3(5) if the implication of the same was inherited in the Act, in any event. Thus, the intention of the legislature should be interpreted as a blanket ban and excluding the jurisdiction of the commission with respect to IPR.

The Delhi HC has already held in the Ericsson case that the Patents act is specific over the Competition Act even in the context of anti-competitive agreements, Although, it did not wipe out the competency of the CCI to review IP-related cases entirely. The interpretation of the intention of the legislature behind 3(5) should be that of exclusion of the jurisdiction of the agreements related to laws mentioned under section 3(5) and not only limited to that of ‘reasonable conditions.’

Conclusion

Therefore, it can be concluded that there is no shadow of a doubt that the Competition Commission is unambiguously following the Rule of Reason approach for adjudicating majority of the cases coming before it. Thus, it can be concluded that section 3(5) and proposed section 4A of The Competition Act are not required at all considering the consistent approach of CCI. Also, on the same line, the interpretation of section 3(5) as done by the Delhi HC in the Monsanto Judgement should be reconsidered.


ABOUT THE AUTHORS

Tilak Dangi

Tilak

Tilak Dangi is pursuing B.A. LL.B. (Hons.) from NALSAR University of law and currently in IV Year. He is interested in commercial and corporate laws. He can be reached at tilak.dangi@nalsar.ac.in.

Yash Mehta

Yash

Yash Mehta is a penultimate student at National Law University, Nagpur. He is primarily interested in Competition Law, Corporate Laws, and International Law. He can be reached at yashmehta@nlunagpur.ac.in.

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