Tuesday, April 7, 2015

Intermediary liability regime- A Historic Opportunity Missed by the Supreme Court

Ever since the pronouncement of the verdict by the Supreme Court on March 24, 2015 in what I prefer to call the “IT Writ Petitions” (since they went beyond Section 66A of the Information Technology Act, 2000), a lot has been written in mainstream and alternative fora on the striking down of Section 66A. And rightly so because its draconian nature, vagueness and unreasonableness were writ large. The number of instances in which the now erstwhile provision had proven its susceptibility to abuse, bears testimony to the dangers it posed to free speech and hence its fundamental constitutional infirmity (readers may recall I have written on Section 66A earlier on the blog).

In stark contrast, the other provision of the IT Act, which has now been read down by the Supremes, namely Section 79(3)(b), has not received its due in popular discourse. This is perhaps because this provision required and still requires attention to nuances. The challenge to the provision was mounted on behalf of internet intermediaries solely by the Internet and Mobile Association of India (IAMAI) in W.P(C). 758/2014 in the same batch of IT Writ Petitions. This challenge was critical owing to the integral nature of intermediaries to the internet ecosystem and the role they place as disseminators of free speech and expression of internet users. With the internet increasingly becoming the medium of choice for expression of social, cultural and political views outside of the mainstream media, attention must be paid to the clamps imposed on intermediaries which facilitate free speech.

According to the IT Act, an intermediary means any person who on behalf of another person receives, stores or transmits that record or provides any service with respect to that record and includes telecom service providers, network service providers, internet service providers, web hosting service providers, search engines, online payment sites, online-auction sites, online market places and cyber cafes”. Clearly, any restrictions on the ability of intermediaries to host content would have an immediate, direct and adverse bearing on the the internet user’s freedoms under Article 19(1)(a). This is the pith and substance of IAMAI’s challenge to Section 79(3)(b).

Section 79(3)(b) which applies to internet intermediaries, prior to being read down by the Court, used intermediaries as proxies to impose constitutionally impermissible restrictions on free speech i.e. restrictions which are beyond Article 19(2).  Therefore, it was the contention of IAMAI that, if Section 66A is liable to be struck down for imposing direct restrictions on an internet user’s free speech and expression which are beyond the pale of Article 19(2), it stands to reason that such or similar restrictions imposed on the user indirectly through intermediaries under Section 79(3)(b), are equally ultra vires Article 19(2). In other words, what cannot be done directly, cannot be done indirectly either, the litmus test being the direct and immediate consequence of the restrictions under Section 79(3)(b) on curtailment of the internet user’s freedoms under Article 19(1)(a).

In order to lend perspective to the challenge to Section 79(3)(b), it is important to understand that the internet as we know it today, is increasingly driven by User Generated Content (the other UGC) which is monumental in sheer diversity and scale. Numbers perhaps tell the story better- every minute almost 360,000 tweets are published on Twitter, 30,000 edits are made to Wikipedia, Facebook users share 684,478 pieces of content and more than 100 hours of video are added to YouTube. These mind-boggling numbers are in fact responsible for contributing to an emerging area in information management systems, namely Big Data. Given these numbers, it is practically impossible for intermediaries such as Google, Twitter or Facebook to pre-screen content or exercise any kind of ex ante editorial control. This also means that intermediaries cannot vouch for or take responsibility for the legality of the content being uploaded or transmitted or published on their platforms. And yet in 2004, no less than the Chief Executive Officer of Baazee.com, Avnish Bajaj, was arrested for the offer of sale of an obscene video clip made on the portal by a user.

To address such instances and to ensure that intermediaries are not held liable for content created/published by their users, the definition of “intermediary” was effected (which is the current version) through the Information Technology (Amendment) Act, 2008 and Section 79 of the Act was amended to carve out a safe harbor for intermediaries from liability arising from User Generated Content.  As part of the amendment, in return for the safe harbor, a corresponding “takedown” (removal of content) obligation was cast on intermediaries under Section 79(3)(b), which was challenged by IAMAI in its petition that led to the provision being read down by the Court.

Section 79(3)(b) has two prongs- the first relates to a takedown notice upon receipt of ‘actual knowledge’ of the illegality of content hosted by the intermediary, and the second envisages a takedown notice issued by a Government or its authorised agency to the intermediary. Both prongs give rise to different but equally grave concerns. The problem with the first prong is that although it borrows the term ‘actual knowledge’ from the EU Directive on E-Commerce 2000/31/EC dated 8th June, 2000, it is nowhere defined in the Indian statute. Importantly, the legal and operational challenges with the use of the term have been clinically captured in a study undertaken in the European Union.  This study correctly notes that the term is capable of being interpreted and has been interpreted in a few jurisdictions to mean that intermediaries are expected to sit in judgment over the legality/unlawfulness of content impugned in a takedown notice. Clearly, this is beyond the wherewithal of intermediaries, which establishes the unreasonableness of this mandate. Echoing the validity of this contention, the Court read down ‘actual knowledge’ to mean knowledge of a court order directing the intermediary to expeditiously remove or disable access to the impugned content.

The second prong of Section 79(3)(b) firstly suffers from vestation of adjudicatory powers in the executive to determine illegality of content, which is problematic. Secondly, the use of the term “unlawful” in Section 79(3)(b) enlarges the scope of restrictions to beyond the specific categories identified in Article 19(2). In response to the second concern, the Court drew parity between the executive’s (only the Central Government) power to block content under Section 69A and the executive’s power to direct takedown on content under Section 79(3)(b) and implicitly noted that the limitation of Article 19(2) applied to the executive’s power under both provisions.

This is perhaps the most positive outcome on the issue of intermediary liability because by reading in Article 19(2) to restrictions imposed on intermediaries under Sections 69A and 79(3)(b), the Court has accepted the argument of the intermediaries that the test to be applied to any law is whether it directly impacts free speech, regardless of who such restrictions may be applied through (in this case through intermediaries). Importantly, even if such restrictions are imposed in return for immunity to intermediaries under Section 79(1), such perceived largesse to intermediaries does not legitimize the transgression of the boundaries set by Article 19(2). This position has received the thumping endorsement of the Supreme Court.

That being said, although the Court has encumbered the executive’s takedown power under Section 79(3)(b) by reading in Article 19(2), the fundamental question of the executive’s constitutional competence to direct such takedown was not addressed, perhaps because the Court was already convinced of such competence during its analysis of Section 69A. Be that as it may, the consistent thing to do would have been to include in Section 79(3)(b) the de minimis procedural safeguards provided for under Section 69A and the blocking Rules, or the safety vales under Sections 95 and 96 of the Code of Criminal procedure, 1973 (which deal with the Government’s power to ban books/publications). This is so because, unlike Section 69A, Section 79(3)(b) does not provide for a hearing either to the intermediary or the creator of the content prior to the takedown, nor is  there a provision for appeal under the Act from such a takedown (except for a Writ Petition).

It is surprising that after taking detailed cognizance of the procedure laid down for blocking under Section 69A, the Court did not apply the same yardstick and due process to Section 79(3)(b). Critically, having recognized the reader’s right to receive information/content in its analysis of Section 66A, the Court ought to have taken note of the adverse effect of a summary executive takedown on the right of the internet audience to receive content, even if such notice is within the metes and bounds of Article 19(2). Had these concerns been addressed, the verdict would have been far more comprehensive on Section 79(3)(b) is concerned.

All in all, although the Court has addressed some primary concerns of intermediaries relating to Section 79(3)(b), thereby rendering their immunity more meaningful, the Court could have dealt with the other equally important concerns which have a concrete and critical bearing on the intermediary liability regime in India. This would have made India a much more attractive destination for investments by intermediaries given the potential of the internet economy and e-commerce. Perhaps, the egregious language and consequence of Section 66A drew the Court’s attention much more than the layered issues posed by Section 79(3)(b) and the Intermediary Rules. After all, out of 122 pages of the judgment, 109 pages have been devoted to Section 66A and a like provision of the Kerala State Police Act. Only the final paragraphs of the verdict, paras 112-118, deal with the issue of intermediary liability.

It is undeniable that the judgement is a welcome one and is expected to further the cause of democratization of the internet in a tangible manner. However, given the opportunity the IT Writ Petitions represented in undertaking a comprehensive overhaul of the IT Act on a range of related issues, each of which has a critical bearing on freedom of speech and expression on the internet, it appears that the Supreme Court has passed up a wonderful opportunity, which may not present itself in the future.

Disclosure: I was part of the team that represented a consortium of internet intermediaries, namely the Internet and Mobile Association of India in the Supreme Court in W.P(C) 758/2014 which challenged Section 79(3)(b) and the Intermediary Rules. Mr.Saikrishna Rajagopal of Saikrishna & Associates argued the petition. All opinions expressed here are personal and academic.

Tuesday, March 10, 2015

A Review of the Competition (Amendment) Bill, 2012- II

In this post, I shall continue with my review of the Competition (Amendment) Bill, 2012 from the last post. Clause 6 of the Bill introduces Section 5A which empowers the Central Government to specify, by notification, different values of assets and turnovers based on the class or classes of enterprise for the purposes of Section 5 which defines a combination. The stated object of this proposed new provision is to provide the Government with a tool which is much more attuned to the dynamics of different market segments.

Unlike the current Section 20(3), which envisages a modification in the thresholds for Section 5 only once every two years, the proposed Section 5A is not encumbered by any such restrictions.  Also, the basis for change in thresholds as spelt out by Section 20(3), namely fluctuations in the wholesale price index or exchange rate of the Rupee, is absent in the proposed Section 5A. This perhaps could mean that thresholds may be altered with a specific view to address market anomalies and not merely to adjust the thresholds for inflation.

Critically, the proposed Section 5A retains the aspect of consultation by the Government with the CCI in altering the thresholds of assets and turnover. This raises an interesting question regarding the nature of the CCI. Since the Government is merely expected to consult the CCI and not seek its consent in changing the thresholds, could it be argued that Sections 5 and 5A in particular, and the Competition Act in general, are instrumentalities which further the economic policy/vision of the Government of the day (the Executive)? If so, is the CCI itself a part of the Executive despite performing several adjudicatory functions? Questions such as these were left open-ended by the Supreme Court in Brahmdutt v. Union of India and will hopefully be answered in the on-going Writ Petitions (W.P (C) Nos. 7638, 7087, 6634 and 6610 of 2014) before the Chief Justice of the Delhi High Court filed by auto majors BMW, General Motors, Mercedes Benz and other parties to the auto spare parts decision of the CCI. Among other things, the constitutionality of the CCI is under challenge in these petitions.

The next proposed amendment is the one to Section 26 by Clause 11 of the Bill. Here are the relevant extracts of  Section 26 as they read currently:

Procedure for inquiry under section 19
26. (1) On receipt of a reference from the Central Government or a State Government or a statutory authority or on its own knowledge or information received under section 19, if the Commission is of the opinion that there exists a prima facie case, it shall direct the Director General to cause an investigation to be made into the matter: Provided that if the subject matter of an information received is, in the opinion of the Commission, substantially the same as or has been covered by any previous information received, then the new information may be clubbed with the previous information.

(3) The Director General shall, on receipt of direction under sub-section (1), submit a report on his findings within such period as may be specified by the Commission.

(5) If the report of the Director General referred to in sub-section (3) recommends that there is no contravention of the provisions of this Act, the Commission shall invite objections or suggestions from the Central Government or the State Government or the statutory authority or the parties concerned, as the case may be, on such report of the Director General.

(6) If, after consideration of the objections and suggestions referred to in sub section (5), if any, the Commission agrees with the recommendation of the Director General, it shall close the matter forthwith and pass such orders as it deems fit and communicate its order to the Central Government or the State Government or the statutory authority or the parties concerned, as the case may be.

(7) If, after consideration of the objections or suggestions referred to in sub section (5), if any, the Commission is of the opinion that further investigations is called for, it may direct further investigation in the matter by the Director General or cause further inquiry to be made by in the matter or itself proceed with further inquiry in the matter in accordance with the provisions of this Act.

(8) If the report of the Director General referred to in sub-section (3) recommends that there is contravention of any of the provisions of this Act, and the Commission is of the opinion that further inquiry is called for, it shall inquire into such contravention in accordance with the provisions of this Act.

A reading of Sub-section 6 reveals that if the CCI agrees with the finding of the DG that there is no contravention of the Act, it shall close the matter. The language of Sub-sections 7 and 8, however, seem incoherent and incomplete. Sub-section 7 alludes to a situation where the CCI does not agree with the DG that there is no contravention of the Act, in which case it may direct further investigation by the DG. The reference to “cause further inquiry to be made in the matter or itself proceed with further inquiry in the matter” is to a situation where the CCI may choose not to seek the DG's assistance for further inquiry. If such further inquiry does not yield results, Sub-section 7 does not explicitly empower the CCI to close the matter, but practically speaking one would think the logical consequence would be for the CCI to agree with the DG’s finding of no contravention under Sub-Section 6. After all, the CCI cannot endlessly enquire into the matter. However, if further enquiry reveals contravention of the Act, Section 26 and Regulation 21 of the CCI General Regulations are unclear if the CCI has the power to pass orders based on its findings.  

Similarly, under Sub-section 8 which deals with a situation where the DG finds contravention of the Act, it is unclear if the CCI may pass orders if it agrees with the DG although this appears to be logical conclusion. If, however, the CCI does not agree with the DG, Sub-section 8 does not appear to permit the CCI to close the matter.  Despite the absence of such power to differ with the finding of contravention by the DG and to close matters, the Standing Committee has observed that until February 2014, in 42 cases the CCI differed with the DG’s finding of contravention. In order to avoid such anomalies, the Bill proposed to insert “and make appropriate orders thereon after hearing the concerned parties” in both Sub-sections 7 and 8. Further, one of the recommendations of the Committee is to retrospectively provide a limited window of appeal to parties which have suffered as a consequence of closure of their matters by the CCI despite a finding of contravention by the DG. I am of the view that consequential amendments to CCI General Regulation 21 too must be effect to avoid any further voids.

In addition to the above amendments, the Bill also provides for a hearing to a party on which penalty is sought to be imposed by the CCI. Finally, the Bill seeks to empower the Chairperson of the CCI to approve search and seizure by the DG, who is currently required to seek the approval of Chief Metropolitan Magistrate. However, the Standing Committee has observed that such a change is premature considering that no flaws have surfaced thus far with respect to the existing mechanism. In its parting recommendation, the Committee has drawn the Government’s attention to the following questions/issues:

(i) Whether the Commission should be a body comprising of only retired persons or it should be a smaller multi-disciplinary body consisting of domain experts;
(ii) Whether more substantive amendments are required to enable the CCI to play a more vibrant and meaningful role in the economic development of the country like creation of robust data-base and formulation of coherent norms/principles in prevention/detection of cartels, price-manipulation/rigging and other market practices inimical to competition and orderly functioning of markets;
(iii) Whether the CCI should enhance its capacity to take cognizance of emerging trends and developments in industry relating to “unfair dominance” or “monopolistic practices”, such as cross-holdings in media ownership.
(iv) Protection of consumer interest through periodical studies/surveys on trends of consumer prices in different sectors.
(v) Whether the law should be designed in a manner that is unduly restrictive with rigid thresholds or should it be a facilitator for growth of business and industry while promoting fair play and freedom in competition and reasonable prices for consumers.

In my opinion, these are thought-provoking high-level issues which are worth ruminating over since they have a critical bearing on the role we expect the CCI to play in furthering its mandate under Section 18 of the Act. 

Sunday, March 8, 2015

A Review of the Competition (Amendment) Bill, 2012- I

The Competition (Amendment) Bill, 2012 was introduced in the Lok Sabha on December 7, 2012 and a report on the Bill by the Standing Committee on Finance was submitted to the Lok Sabha on February 17, 2014. However, the Bill has since lapsed due to the dissolution of the 15th Lok Sabha.

The Bill proposes significant changes to the Competition Act, 2002. For instance, the applicability of the current Section 3(5), which permits an IP owner to impose any “reasonable condition” to restrain infringement of his rights, is restricted to copyrights, patents, trademarks, GIs and semi-conductor design layout. The Bill proposes to add an omnibus clause to Section 3(5) which extends its application to any other law for the time being in force which relates to the protection of other forms of intellectual property rights. On a reading of the proposed amendment, it appears that the said provision still does not apply to reasonable conditions applied for the protection of trade secrets for it refers to “any other law for the time being in force”. Perhaps, this is something the new dispensation can look into.

Also, for the sake of abundant clarity and to avoid mischievous interpretations, it would help to clarify that restrictive covenants which Section 140 of the Patents Act frowns upon do not enjoy the safe harbour under Section 3(5) of the Competition Act. That said, even in the absence of such a clarification, it could be reasonably argued that proscriptions under Section 140 of the Patents Act do not qualify as “reasonable restrictions” within the meaning of Section 3(5) of the Competition Act, and are therefore anti-competitive.

Yet another critical amendment proposed by the Bill is the recognition of the concept of joint dominance i.e. position of dominance enjoyed by one or more enterprises, or one or more groups of enterprises. Industry groups have pointed to the complications this concept may pose for it appears to impugn joint conduct even if it does not satisfy the requirements/standards of Section 3 of the Act. It has also been suggested that the introduction of this concept in Indian conditions may even be premature. The CCI and the Ministry of Corporate Affairs have however justified the introduction of joint dominance on grounds that it provides the CCI with the necessary legal tool to deal with collusion between players in an oligopolistic market where cartelization is otherwise difficult to establish. The Standing Committee has recommended that in addition to amending Section 4, consequential amendments must be undertaken to the explanation to Section 4 and to Section 19(4) as well. The Committee has also rightly recommended that the definition of “group” must be shifted to Section 2 so as to avoid confusion regarding the applicability of the definition to the rest of the Act.  That said, given that the nature, scope and rigour of Sections 3 and 4 are yet to be understood with a reasonable degree of certainty, it is my personal opinion that the time is not yet ripe to introduce the concept of joint dominance.

Another amendment which is of particular interest to me is the amendments proposed to Sections 21 and 21A for it has a bearing on the interplay between the CCI and sectoral regulators. Sector 21, as it reads currently, is set out below:

Reference by statutory authority 21. (1) Where in the course of a proceeding before any statutory authority an issue is raised by any party that any decision which such statutory authority has taken or proposes to take is or would be, contrary to any of the provisions of this Act, then such statutory authority may make a reference in respect of such issue to the Commission:

Provided that any statutory authority, may, suo motu, make such a reference to the Commission.

Under the current version, a statutory authority may, on its own or upon an issue being raised by a party to a proceeding before it, refer the mater or issue to the CCI if the decision the authority proposes to take or has taken is contrary to the scheme and provisions of the Competition Act. In a way, this reinforces the overriding effect of Competition Act as spelt out in Section 60 of the Act. That said, under the current version, the decision to refer the issue to the CCI is left to the discretion of the statutory authority. Consequently, if the authority opts not to refer to the matter to the CCI and takes a decision which contravenes the Competition Act, the affected party can only raise the issue in appeal (if available and applicable under the relevant legislation which governs the authority) or may file a writ before the appropriate High Court. Although this appears to be an adverse consequence of the current version, this version does justice to the inherent power of the statutory authority to decide on aspects of conflict of jurisdiction.

The Bill proposes to alter this position by replacing the words “is raised by any party” with “arises” and by substituting “may” in the provision with “shall”. The amendment also proposes to delete the proviso thereby making it mandatory on the part of the statutory authority to refer the matter to the CCI if an issues arises that the decision taken or sought to be taken by the authority runs counter to the Competition Act. Similar changes are proposed to be effected to Sections 21A and 27 as well. Another proposed change is to render the decision taken under Sections 21 and 21A appealable under Section 53A of the Act.

These proposed amendments could give rise to several complications. First, I am of the opinion that the impact of such proposed changes on Sections 21 and 21A cannot be the same in light of Sections 60 and 62 of the Competition Act which set out the position of the Act vis-à-vis other legislations. Therefore, it would be incorrect to mechanically apply the same set of changes to both Sections 21 and 21A. Second, the consequences of mandatory reference on the inherent jurisdiction of a statutory authority to deal with conflict of jurisdictions and to address issues relating to its governing legislation must be considered. Third, to provide for an appeal under Section 53A for a decision taken by the statutory authority under Section 21 could result in undermining the position of the appellate authority which supervises the functioning and decisions of the statutory authority, besides giving rise to multiplicity of litigation. Fourth, by replacing “is raised by any party” with “arises”, it appears that parties may not have the right to raise this as an issue and it is left to the sole discretion of the statutory authority to decide if a reference to the CCI is necessary. This also leads to the conclusion that every statutory authority must have regard to the Competition Act in addition to the specific legislation that applies to it, which does seem onerous. Perhaps, the current version is best left untouched until more instances of jurisdictional conflict surface.

I will deal with the rest of the proposed amendments in the next post. Look forward to comments and corrections from readers.

Monday, February 16, 2015

Division Bench of the Delhi High Court Vacates Interim Injunction against Glenmark in Linezolid Patent Dispute

On February 5, 2015, a Division Bench of the Delhi High Court vacated the interim injunction granted on January 19, 2015 by a Single Judge of the Court against Glenmark Pharma in respect of Symed Labs’ process patents on Linezolid IN213062 and IN213063.

The reason for the ad interim vacation of the interim injunction of the Single Judge, according to the Division Bench, was the failure on the part of the Single Judge to take into account Glenmark’s contention that Symed Labs had failed to establish that the products of the parties were identical, which is a mandatory requirement under Section 104A of the Patents Act, 1970. Extracted below are the relevant portions of the DB’s order:

“According to Mr Chidambaram, a specific plea is taken in the written statement and he has drawn our attention to certain paragraphs thereof to show that the Linezolid API manufactured by the appellants/defendants is different from that of the plaintiff/respondent. Therefore, before the learned Single Judge could grant an injunction in favour of the respondent/plaintiff, it was incumbent upon the learned Single Judge to, prima facie, come to a conclusion that the Linezolid API manufactured by the plaintiff using its patented processes was identical to the Linezolid API manufactured by the defendants/appellants. This does not appear to have been done. It is in these circumstances that we are vacating the interim order for the time being and direct that the defendants/appellants shall maintain accounts and shall file the same in this Court as also supply a copy to the respondent/plaintiff”

Section 104A envisages reversal of burden of proof on the defendant in limited circumstances where the patentee is unable to establish that the defendant’s process is identical to that of the former’s patented process, but has established the limited fact that products of both parties are identical. In the facts of Linezolid case, unless the patentee sought to place reliance on Section 104A to seek reversal of burden of proof, I am not sure it is incumbent on it to establish the identicality of the products. Since I haven’t had the chance to read the Single Judge’s order of injunction, I shall reserve my comments on the issue.  

That being said, the vacation of the interim injunction by the DB is only ad interim since it is yet to dispose the appeal. The next date in the appeal April 6, 2015. 

Sunday, January 11, 2015

Delhi Patent Office Revokes Abbott’s Patent on the blockbuster drug Adalimumab (Humira)

On December 31, 2014, in a 30-page decision the Delhi branch of the Indian Patent Office set aside its order of grant of patent IN234555 to Abbott on its blockbuster arthritis drug Adalimumab (trade name “Humira”). The patent was revoked on grounds of lack of inventive step and insufficient disclosure.

The facts of the case make for interesting reading. The Patent Office granted the patent to Abbott on June 8, 2009, oblivious to the pendency of a pre-grant opposition filed by Glenmark in September 2008. When Glenmark brought this to the Controller’s attention, the letter intimating Abbott of the grant of the patent was cancelled, this time without hearing Abbott. Naturally, this peremptory decision was challenged by Abbott in a writ petition before the High Court of Delhi, wherein the Court directed the Controller to review the decision of grant by treating Glenmark’s challenge as a review petition under Section 77(f) of the Act. It is in this review petition that the decision of grant of the patent was set aside on December 31, 2014. That’s quite a way to start the New Year for both the parties concerned.

The Controller’s observations and findings start in Para 9 on Page 15 of the Order. Before dealing with the grounds of review, the Controller undertook a discussion on the subject-matter of the claims of the patent taking into account the amendment of claims undertaken by Abbott during the prosecution of the patent. Subsequently, the Controller rejected the contentions of Glenmark with respect to lack of novelty including the ground of prior claiming and ineligibility of subject-matter under Section 3(e) of the Act. However, the contentions relating to lack of inventive step and insufficient disclosure were accepted.

I will discuss the specifics of these findings in detail in a later post, but what is to be noted is that this decision again proves the need for and efficacy of the pre-grant opposition mechanism which is effectively the reason for the outcome in this case. Importantly, this also highlights the need to improve the procedure of examination of patent applications since examination, and not pre-grant opposition, is the first line of scrutiny. Therefore, it would help if details of examination of a patent including the search and analysis carried out by the Patent Office are captured clearly during its prosecution and are also available to the public, instead of the confidential treatment it receives now. After all, what is so confidential about the steps taken the examiner of a patent application to evaluate the patentability of the subject-matter?

Let’s hope these issues receive the attention that are due to them. Until then, we will have to repose faith in the opposition and revocation mechanisms.

I thank a good friend of mine for sharing a copy of the decision with me! The link to the Controller's decisions on the official website of the Indian Patent Office is as usual playing truant (even at the time of publication of this post).

Delhi High Court Enforces Novartis’s INDACATEROL against CIPLA

In a 143-page judgment pronounced on January 9, 2015, Justice Manmohan Singh of the Delhi High Court granted an injunction in favour of Novartis enforcing its patent 222346 on the bronchodilator drug Indacaterol against Cipla. Extracted below are the observations of the Court on the options available to it and operative portions from the decision (In the next post, I will present my analysis of the decision):

“121. Let me therefore ascertain as to what tools are available on record in order to enable to perform this duty of striking the balance between the parties. The said tools can be discerned from the pleas raised by the parties and position which they have taken the same can be summarized in the following manner:

a) Before starting of hearing in the injunction application in the present case, the statement was made on behalf of the plaintiffs that they are agreeable to license its patented product to the defendant subject to the defendant’s agreeing that the plaintiff would allow the defendant’s to import its product and work on profit sharing basis. In response thereto, the defendant refuses to consider the said offer as it is interested in conducting the manufacturing activities in India as according to the defendant that the merely importation would still lead to monopoly situation which is the ground of the tribunal to interdict for a compulsory license under Section 83 and 84 of Patent Act and upon which I cannot prematurely decide the same and perform the role of compulsory licensing tribunal at this stage without fact finding and evaluation of evidence and correctness of the stand of the parties.

b) The defendant on the other hand suggested that the court can mould the relief in its written submissions and also pleads that the court may fix up the royalty which can be ordered to be deposited before the court subject to the trial of the present suit. I find this approach again to be inequitable. This is due to the reason that in the present case, the court is not proceeding to hold that there exists a credible defence raising the grounds of the invalidity of the patent (though the defendant has raised the said grounds but the same are neither explained properly nor the same are relevant in view of the contra material on record and are distinguished by the plaintiffs for which the defendant has not provided any further answer) but is proceeding to observe on prima facie basis that there exists a valid patent and the defendant could be provided a permission to manufacture subject to payment of the royalty as an alternative to injunction so that the inventor is rewarded. Thus, the alternative to injunction approach for carrying out the activities which would otherwise be an infringement but for the public interest cannot be misunderstood on presumptive basis that the amounts are secured in the court subject to trial which means that the defendant would continue to use the invention with the plaintiff getting nothing until the trial of the suit gets concluded (without approaching the appropriate forum which is compulsory licensing court) when prima facie case has been made out for infringement and all other circumstances warrants the injunction. That is the reason why, I cannot agree with the proposal of the defendant that this court should permit the defendant to manufacture the patented product by observing that the public interests warrants so without recompensing the plaintiff realistically at this stage and merely seeking a deposit in the court which would lead to all other generic companies would be taking the same route without actually rewarding the inventor in practice. This approach was never contemplated by the US courts nor was such jurisprudence ever intended to be laid down by this court even.

c) The third tool which exists at this stage in my hand is to fix up the royalty as an interim measure as to what sort of the royalty would be reasonable and practicable so as to suitably recompense the plaintiff as an inventor. In order to perform this task, I have gone through the records of the case. There exists sale figures of the plaintiffs and the defendant also states that it has sold 12148 unit of drug in the month of October, 2014. I find that the said material again is not adequate in order to understand the profit margin of the either side and further perform calculation on the basis of the proximate loss or detriment to be caused to the plaintiff in terms of financial loss or otherwise in order arrive at the figure of reasonable royalty. Furthermore, the said fixation of the royalty by this court on the monthly basis would be against the scheme of the Act when there exists a mechanism under the Act to seek compulsory license and the domain of the tribunal is prescribed under the Act. Thus, it would be neither wise nor it is justifiable for me to comment on the sum of the royalty on per monthly basis or per annum basis without analyzing the relevant material on record to be presented before the court. I would say that in case the defendant was really interested in paying the royalty on practicable rates without hiding anything from the court, then the defendant ought to have proposed the concrete proposals to the court and discussions could have been made by it in detail in the written submissions as to what reasonable sum can be arrived at between the parties as an interim royalty in lieu of the injunction."

Operative Portion 

"130. The question to be asked at this stage is whether there exists any such circumstance showing the extreme demand of the patented product in question as per the material available on record showing imminent need or dire straits reflecting the plaintiffs inability to provide the medicine in question to the consumers except the concerns emerging from articles which are noteworthy yet general in nature. I find that there is no material on record suggesting the demand of the said patented product outstripping the supplies on the basis of the public interest. Rather, there exists a contra material on record wherein the plaintiff is stated to have a surplus medicines available and agrees to further accelerate the supplies if need be.

131. The main question in the present case before Court is whether the Court will allow a party to infringe the registered patent which is prima facie held to be valid, the infringement is established and there is no credible defence raised by the other side. The answer of this question is "NO". Under these circumstances, the Court would never encourage the infringement in view of the exclusive and statutory rights granted under section 48 of the Act. The effect of registered patent is defined in the statute and the same is not capable of being misunderstood. The statutory and monopoly rights cannot be reduced to a nullity as by virtue of section 48 of the Act till the term of validity of the suit patents, the plaintiff is entitled to prevent any third party who does not have its permission from the act of making, using, offering for sale, selling or importing for those purposes an infringing product in India. In the present case, the compulsory licence has not been granted by the authority to the defendant. Even its application for the same is not pending. Merely the grounds and conditions stipulated under section 83 and 84 of the Act do not absolve the defendant to infringe the registered patent.

132. Accordingly, in the facts and circumstances of the present case, the following directions are passed in order to balance the interest of the parties in the interim:

a) The defendant is restrained by itself or through its directors, group company, associates, divisions, assigns in business, licensees, franchisees, agents, distributors and dealers from using, manufacturing, importing, selling, offering for sale, exporting, directly or indirectly dealing in Active Pharmaceutical Ingredient (API), pharmaceutical products, compound or formulation containing INDACATEROL, specifically its Maleate salt, namely INDACATEROL Maleate alone or in combination with any other compound or API or in any other form as may amount to infringement of Indian Patent No.222346 of the Plaintiff No.1 until the determination of the pleas raised by the defendant for seeking the compulsory licensing if so filed shall be determined on merit and after hearing of parties in favour of defendant, otherwise, it would continue during the pendency of the suit.

b) If such an application is filed by the defendant, under those circumstances, the directions are issued to the controller or to the relevant authority to decide the application for seeking compulsory licensing within the period of six months from the date of filing the application within two weeks from the pronouncement of the order.

c) The defendant is at the liberty to move an application seeking modification/ vacation of the interim injunction in case the application seeking compulsory licensing is decided by the competent authority in its favour or the parties otherwise arrive at some consensus on the licensing terms.

With these observations, the application, being I.A. No.24863/2014, is disposed of. It is clarified that all the findings arrived by this Court are tentative which shall have no bearing at the final stage of the suit as well as at the time of deciding the application for compulsory licence, if filed by the defendant.”

Thursday, January 8, 2015

Powers of the Competition Commission to deal with Exploitative Abuse

Most students and practitioners of Competition law are aware that Section 4 of the Competition Act, 2002 deals with abuse of dominant position. Among the various proscriptions in the provision, direct or indirect imposition of unfair or discriminatory prices (including predatory prices) in purchase or sale of goods or services by a dominant entity is deemed as abuse by the entity of its market position under Section 4(2)(a) of the Act.

Of the three kinds of pricing referred to in the provision, predatory price is defined in the explanation to the provision, whereas there is no express guidance on what constitutes “discriminatory price” and “unfair price”. Since the Act uses two distinct terms which are capable of being ascribed independent meanings, they must be recognized as two different forms of abuse by a dominant entity, which are also distinct in the consequences for the victim of the abusive conduct.

Discriminatory pricing results in what the literature broadly calls exclusionary abuse, whereas unfair pricing is understood to lead to exploitative abuse. Between the two, what constitutes discriminatory pricing is relatively easier to understand compared to unfair pricing, notwithstanding the absence of definitions for both in the Act. It is the interpretation of unfair price that poses the challenge of subjectivity, which in turn calls for safeguards to prevent imputation of a meaning which was never intended by the Legislature.  

As stated earlier, the Act does not define “unfair price”. Section 2(z) of the Act states that words and expressions used but not defined in this Act and defined in the Companies Act, 1956 shall have the same meanings respectively assigned to them in the latter statute. Neither the Companies Act, 1956 nor the Depositories Act, 1996 appears to define “unfair” or “unfair price”. The definitions of “unfair trade practice” in the Consumer Protection Act, 1986 or the erstwhile MRTP Act, 1969 too do not seem to be of help in understanding the meaning of “unfair” from the perspective of pricing.
This requires us to look for interpretation of provisions in foreign legislations which are in pari materia with the Indian provision. Article 102 of the Treaty on Functioning of the European Union (TFEU) is similar in language to Section 4(2)(a) of the Competition Act. However, in the EU too, the body of case law on exploitative abuse is significantly small compared to judicial guidance on exclusionary abuse. The trend in the EU too perhaps may be attributed to the reluctance of the European Commission to deal with an inherently subjective enquiry such as exploitative abuse.
Whatever little case law exists appears to interpret “unfair” as “excessive”.  The frequently cited case on unfair/excessive pricing in the EU is the decision of the European Court of Justice in United Brands Company v. Commission of the European Communities (C-27/76 [1978]), wherein the following test was laid down:
“The questions therefore to be determined are whether the differences between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.”

Of the two questions which need to be answered under the test, the first calls for the establishment of absence of a correlation between the costs actually incurred and the price charged by the seller for a good or service. This would require the antitrust regulator to also assess the fairness of the profit margin earned by the seller. The larger policy implication is that dominant players could be expected to charge fairly, which obligation does not apply to entities which are not dominant. Simply put, since a dominant player, by definition, is one who can act independent of market forces, he is expected to adhere to higher standards of conduct given the potential for abuse and the consequences for consumers and market as a whole.

Having said this, the question that arises with respect to application of the United Brands test is this- is the regulator expected to merely establish the absence of a reasonable correlation between costs and selling price to arrive at a finding of unfair pricing? Or is it expected of the regulator to first arrive at what is fair before commenting on the unfairness of the price? It is one’s opinion that in either approach, the seller cannot be left in the dark as to what is truly fair in order for him to avoid being hauled up a second time for unfair pricing. In other words, although an enquiry on exploitative abuse requires the regulator to perform the role of a price regulator, it could be said that the regulator may also be called upon to set prices. That said, this is not merely an issue of policy, since a regulator who is the creature of a statute cannot exercise powers which have not been vested in him by the statute.

In the Indian context, this boils down to a simple question- whether the Competition Commission has the power to set/fix prices, and not just comment on its unfairness? To answer this, one must interpret Sections 27 and 28 of the Competition Act which spell out the powers of the Commission to deal with abuse of dominant position. Specifically, Section 27(d) empowers the Commission to direct that agreements which are in contravention of Section 4 “shall stand modified to the extent and in the manner as may be specified in the order by the Commission”. Section 27(g) is even broader since it permits the Commission to pass such orders or issue such directions it may deem fit.  Similarly, Section 28(2)(a) empowers the Commission to vest property rights, which implicitly includes creation of interest in favour of third parties by way of a license. The combined interpretation of these provisions makes it abundantly clear that the Commission has the necessary power to fix prices in a given case if the case so warrants.

For instance, in a situation where the agreement relates to a patent license between a patentee who is a dominant entity and another entity which is the licensee, the royalty tariff demanded by the dominant patentee could be accused of abuse under Section 4 for unfair/excessive pricing. In exercise of its power under Sections 27(d),(g) and 28(2)(a) based on the language of the provisions, it appears possible for the Commission to modify and spell out the prospective royalty tariff. Simply stated, apart from finding the extant royalty tariff unfair, the Commission has the express power to dictate the future tariff.

This conclusion typically raises objections relating to the ability/expertise of the Commission to set future commercial terms in highly specialized agreements where domain/sectoral expertise is called for to understand the commercial practicalities of the sector. But that objection is not one of statutory power, it is one of the Commission having the wherewithal/expertise to do justice to the nature of enquiry. Therefore, such an objection cannot be used to argue that the Commission lacks statutory authority to fix prices since it is the language of the Act that is decisive of the issue.  In any event, this is not an insurmountable challenge since the Commission has the power to consult experts in the relevant domain before it fixes future tariff in specialized contexts.

The long and short of it is that the Competition Commission has the power to enquire into exploitative abuse by a dominant entity and also has broad express powers to fix prices, where warranted.