Is it good for the Indian economy if Wipro starts purchasing all of the promising small, entrepreneurial firms in India? Do Indian consumers benefit if Cipla and Ranbaxy engage in joint ventures for the research and production of new drugs? These types of questions are characteristic of a technologically advanced economy and are the types of questions India’s new Competition Commission (the “CCI”) will confront, as the CCI seeks to protect India’s marketplaces. This article seeks to identify whether India’s competition law is sufficiently equipped to resolve these questions, and where areas of concern are identified, looks to Canadian competition law for possible assistance.
- The (Collaborative) Innovation Imperative
As various panels appointed by governments in both India and Canada have identified, technological innovation is critical to the prosperity of each nation and its citizens. According to the OECD, technological innovation is typically defined as the implementation or commercialization of an invention arising from research and development work (OECD, Oslo Manual). It can range in significance from a mere incremental improvement to disruptive technologies, such as electric power.
The economic research driving this call to action could not be more compelling, as seven-eighths of economic growth in the United States between 1909 and 1949 according to economist Robert Solow, and three-quarters of economic growth since then according to the United Stated Department of Commerce, is attributable to technological innovation. This relationship has only grown stronger, such that today, one could look to any number of countries, especially those without significant amounts of natural resources, spending heavily to build domestic capability for technological innovation. China is a poignant example. Domestic technological innovation is therefore imperative if India is to achieve its national ambitions, as illustrated by Vannevar Bush in 1945 with reference to the United States. Innovation in high-technology industries, such as information and communications technology and pharmaceuticals, is especially important because these industries are responsible for major disruptive change to the global economy, such as through the development of the Internet. Technological innovation in high-technology industries often generates tremendous wealth and prosperity.
The “secret sauce” for technological innovation depends on a wide range of factors, and sometimes differs between industries and the stage of development of an industry. Innovation has historically been primarily the result of intra-firm research and development. However, as experience has demonstrated there is a range of potential benefits if the innovation process includes activity outside the firm, it is increasingly becoming a collaborative activity between and among firms in similar industries, dissimilar industries, universities and governments. The mechanisms permitting this transfer of technology include contractual arrangements, joint ventures and especially mergers and acquisitions, a frequent event in the ever-innovative Silicon Valley. However, especially since its modern genesis in the United States at the beginning of the 20th century, competition law has been particularly concerned with conspiring competitors, as consumers are usually harmed by these arrangements, such as in the event of price-fixing. Rapidly changing high-technology industries are no different, and harm to consumers, innovation and the economy is still very much of concern (Barnett, Competition Enforcement in an Innovative Economy).
In India, harmful anti-competitive conduct has historically remained free from government intervention, as the previous competition law, the Monopolies and Restrictive Trade Practices Act, 1969, was antiquated and rarely enforced. In May 2009, a modernized Competition Act, 2002 (the “Act”) came into effect, as did the provisions governing combinations, or mergers, on June 1, 2011.
Are India’s new competition laws and the enforcer of those laws, the CCI, equipped to deal with the nuances of protecting consumers, innovation and the economy, while still permitting the collaboration required for innovation to take place?
- Competition Laws Relevant To Collaborative Innovation
Competition law is a policy lever to facilitate technological innovation; however, it is not of the same type as patent law, tax law, or other levers that provide an explicit incentive to innovate. Instead, much as property rights do, competition law is a way of protecting the marketplace, including participants in the marketplace, by seeking to avoid the deterrence or prevention of innovation that can be caused by a range of harmful behaviours.
The Act created the CCI and empowered it with wide powers of investigation and the ability to levy significant financial penalties. Two provisions are of particular relevance to collaborative innovation: anti-competitive agreements and dealing with business combinations. Similar provisions exist in Canada’s Competition Act (the “Canada Act”).
- Anti-Competitive Agreements
Preventing conspiracy between competitors (the indicia of which are common in many countries, effectively consisting of competitors agreeing not to compete, typically through the fixing of prices, outputs or geographical markets) is a longstanding pillar of competition law. Whether referred to as a conspiracy or a cartel, the static economic effects are typically the same: prices are higher, output is reduced and consumer welfare is harmed. The dynamic effects, or the “impact on the optimal introduction or improvement of products and production processes” according to Canada’s counterpart to the CCI, the Competition Bureau (Competition Bureau, Efficiencies in Merger Review), are less well studied, but typically the static harm will outweigh any potential benefit created by increased innovation, and further, a competitor that is not competing has little incentive to innovate.
While conspiracy between competitors is almost always harmful, there are a wide range of agreements involving the sharing of, development of, or transfer of, technology between and among competitors. Some of these may be, on a net basis, anti-competitive. Many of them, however, are pro-competitive, owing to the technological innovation or dynamic efficiencies that are created. Policing these agreements correctly is an exceedingly difficult task.
Looking first to India, section 3 of the Act is the primary tool for stopping conspiracies. It provides that no person, enterprise or association thereof may enter into an agreement in respect of production, supply, distribution, storage, acquisition or control of goods or services, which causes or is likely to cause an appreciable adverse effect on competition within India. Sub-section 3(3) of the Act presumes that particularly harmful behaviour, such as price-fixing, satisfies this threshold.
This provision is similar to one of the two principal provisions of the Canada Act targeting anti-competitive agreements. The first is a flexible analysis similar to section 3 of the Act, in section 90.1 of the Canada Act. Instead of “appreciable adverse effect on competition”, the Canada Act imposes a similar threshold, although only of “competitors” of one another: whether an agreement “prevents or lessens, or is likely to prevent or lessen, competition substantially in a market…” (Canada Act, s. 90.1(1)). Under this flexible approach, this analysis considers a range of factors set out in the Canada Act, as well as an accompanying enforcement guideline created by the Competition Bureau (Competition Bureau, Competitor Collaboration Guidelines).
The Canada Act’s second principal provision combating conspiracy, section 45, requires no such flexible analysis. If a person is found to have engaged in the fixing of price, output or the production or supply of a product with a competitor, criminal sanctions will be applied. In a way, this is similar to section 3(3) of the Act, in that both target these particularly harmful activities and pay no regard to competitive effects, although section 3(3) carves out “joint ventures” from the presumption of an appreciable adverse effect.
- Business Combinations / Mergers
A firm wishing to expand or acquire a new competency typically faces a binary choice: grow organically or acquire an existing firm. It is the latter that permits a firm to rapidly accumulate market power and potentially even monopoly power, which attracts the attention of an enforcement body such as the CCI. In any developed economy, business combinations are a frequent occurrence. As noted above, they have also increasingly become a common vehicle for acquiring technology and the talented people that create and commercialize that technology.
Business combinations occur so frequently, in fact, that much of the merger review provisions under the Act are procedural in nature (Act, s. 5), to enable the CCI to gather relevant information quickly and assess whether a proposed merger will have an appreciable adverse effect on competition within a relevant market in India (Act, s. 6(1)). The Canada Act is largely similar in structure, by setting out procedure of merger review and only requiring medium and large firms to submit to the merger review process and governing the timing of the merger review. Also similar is the test for whether to approve or challenge a merger, based on whether it prevents or lessens, or is likely to prevent or lessen, competition substantially in a trade, industry or profession in Canada. One difference is that in Canada, the Competition Bureau will analyze a range of factors, contained in both the Canada Act and in an accompanying enforcement guideline, to assess whether the transaction will pass the test.
III. Is India Equipped For Nuances In This Analysis?
The law relating to conspiracies and merger reviews is quite similar in Canada and India, subject to some subtle differences. However, applying these laws is the difficult part of safeguarding the marketplace, and doing so requires economic analysis of a given situation.
Unfortunately, the economic tools available to analyze the nuances of whether a particular arrangement or merger is pro-competitive or will increase technological innovation, are not nearly as well established as they are for static price or output effects, according to Gwill Allen and Alan Gunderson (19). As both the Act and the Canada Act are relying on this common body of economic theory, these challenges are common to both the CCI and the Competition Bureau.
In seeking to ensure that the CCI is best able to effectively enforce the Act, I offer three suggestions which may be of assistance.
- Insulate Non-Cartel Type Agreements From Serious Penalties to Avoid a Chilling Effect on Innovators
Currently, section 27 of the Act enables the CCI to apply onerous financial penalties, among a range of other remedies, against any type of agreement it determines to have an appreciable adverse impact on competition in India. While the ability to levy significant penalties may be desirable on occasion, the threat of penalties as significant as criminal sanctions in other countries can discourage firms from engaging in potentially beneficial alliances. This was a recognized shortcoming in Canadian competition law relating to anti-competitive agreements, which until 2009, was a regime built around criminal sanctions. In 2009, it was revised such that most agreements are analyzed under a flexible framework, considering a broad range of factors, usually with no potential criminal sanctions. The new framework acts to (i) prevent any chilling effect on most collaboration, since they don’t involve problematic behaviours, such as price-fixing, and (ii) identify and protect specific positive arrangements, including commercialization and joint selling agreements, research and development agreements, information sharing agreements and joint production agreements. Accordingly, while creating a flexible analysis, it retained a provision for criminal sanctions against serious conspiracies, in recognition that the harmful effects of such an arrangement will outweigh the benefits potentially created.
The CCI’s broad discretion in applying section 3, including levying significant penalties for a common technology transfer transaction, can create uncertainty amongst firms in arranging their affairs. An interpretive or enforcement guideline to provide similar safeguards could inspire confidence among firms, such as reserving serious penalties permitted by section 27 of the Act for serious anti-competitive conduct addressed in sub-section 3(3) and outlining types of agreements presumed to be beneficial, such as certain types of joint research and development agreements.
- Address The Shortcomings of Economic Analysis for High-Technology Industries
Competition law relies on economic theory to identify anti-competitive harm. However, in rapidly changing high-technology industries, traditional economic tools, such as an analysis of static price and output effects, can be misleading. For example, by focusing on traditional price or output effects, an analysis could entirely miss the dynamic effects of an arrangement, either positive or negative, and intervention by the CCI could significantly harm innovation (Rosch). Unfortunately, at the same time, the potential for anti-competitive harm is still very much a reality.
Various studies have identified that to better analyze high-technology industries, one should consider: (i) dynamic efficiencies, as defined above, (ii) qualitative factors, perhaps including incentives for innovating, and (iii) the presence of vigorous, innovative competitors, known as “mavericks”, who are generally beneficial to consumers because they often create downward pressure on prices, innovate and come up with new products, which disrupts the power of incumbents in a particular market.
With respect to combinations, encouragingly, the Act refers the CCI to a list of factors when determining whether a combination will result in an appreciable adverse effect on competition in the relevant market (Act, s. 20(4)). Explicit reference is made to considering the “nature and extent of innovation” likely to be generated or destroyed by the combination, as is any removal of “vigorous and effective competitors” (Act, ss. 20(4)(l) and (m)). The Competition Commission of India (Procedure in regard to the transaction of business relating to combinations) Regulations, 2011 (No. 3 of 2011) (the “Regulations”) note that information must be disclosed by the combining parties to speak to these considerations, including any new technologies in an industry, research and development and intellectual property rights (Regulations, ss 11.10(d) and (e), 11.18-11.20). Finally, just as Canadian merger review provisions provide for a “defense” if pro-competitive efficiencies outweigh anti-competitive effects (Canada Act, s. 96), the Act includes such considerations by analyzing the contribution to economic development and any outweighing of adverse impact (Act, s. 20(4)(n)).
With respect to anti-competitive agreements, the Act is similarly equipped to incorporate these factors into the analysis of whether harm has occurred. Sub-sections 19(3)(e) and (f) of the Act address the consideration of “improvements in production or distribution of goods or provision of services”, a functional definition of innovation, and “promotion of technical, scientific and economic development by means of production or distribution of goods or provision of services”, which also captures innovation and broader dynamic and qualitative effects.
The CCI should make full use of these provisions, in conjunction with the latest in economic theory, as the result will be a much better analysis of competitive benefits and harm.
- Provide Explicit Guidelines Around Patents and the Use of Patents
Intellectual property, and in particular, patent law, is a core component of a nation’s innovation policy. A patent is the statutory incentive for innovation, offering a temporary monopoly on an invention in exchange for disclosure of that invention into the public domain. However, as it is charged with protecting the economy, partially through hostility towards monopolies, competition law is inherently in tension with patent law. At the same time, keen management of this tension is in order, as both patent law and competition law have goals of promoting innovation.
The use of patents engages competition law in a variety of ways. As a contemporary example, for a hardware manufacturer in the information and communications technology industry, a major aspect of a firm’s business is the accumulation of patents to protect the ability to sell products and the incorporation of technological standards, such as 3G wireless technology, into their products. Building a product that is compatible with a standard often involves the declaration of patents covering that particular standard standard to the particular standard setting organization (“SSO”). There are a number of competition law issues with SSOs, some owing to the fact that a SSO is a collection of competitors or firms in similar industries agreeing to adopt particular technologies and engage in other conduct which can sometimes look like a conspiracy and the fixing of prices for key inputs. Typically, however, SSOs are pro-competitive.
Similarly, a firm participating in a standard can “ambush” that standard by not informing the SSO about a relevant patent which covers part of the standardized technology, then suing the other firms using the standardized technology afterwards for patent infringement, for a much higher amount than would otherwise be possible.
Another way that patent law is increasingly engaging competition law around the world is in considering how to deal with an increasing amount of “patent troll” litigation, particularly in the United States. A patent troll is an entity which does not produce products and instead acquires and holds patents simply to assert them for royalties or settlements in court. It is far from clear that such patent assertion is pro-competitive or that it encourages innovation, and indeed, many academic authors suggest this behaviour is likely harmful to innovation.
Unlike Canadian competition law, with a set of enforcement guidelines which provide limited direction to firms (Competition Bureau, Intellectual Property Enforcement Guidelines), or United States competition law, with a set of enforcement guidelines and a substantial body of relevant court decisions and, there is little guidance offered to firms operating in India under the Act. In fact, sub-section 3(5) of the Act offers protection for anti-competitive conduct simply because it “restrain[s] any infringement of… [an intellectual property right]”. This provision, and the lack of other applicable guidance, does not appear to equip the CCI with the ability to thoroughly identify competitive effects caused by certain uses of patents, analyze whether harm is occurring, and intervene accordingly. The CCI may find it helpful to refer to the body of analysis in other jurisdictions, especially Canada and the United States to remedy this shortcoming in the Act.
Technological innovation is imperative to national development. The tricky question for the CCI is that collaboration is increasingly required for maximum technological innovation, yet collaboration may very easily cause anti-competitive harm. India’s new competition laws generally provide the tools necessary to successfully navigate around discouraging innovation, between the Scylla of “heavy handed” enforcement, and the Charybdis of no enforcement at all. For the particularly difficult problems, drawing upon experience with these issues in Canada and in the United States is helpful, and in particular, Canada’s recent amendments and enforcement guidelines offer the CCI guidance when applying the Act to novel situations.
Chris Hannesson is a Student-at-Law, Davies Ward Phillips & Vineberg LLP.
Chris graduated from the University of Western Ontario, Faculty of Law, in 2011 and from the Beedie School of Business at Simon Fraser University in 2008. Chris currently resides in Toronto, Ontario, Canada. Chris can be contacted at firstname.lastname@example.org.
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By Chris Hannesson