Exemptions from Section 3: Intellectual Property, Exports and Joint Ventures

Section 3 contains three carve-outs. Section 3(5)(i) preserves the right to restrain infringement of intellectual property and to impose reasonable conditions necessary to protect it. Section 3(5)(ii) preserves agreements relating exclusively to exports. And the proviso to Section 3(3) removes the presumption from a joint venture that increases efficiency. None of the three is a blanket exemption: the first is limited by the word reasonable, the second by the word exclusively, and the third removes only the presumption and not the prohibition.

1. The Intellectual Property Saving

Four propositions follow, and they should be stated in this order in any answer on the subject.

1. The grant is not the objection. Competition law does not quarrel with the exclusivity that the intellectual property statutes confer. What it examines is the manner in which the right is exercised.
2. The saving is conditional. It protects reasonable conditions as may be necessary for protecting the right. A condition that goes beyond the scope of the right, or beyond what its protection requires, is not saved, and the burden of showing that a condition is reasonable and necessary lies on the party asserting the saving.
3. The list is closed. Only the enactments named are covered. A right arising from confidence, from know-how or from a foreign registration not corresponding to one of the listed statutes does not attract the saving.
4. Section 4 has no equivalent. The saving is expressly confined to Section 3. An enterprise dominant by reason of its intellectual property is subject to Section 4 in full, which is why most Indian litigation in this field has concerned abuse rather than agreement.

1.1 Conditions inside and outside the right

• Ordinarily within the saving. Field of use restrictions, quality control obligations in a trade mark licence, a requirement to mark the product, confidentiality obligations, and a restriction on sub-licensing.
• Ordinarily outside it. Tying the licence of a patent to the purchase of unpatented goods; royalty obligations continuing after expiry of the right; a prohibition on challenging the validity of the right; grant-back clauses requiring exclusive assignment of the licensee's improvements; and a restriction on the licensee dealing in competing products unrelated to the protected subject matter.

The commonest error is to treat the saving as covering everything done under a licence. It covers what the right itself requires. A patentee may insist that the licensee use the invention only as licensed; he may not use the licence as a means of regulating the licensee's conduct in a market the patent does not touch.

2. Licensing under the Three Principal Statutes

• Patents. The Patents Act, 1970 itself contains competition-like provisions. Section 140 voids certain restrictive conditions in a licence, including a requirement to acquire from the licensor articles not protected by the patent and a prohibition on using articles supplied by another. Chapter XVI provides for compulsory licences where the reasonable requirements of the public are not satisfied, the invention is not available at a reasonably affordable price, or it is not worked in India. These are alternatives to competition enforcement and are the basis of the argument that the Patents Act occupies the field.
• Copyright. The Copyright Act, 1957 provides for compulsory licensing where a work is withheld from the public. In Entertainment Network (India) Ltd. v. Super Cassettes Industries Ltd., (2008) 13 SCC 30, the Supreme Court held that the owner of a copyright does not have an absolute right to refuse to license, that a refusal which amounts to withholding the work from the public may attract compulsory licensing, and that the terms must be reasonable. The decision predates the enforcement of Section 3 but states the principle that exclusivity does not include the right to deny the public access on unreasonable terms.
• Trade marks. A trade mark exists to identify origin, and a licensor may impose quality control because without it the mark ceases to perform its function. Conditions that go beyond quality control, such as restricting the licensee's dealings in unrelated goods or fixing resale prices under cover of brand protection, are outside the saving.

3. Standard Essential Patents and FRAND

A standard essential patent is one that must necessarily be infringed in order to implement a technical standard, such as a telecommunications standard. Because the standard forecloses alternatives by design, the holder of such a patent has, in respect of the standard, a position no competitor can challenge. Standard setting organisations therefore require members to commit to license on fair, reasonable and non-discriminatory terms, described as FRAND terms, as the price of having their technology included.

1. Hold-up. The patent holder, having obtained inclusion in the standard, demands royalties far above what the technology would have commanded before the standard locked implementers in. The competition complaint is that the royalty is excessive or discriminatory, or that the threat of an injunction is used to extract terms no willing licensee would accept.
2. Hold-out. The implementer uses the technology and refuses to take a licence, relying on the FRAND commitment and on the difficulty of obtaining an injunction. The patent holder's complaint is that the commitment is being used to devalue the right.
3. The royalty base. A recurring dispute is whether the royalty should be calculated on the price of the whole device or on the value of the component implementing the standard. Calculating on the device price captures value attributable to features the patent has nothing to do with.
4. Non-discrimination. Offering different rates to similarly placed implementers is the second limb of the complaint, and in Indian proceedings it has been raised alongside allegations of imposing non-disclosure agreements that prevent implementers from comparing terms.

4. The Export Exemption

Section 3(5)(ii) provides that nothing in Section 3 shall restrict the right of any person to export goods from India to the extent to which the agreement relates exclusively to the production, supply, distribution or control of goods or provision of services for such export. The rationale is that the Act protects competition in markets in India, and an agreement whose effects are felt only abroad does not harm Indian consumers.

• The word exclusively is the limit. An arrangement among exporters that also regulates their conduct in the domestic market, or that restricts supply at home in order to sustain the export price, is outside the exemption entirely.
• It is not symmetrical. Section 32 permits the Commission to examine conduct outside India that affects Indian markets, so an import cartel abroad is within the Act while an export cartel operating only abroad is not.
• Foreign law is unaffected. An Indian export cartel exempt under Section 3(5)(ii) remains liable under the competition law of the country where its effects are felt, which increasingly applies its own effects doctrine.

5. Joint Ventures and the Efficiency Proviso

The proviso to Section 3(3) states that nothing contained in that sub-section shall apply to any agreement entered into by way of joint ventures if such agreement increases efficiency in production, supply, distribution, storage, acquisition or control of goods or provision of services. It is the only place in Section 3 where efficiency operates as an exemption rather than as a factor, and its scope is narrow.

1. It removes the presumption, not the prohibition. The agreement is still examined under Section 3(1), and if it causes an appreciable adverse effect it is void and the parties are liable.
2. There must be a genuine joint venture. The parties must combine resources or functions to do something neither does alone. An arrangement that leaves each party operating independently, and does no more than coordinate their conduct, is not a joint venture whatever it is called.
3. Efficiency must be shown. The proviso is conditional, and the increase in efficiency must be demonstrated by evidence rather than asserted.
4. Ancillary restraints are examined separately. Restrictions necessary to make the venture work, such as an obligation to contribute exclusively to it, are treated as part of it; restrictions extending to the parties' conduct outside the venture are not, and are examined under Section 3(3) in the ordinary way.

6. Related Topics and Provisions