Analysis of the Trade Secret Laws and Anticompetitive Practices under the Competition Law Regime in India

In this article, the author has done an analysis of the Trade Secret Laws and the regulation of the anticompetitive practices prevailing in the Indian Competition Law Regime. This analysis is of utmost importance, even more so after the Liberalisation, Privatisation and Globalisation of the Indian economy, as this will connect the anticompetitive practices prevalent in the trade secret laws with the competition laws in India. This article tries to demonstrate the evolution of the competition law regime in India along with the concepts of anticompetitive practices and abuse of dominant position and their relation to Trade Secret Laws.

Background

The Indian economy was opened up for entry of foreign corporations in the year 1991 through Liberalisation, Globalisation and Privatisation, also known as the LPG Reforms. The Indian Government in the pursuit of increasing the economic efficiency of the country did acknowledge the liberalisation privatization globalization (LPG) era while liberalizing the economy and reducing the government control. Domestic Corporations, which did not have as many resources as the foreign corporations, also asked for anticompetitive laws to be brought in force to keep in check the anticompetitive practices which would pose a danger to their existence in the market. After the LPG reforms were effectuated, the Monopolies and Restrictive Trade Practices Act, 1969 became redundant as the competition automatically gained a boost because of the booming international trade. This is another reason why the Legislature in India had to come up with a law which was more suited for the current liberalised, globalised and privatised Indian economy. The new law also had to comply with the World Trade Organisation’s agreements on anticompetitive practices.

In order to understand the Competition Law regime, the reasons for enacting the Monopolies and Restrictive Trade Practices Act, 1969 (hereinafter referred to as the ‘MRTP Act’) should be understood. The Statement of Objects and Reasons states “The bill is designated to ensure that the operation of the economic system does not result in the concentration of economic power to the common detriment and to prohibit such monopolistic and restrictive trade practices as are prejudicial to public investment.”^[1] It can be understood that the main aim for enacting this act was to break any  concentration of economic power which would be detrimental, for the regulation of monopolies and for “Control over and prohibition of monopolistic and restrictive trade practices as are found to be prejudicial to public interest”.^[2]

The MRTP Act, 1969 provided for the formation of a Monopolies and Restrictive Trade Practices Commission under section 5 of the MRTP Act, 1969. Section 12 of the MRTP Act stated:

“The Commission shall for the purposes of any inquiry under this act have the same powers as are vested in a Civil Court under the Code of Civil Procedure, 1908 (5 of 1908)”.^[3]

Other powers of the Commission are also listed in this section. This act was amended whenever the need arose but still, it fell short of putting an end to anticompetitive practices and of fostering competition in the trade. Therefore, after the LPG reforms had been effectuated, the government of India appointed the Raghavan Committee on Competition Policy  in October 1999. The committee in its report stated numerous points that can be summarised as follows: –

1. That ‘The Indian Competition Act’, a new statute maybe formulated along the lines of the recommendations of the report.

2. The MRTP Act,1969 may be repealed and thereby the MRTP Commission may be wound up. Also, the provisions relating to unfair trade practices need not be given a space in the newly to be formulated Indian Competition Act as they are already present in the  Consumer Protection Act, 1986.

Brief Overview of the Competition Act, 2002

On the recommendation of the Raghavan Committee report, the Competition Act, 2002 was enacted. Section 7 Of the Competition Act provides for the establishment of the Competition Commission of India and the powers, functions and duties of the Commission have been mentioned in chapter IV of the Competition Act. A writ petition had been filed in the Supreme Court of India challenging the constitutional validity of rules framed under the Competition Act. In the case of Brahm Dutt vs. Union of India,^[4] a recommendation was made in which it was recommended that “If an expert body is to be created as submitted on the behalf of the Union of India consistent with what is set to be the international practice, it might be appropriate for the respondents to consider the creation of two separate bodies, one with expertise that is advisory and regulatory and the other adjudicatory. This followed up by an appellate body as contemplated by the proposed amendment, can go a long way, in meeting the challenge sought to be raised in this writ petition based on the doctrine of separation of powers recognised by the Constitution.”^[5] This recommendation of the Supreme Court led to the creation of the Competition Appellate Tribunal in 2007 and the MRTP Act was repealed in 2009. Sections 3 and 4 of the competition act, which relate to anticompetitive agreements and abuse of dominant power, respectively, came into force in 2009 whereas provisions related to merger control came into effect in 2011.

The Competition Act provides for the appointment of a Director General, which is the investigating wing of the Commission, under section 16(1) whose job is “assisting the Commission in conducting inquiry into contravention of any of the provisions of this Act and for performing such other functions as are, or may be provided by or under this Act.”^[6] The Commission has to mandatorily get a report from the director general, under section 26(1), but is not obligated to comply with the report. Section 16(2) talks about appointment of Additional, Assistant and Deputy Director General who will work under the supervision of the Director General but will also have his powers and will discharge the functions of the Director General.

Upon the recommendation of the Supreme Court in the Brahm Dutt case, a new chapter titled “Chapter VIIIA Competition Appellate Tribunal” was added to the Indian Competition Act. The procedure of the tribunal, the appointment of chairperson etc. are governed by this chapter. Section 530 says that the tribunal shall not be bound by the CPC and it “Shall be guided by the principles of natural justice”.^[7] The tribunal would serve as an appellate authority for the decision of the Competition Commission and all the appeals filed in the tribunal shall be governed by sections 53A to 53U of the Competition Act.

After the LPG reforms, the economy had undergone a shift from the monopolistic regime to a more open and competitive environment. The Competition Act cast a duty on the Competition Commission of India (hereinafter referred to as ‘CCI’) to keep a check on any practice which hampered the competitive nature of the market. Section 18 of the Competition Act which reads as ”Subject to the provisions of this act, it should be the duty of the Commission to eliminate practices having an adverse effect on competition, promote and sustain competition, protect the interest of consumers and ensure freedom of trade carried on by other participants, in markets in India: Provided that the Commission may, for the purpose of discharging its duties or performing its functions under this act, enter into any memorandum or arrangement with the prior approval of the Central Government, with any agency of any foreign country.”^[8] In the case of Competition Commission of India vs. Steel Authority of India Ltd., the Supreme Court of India ruled “The main objective of competition law is to promote economic efficiency using competition as one of the means of assisting the creation of market responsive to consumer preferences”.^[9] In the same case, the court listed the advantages of having competition in the market. The court stated, “The advantages of perfect competition are three-fold: allocative efficiency, which ensures the effective allocation of resources, productive efficiency, which ensures that the cost of production are kept at a minimum and dynamic efficiency, which promotes innovative practices.”^[10]

Anticompetitive Agreements

As mentioned earlier, anticompetitive agreements are mentioned and prohibited in Section  3 of the Indian Competition Act.

Section 3(2) reads as “Any agreement entered into in contravention of the provisions containing subsection (1) shall be void.”^[11]

Section 3(3) elaborates the agreements or decisions which would be presumed to have an adverse effect on competition. The factors for deciding if an agreement has an appreciable adverse effect on competition is different for agreements between competing entities, also known as horizontal agreements, and it is different for agreement between entities working at different levels in the same industry, also known as vertical agreements. Section 3 of the Competition Act clearly states that horizontal agreements which are related to price fixing, bid rigging, market sharing, output restrictions, etc. are void as these agreements have an appreciable adverse effect on competition in the market. This stance of the Competition Act is in accordance and compliance with the anti-cartel policy of the international authorities. But there are certain kinds of horizontal agreements which are not presumed to be void. These agreements are mostly between Joint Ventures. In the case of Joint Ventures, the benefits derived through these agreements are weighed against the adverse effect they have on the competition. If the Joint Ventures are enhancing the efficiency then even though hard core restrictions may have been imposed, these agreements will not be presumed to have an appreciable adverse effect on competition.

Vertical agreements are mentioned in section 3(4) of the Competition Act. This clause mentions  five different categories of vertical agreements and any agreement which falls into any of these five categories will be considered as void under subsection 1 of this section if that agreement has an appreciable adverse effect on the competition in the market. All the vertical agreements have been given a uniform and more lenient treatment as vertical agreements are beneficial and the benefits of these agreements should be weighed against the adverse impact they have on the competition in the market. Some of the benefits of vertical agreements are improved efficiency, prevention of free riding and increased inter-brand competition. On the other hand, vertical agreements have a negative impact as well like reduced intra-brand competition, compartmentalisation of markets and foreclosure of competition. Therefore, the benefits arising out of the vertical agreements should be contrasted with the adverse effects they have on the competition in the market before deciding on their voidability under section 3(1).

Section 3(5) provides for exemptions in two scenarios. The first one being ‘reasonable conditions’ being imposed on Intellectual Property Rights and the second being ‘agreements the subject matter of which is the right to export goods from India’.

Remedies for contravention of section 3 of the Competition Act are stipulated in section 27 of the act. The Competition Commission of India has the power to pass orders namely: –

“(a) direct any enterprise or association of enterprises or person or association of persons, as the case may be, involved in such agreement, or abuse of dominant position, to discontinue and not to re-enter such agreement or discontinue such abuse of dominant position, as the case may be;

(b) impose such penalty, as it may deem fit which shall be not more than ten per cent. of the average of the turnover for the last three preceding financial years, upon each of such person or enterprises which are parties to such agreements or abuse: Provided that in case any agreement referred to in section 3 has been entered into by any cartel, the Commission shall impose upon each producer, seller, distributor, trader or service provider included in that cartel, a penalty equivalent to three times of the amount of profits made out of such agreement by the cartel or ten per cent. of the average of the turnover of the cartel for the last preceding three financial years, whichever is higher;

(c) award compensation to parties in accordance with the provisions contained in section 34;

(d) direct that the agreements shall stand modified to the extent and in the manner as may be specified in the order by the Commission;

(e) direct the enterprises concerned to abide by such other orders as the Commission may pass and comply with the directions, including payment of costs, if any;

(f) recommend to the Central Government for the division of an enterprise enjoying dominant position;

(g) pass such other order as it may deem fit.”^[12]

It must be noted that even individuals can be held liable under this section. Any contravention of the orders of the Commission would have serious consequences which have been mentioned under section 42 of the Act. The consequences mentioned in this section are detention  in a civil prison for a term which may extend to one year and a penalty of up to Rupees 10 lakhs. The Commission also under special circumstances has the power to impose a lesser penalty under section 46 of the Act.

Abuse of Dominant Position

The provision relating to the Abuse of Dominant Position in the Competition Act is Section 4. It must be noted that the laws surrounding the abuse of a dominant position are highly inspired by the jurisprudence of the European Community. Article 82 of the European Community Treaty, 1957, talks about the abuse of a dominant position. In the Indian legislation, the dominant position has been defined in the explanation to section 4(e) of the Competition Act. It has been defined as, “a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to –

• Operate independently of competitive forces prevailing in the relevant market; or
• Affect its competitors or consumers or the relevant market in its favour”^[13]

Therefore, when the entity has a very huge market share and it is not affected by the forces of the market, then that entity is in a dominant position. When the entity is in a dominant position, it can influence the market. Another important point to be noticed is that, unlike the MRTP Act, the Competition act does not outrightly prohibit dominant position. It prohibits the abuse of such position under section 4(1) of the Act. The explanation in section 4 talks about dominance in the ‘relevant market’. The term ‘relevant market’ has been defined as “the market which may be determined by the Commission with reference to the relevant product market or the relevant geographic market or with reference to both the markets”.^[14]

After the determination of the relevant market, the next thing for consideration is if the entity is in a dominant position in that market and section 19(4) of the Competition Act lists out the factors which should be looked into before deciding this. The risk of infringing these factors should be looked into when deciding  the dominant position of an entity. While interpreting the concept of dominant position, the Competition Commission has to take into consideration the stance of the European Court of Justice on this concept. As has been stated earlier, dominance in itself is not forbidden but the abuse of such dominance is prohibited in the law. Section 4(2) of the act stipulates an exhaustive list of the activities which could amount to an abuse of dominant position.

If the Competition Commission is satisfied that any entity is abusing its dominant position in the relevant market, then it can pass all the orders which it could have passed in the case of anticompetitive agreements. Apart from these, the Competition Commission also has the power to order structural remedies under section 28(1) of the Competition Act. It must be noted that the Central Government can do this only on the recommendation of the Commission and the order will be corrective in nature rather than pre-emptive i.e. the abuse has to be present at the time when an order under this section is passed.

Trade Secret Laws and Competition Act, 2002

Trade secret laws comprise mainly of Intellectual property rights. IP Rights aim at protecting the interests of innovators and creators by giving them rights over their creations. IPRs in a way reduce the competition in the market as they give a monopoly of use to the owner of the property. Article 40 of the ‘Trade Related Aspects of Intellectual Property Rights’ talks about how IPRs have an adverse effect on the competition and trade. Under Article 40(2) of the TRIPS Agreement, the signatories of the agreement have the power to regulate conditions and practice which can be construed as an abuse of the intellectual property rights and have an adverse effect on competition in the relevant market, and to fix the conditions for licensing of the intellectual property. An example of abuse of intellectual property rights is when the holder of such rights fixes an unreasonably high price resulting in unjust enrichment. A Carte Blanche is available as the government of the signatories have the complete freedom to make laws in the Competition Law and Trade Secrets regime to curb the abuse of intellectual property rights. This Carte Blanche is enshrined in Article 8(2) of the TRIPS Agreement which reads as “Appropriate measures, provided that they are consistent with the provisions of this agreement, may be needed to prevent the abuse of intellectual property rights by the right holders or the resort to practises which unreasonably restrained trade or adversely affect the international transfer of technology.”^[15] In lieu of this, the Competition Act was enacted which keeps all entities operating in the relevant market from entering into any agreement which could have an appreciable adverse effect on competition in India as per section 3(1) of the Competition Act. If any entity enters into any such agreement, it would be void by virtue of subsection 2 of section 3 of the act. As has been mentioned earlier, section 3(5) of the Act gives an exemption to the holders of intellectual property rights. It allows holders to impose conditions necessary for the upkeep of right and to even enter into anticompetitive agreements in order to prevent any infringement of their intellectual property rights. This section also gives a list of 6 Acts, which have been mentioned earlier, under which this exception is allowed to the right holders.

Conclusion

In the end, it can be said that intellectual property is potentially problematic when it comes to competition law as it has been exempted from the prohibition of anticompetitive agreements to the extent the rights of the right holders are not infringed. Intellectual property rights should be exercised in a way which does not have any kind of appreciable adverse effect on competition in the relevant market. But at the same time, the exercise of these rights should not be made so philanthropic that the entire purpose of the rights gets defeated. A perfect balance needs to be struck between the two. The rights arising out of intellectual property should not be used to allow anticompetitive agreements. The Competition Act has been proven to be very effective in putting a check on the anticompetitive agreements and restrictive trade practices but when it comes to intellectual property rights, the Competition Act falls short.

[1] Statement of Objects and Reasons, MRTP Act, 1969

[2] ibid

[3] Section 12(1), MRTP Act, 1969

[4] AIR 2005 SC 730

[5] Brahm Dutt vs. Union of India, AIR 2005 SC 730

[6] Section 16(1), Competition Act, 2002.

[7] Section 53O, Competition Act, 2002.

[8] Section 18, Competition Act, 2002.

[9] Competition Commission of India vs. Steel Authority of India and Anr, (2010) 10 SCC 744

[10] ibid

[11] Section 3(2), Competition Act, 2002.

[12] Section 27, Competition Act, 2002.

[13] Section 4, Competition Act, 2002.

[14] Section 2(r), Competition Act, 2002.

[15] Article 8(2), Trade Related Aspects of Intellectual Property Rights Agreement, 1994.