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Articles on Competition Policy & Issues 

New Competition Law, Sans The Wherewithal?
Need to strike the right balance

Why we need a new competition law

How Free Will The Competition Commission Be?

Competition law should have special provision to check cartels 

Tackling IPR excuses through the new competition law

Need for clearer norms on IPR in new competition Bill 

Fighting the vitamins conspiracy 

New Competition Law, Sans The Wherewithal?

Published:  The Financial Express,, December 23, 2002 ,

 By Pradeep S Mehta

A new and quite modern Competition Bill was adopted by Parliament last week, but the financial outlay is so poor that it will just about limp. This was one of the drawbacks with its predecessor, the Monopolies and Restrictive Trade Practices Act, by virtue of which it could hardly deliver. This was compounded by poor quality of personnel, lack of political will, etc. These need to be addressed in the new law seriously.

In this article, I look at seven crucial ingredients which will enable us to turn our new competition law into an effective one: finances; personnel; advocacy; compliance education, capacity building, networking and political education.

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National interest vs competition — Need to strike the right balance

Published:  The Business Line, December 10, 2002 ,

 By Pradeep S Mehta

SHOULD the `national treatment' idea be kept out of the new Competition Bill (now in Parliament)? While the Commerce Ministry's Trade Policy Division thinks so, the Department of Company Affairs does not. The latter argues that the law does have provisions for exemptions, under which, such issues can be dealt with if required. But the Commerce Ministry feels that this is the only way to promote national champions.

The debate on national champions exists in many countries, including the rich ones. Recent developments in the German energy market have revived the debate. This may signal either the strengthening or introduction of industrial policies that encourage national champions, and thus have serious implications for competition policy. A country's industrial policy can be regarded as the active intervention by the state in the market to strengthen domestic industrial sectors to serve goals (such as successfully competing in global markets) other than competition and economic efficiency.

Unlike the competition policy, which aims at protecting the competitive process, the industrial policy seeks to channel the market forces into working for particular national or industry interests. Recently, the German Economics Ministry overruled, for the second time, a Federal Cartel Office (FCO) decision rejecting Eon AG's proposed $10.2-billion takeover of Ruhrgas AG, Europe's largest gas importer. The Ministry argued that the takeover would create a powerful national champion to negotiate in international markets. (A Dusseldorf court has, however, temporarily stayed the Ministry's decision.) A Ruhrgas-Eon deal would strengthen the groups' already dominant position in gas and electricity distribution in Germany, in effect reducing competition in these markets, just months after they were officially liberalised. Through the so-called "ministerial approval" included in the competition law, the government can overrule an FCO veto if a merger's anti-competitive effects are either "outweighed by the advantages to the economy as a whole" or if the merger is "justified by the overriding public interests".

A variation of this intervention exists in France and Belgium. The draft Indian competition law also proposes such an override. In 2001, New Zealand too approved the merger of two dairy companies, resulting in a 90 per cent market-share. Officials indicated that the merger would help promote the sector's export competitiveness. The advocates of national champions argue that such interventions lead to completely independent decisions from the competition authority, in that they are devoid of industrial policy considerations. However, this view does not explain why the UK and the Netherlands are set to adopt a different approach.

Their new competition laws propose to limit ministerial intervention to national security grounds at the most; other national interest deliberations will be left to the competition authorities.

Moreover, in the US, industrial policy considerations have not influenced the anti-trust law much. It could even be said that `competition' lies at the core of the US industrial policy.

The tendency to heed the calls for national champions is not restricted to industrialised countries. The Latin American brewing industry, for instance, recently witnessed a spate of consolidation despite their anti-competitive effects.

However, for developing countries, other factors contribute to their desire to create globally competitive entities. These include trade liberalisation, perceived to be threatening their national policy space and largely favouring multinationals, and the proposed multilateral competition framework in the WTO.

In India, two government departments, one responsible for competition and the other for WTO issues, are at odds on whether to provide for national treatment in the proposed new competition law. Opponents cite that this would inhibit the Government's desire to promote national champions.

These sentiments are reflected in the ongoing Government divestiture exercise. Unfortunately though, the new competition law is not in place and that skews the privatisation efforts. The Defence Minister, Mr George Fernandes, is right in pointing out that if Reliance is allowed to bid for IPCL and BPCL, it could lead to a high market concentration.

Other developing countries, such as Pakistan and Malaysia, are also resisting attempts to bring competition within the WTO ambit for fear that it would limit their ability to base their economic development on the promotion of national champions and other industrial policy considerations. The economic arguments in favour of this view recognise that in the initial stage of economic development, it can make sense to use industrial policy tools to promote growth and development.

Hence, in the case of developing countries, an ideal level of competition is needed which complements the industrial policy rather than maximising competition. The `national champion' argument may have been misused by many countries, and wrong `winners' picked, but some East Asian economies have applied the strategy well, giving local concerns breathing space to build industrial capacity and achieving commercial success in world markets. Some countries have tried to strike a balance between the two policy objectives — competition goals and national interests — by pursuing them concomitantly. In South Africa, for instance, this has been through the incorporation of a public interest criterion into the country's competition law objectives.

One of the criteria is to make the country's firms competitive internationally. However, this has also often been abused to justify the uncompetitive activities, without commensurate benefits to the public.

Practice has shown that a firm that does not face competition locally invariably fails to be competitive internationally. The question of how to balance the two policy areas so as to maximise economic and consumer welfare without losing out to foreign companies in the global market still remains.

Hence, the challenge for policymakers is how to strike a balance between competition policy and industrial policy when formulating and integrating them into national development strategies.

In the case of India, a carve-out on national treatment in the proposed competition law could drive away much-needed FDI, which comes in mainly through the mergers and acquisitions route.

It could also promote more national laggards, as seen in the pre-reform era. Thus, a more holistic approach to our industrial policy is required, but not by tinkering with the new competition law.

Competition law should have special provision to check cartels

In what amounts to a slap in the face for the Monopolies and Restrictive Trade Practices Commission (MRTPC), India's cement cartel, aka the Cement Manufacturers Association, has just hiked prices by almost 20 percent, the highest one-off hike in recent times. The cement companies are already under investigation for their anti-competitive behaviour by the Commission. 

This latest hike in prices proves that the current regime is helpless in cracking such pernicious cartels. The proposed new competition law, which has just been cleared by the Cabinet, may check this to some extent, but much more is required if cartels are to be checked. 

As India liberalises and relaxes it control over market forces, the chances of market abuses also increase. The most heinous of all these abuses are those perpetrated by cartels. What is required, therefore, is a targeted strategy backed by complementary legal provisions. Due to lack of such a strategy and legal provisions, it is not surprising that the existing Indian competition authority, the MRTPC, in its history of 30-odd years, has booked very few cartels in the domestic market, let alone in the global market. 

The adverse effects of cartels or collusive agreements vary in degree depending on the nature of the companies involved. It is the hard core cartels, i.e. agreements by competitors to fix prices, restrict output, submit collusive tenders and/or divide or share markets, that are the cause of immediate concern for governments the world over. While developed countries are taking steps in this regard, the developing world is lagging behind, with the negative effects that it entails.

In this era of fast-globalising markets, the internationalisation of cartel behaviour cannot be ignored. International cartels operating in product markets such as bulk vitamins, citric acid and graphite electrodes, to name just a few, have been broken in the recent past by some developed countries, including the US, Canada and the European Union. However, the extent of the damage caused by the cartels through their subsidiaries/suppliers on developing countries has not been assessed, nor has there been any initiative on the part of the developing world to deal with such cases. 

Lessons can be learnt from the cases where competition authorities in developed countries have managed to prevent or crack hard core cartels. Success requires the following: proactive role on the part of the competition authority; application of per se rule; high level of fines; criminal liability (for individuals); protection for whistleblowers; leniency programme for the firms willing to cooperate in the proceedings; and co-operation among countries (and probably an international watchdog) in case of global cartels.

The existing regime under Monopolies and Restrictive Trade Practices (MRTP) Act, 1969 is far from ‘proactive’. Second, even where the Director General has initiated an investigation it has either not been encouraged (and perhaps discouraged) by the Commission or it has found its hands tied by the provisions/interpretation of the Act. The end result has been nil. This drawback is one of the main reasons for India to go in for a new set-up. 

Viewing the difficulties in obtaining evidence and proving a cartel on the one hand, and its gravity on the other, the new competition law should be as preventive as possible. A per se rule, which considers certain trade practices as inherently anti-competitive and injurious to the public without any need to determine whether it has actually affected market competition, is a step in the right direction. Although the draft competition Bill has such a provision, its scope is too narrow. According to the draft Bill, only agreements that cause an adverse effect on competition are prohibited per se. 

Accused firms able to prove that there was no "appreciably adverse effect on competition" would escape penalties even if the agreement had been entered into with the purpose of restricting competition. To make the law a more effective deterrent, it should be strengthened to include anti-competitive purpose in addition to result. 

To prevent cartel behaviour, the competition authority relies on access to information that is difficult to come by. It needs to have ‘carrot’ like protection for whistleblowers and leniency for firms cooperating with the investigation to balance the ‘stick’ of fines and prison terms. This has been an effective combination in many countries. The infamous vitamin cartel broken by the US antitrust agency is a perfect example in which Rhone-Poulenc, one of the carteling members, supplied much of the evidence and escaped punishment while the other conspirators had to pay huge fines.

Unfortunately, there is no mention of protection or leniency in the draft Bill. More so, the structure of fines given under the draft Bill has painted all types of conduct with the same brush. On one hand fines could be harsh for abuse of dominance and vertical agreements, while on the other, they may be less for serious abuses like cartels. Fines are capped at 10 percent of the average turnover for the last three years even though price-fixing and other activities can enhance profit margins exponentially.

To be an effective deterrent, fines on cartels should be much higher than the gains from them. They should be at least three times the proven loss or damage due to the impugned agreement. The law can be given more muscle by providing for criminal liability in the form of fines or imprisonment. This is followed in many countries including Canada, US, France, Germany and has recently been introduced in the UK. Mexico has an interesting provision that provides for a fine for enterprises of up to 375,000 times the minimum general wage prevailing in Mexico City, and 7,500 times for individuals.

Last but not least, to effectively control, break and punish international cartels, merely having an extra-territorial jurisdiction, as in the MRTP Act or the draft Bill, may not be enough. Countries have to cooperate with each other. Normally, this cooperation would take place under a bilateral agreement between governments, leaving it up to the competition authorities to actively pursue links. Here too, the proactive role of the authority is a sine qua non for success. Another possibility would be an international arrangement making cooperation 'mandatory' as well as providing for a watchdog.

The draft Bill, therefore, needs to be revisited, or else India risks ending up with yet another ineffective law.

BACK

Tackling IPR excuses through the new competition law 

India risks throwing away its right to regulate the abuses of intellectual property rights (IPRs), if the new Competition Bill is adopted in its present form. International law under the controversial World Trade Organisation (WTO) Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPs) allows governments to enforce access to vital technologies for the nation at affordable costs to people.

Instead of taking advantage of this, the new draft Bill retreats to an out-dated and potentially damaging position on IPRs that amounts to legitimising monopoly exploitation. The same is the position in the existing competition law: the Monopolies & Restrictive Practices Act. Our mandarins feel that these issues can be dealt with through the route of ‘notifications’, virtually giving them law-making powers, and thus subject to ‘influence’. The country cannot afford this route, because it relies too much on bureaucracy rather than on informed debate in the legislature, and civil society. If the Bill is not suitably improved, we may end up as a loser in the new global economy.

Even though the exercise of IPRs is extensively regulated through laws, competition law provides an extra tier of regulation to ensure that the exclusivity granted by IPR laws is not misused to proliferate anti-competitive behaviour. The TRIPs agreement recognises this fact.

IPR protection drives forward innovation in the market by providing incentives for firms to compete with new products and processes. But there is a risk that the exclusive right that a patent gives to an innovator will lead to abuse of market power. A successful IPR regime strikes a balance between protecting consumers from exploitation, ensuring adequate access to and use of the innovation in the economy while encouraging firms to invest in research and development.

Whatever its faults—the Agreement is widely considered to be deeply flawed—TRIPs does try to achieve a degree of balance between protecting consumers and protecting innovators. Articles 6, 31 and 40 of the Agreement, providing for parallel imports, compulsory licensing and control of anti-competitive practices respectively, are some of the tools to attain the said balance. However, the onus lies on the member states to use such provisions by building them into their national laws.

Article 6 of TRIPs recognises the possibility of legally admitting parallel imports, the use or sale of licensed goods outside the territory in which they have been licensed. This is based on the principle of “exhaustion of rights” which means that once the right holder has authorised the release of the IPR, they are considered to have ‘exhausted’. The IPR owner has no right to control the use or resale of goods that he has put on the market or has allowed the licensee to market. The inventor is rewarded through the first sale or distribution of the product, while subsequent sales ensure the spread of the technology making intellectual property work “to mutual advantage of producers and users of technological knowledge” (Article 7) in a global economy.

Parallel imports reduce prices and increase consumer welfare by enhancing competition. However, to be certain that society benefits from this window in TRIPs, the legality needs to be stated clearly within the national competition law. Surprisingly, the draft competition Bill does not contain any such provision.

Firms generally block parallel imports through licensing arrangements with their retailers and distributors. Legal experts around the world are also advising their clients to write special clauses into licensing arrangements should they want to prevent parallel imports. Such advices are set to proliferate as firms become more conscious of the issue. From a legal standpoint, it is not clear whether these restrictive licensing arrangements fall within the purview of the exclusive rights granted under IPR laws or whether they should be considered as anti-competitive practices. The TRIPs agreement does not provide much insight on the matter and this lack of clarity at the international level is forcing countries to develop their own strategies vis-a-vis parallel imports. 

For instance, Japan permits parallel imports unless contract provisions explicitly bar them. The United States follows a similar practice, however, discouraging other countries in this regard. Australia has recently recognised the international exhaustion principle. The position of the European Union (EU) is somewhat different. Although it recognises ‘regional’ exhaustion, i.e., parallel imports within the EU countries, it is still to come out openly on ’international’ exhaustion. However, few judicial decisions in individual countries of the EU, such as Davidoff and Levi vs. Tesco in the United Kingdom, have recognised the international exhaustion principle. Due to pressures from such members, the European Commission is reconsidering the matter seriously. 

TRIPs provides scope for the issue to be resolved at the national level in Article 40. This allows members to specify, in their legislation, licensing practices or conditions that may, in particular cases, have an adverse effect on competition and constitute abuse of IPR. It further allows members to adopt appropriate measures to prevent or control such practices in the light of relevant laws and regulations of that member.

The national competition authority is the ideal body to weigh up the competitive effects of a licensing agreement. But for it to do so, carefully drafted provisions have to be inserted into the national competition law. Yet India’s new Competition Bill disregards the potentially harmful use of exclusive IPRs, focusing entirely on the protection of the owner.

The draft Bill seems to legitimise all efforts to exploit IPR, more to the detriment of the public interest. The Bill prohibits the authority from restricting a right-holder to impose reasonable conditions on the licensee (which may include disallowing parallel importation) for the purpose of protecting or exploiting such IPRs. In a sense, it infers that IPR laws override competition law, where as it should be the other way round.

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Need for clearer norms on IPR in new competition bill

Apart from parallel imports (covered in our previous article) another area where the Competition Bill has failed to use the flexibility provided by TRIPs (Trade Related Intellectual Property Rights) is “compulsory licensing.” The agreement vide Article 31 allows compulsory licensing under certain conditions. One of them is to control anti-competitive practices by IPR owners.

Most importantly, even the licensee is allowed to export the protected product, which otherwise is meant predominantly for supply in the domestic market. This could be highly relevant to certain sectors in India, namely, the pharmaceutical sector, which would be able to export drugs to countries with national health emergencies.

Another condition for grant of compulsory licensing and where the competition authority has a role is in case of “refusal to deal”. An example of how a compulsory license can be based on “refusal to deal” is provided by a 1995 decision of the European Court of Justice in the Magill case. The Court held that Radio Telefis Eireann (RTE) and Independent Television Publications Limited (ITP), who were the only sources of basic information on programme scheduling, could not rely on national copyright provisions to refuse to provide that information to third parties. The Court opined that such a refusal constituted the exercise of an IPR beyond its specific subject matter and, thus, an abuse of a dominant position under Article 86 of the Treaty of Rome.

Even though the US patent law does not provide for compulsory licenses, this is probably the country with the richest experience in the granting of compulsory licenses to remedy anti-competitive practices. According to one study more than 100 such licenses have been granted. 

The provisions of compulsory licensing should be used with utmost caution else it would have a negative impact on investment in R&D, evolution of new technologies etc. But the provisions should not remain unimplemented either, should the need arise. Interestingly, a statistical study by Scherer relating to 70 companies showed no negative effect on R&D in companies subject to compulsory licenses but, on the contrary, showed a marked rise in their R&D relative to those of comparable size not subject to such licenses.

That said, before any government can act on Article 31 of the TRIPs Agreement to grant a compulsory license, it has to follow due administrative or judicial process. A competent authority has first to determine that the anti-competitive practice is prevalent before the government can grant a license to others. Again the best-suited authority here would, of course, be the competition authority and hence this needs to be reflected in the new competition law.

But our draft Bill only says that for the purpose of determining whether enterprise enjoys a dominant position, the authority would take into account inter alia “technical advantages enjoyed by the firm, which could include patents, know-how and copyright.”

Clear provisions on IPR and competition must be implemented at the national level to take full advantage of the flexibility built into TRIPs, to stem the tide of anti-competitive arrangements.
 

Consumer Unity & Trust Society

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Jaipur  302 016,  India,

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Email: cuts@cuts.org