INTELLECTUAL PROPERTY DUE DILLIGENCE
IN
ACQUISITION OF TECHNOLOGICAL COMPANIES

INTRODUCTION OF IP DUE DILLIGENCE:-

The purpose of due diligence is to give the acquirer a better understanding of the business of Target (owner of IP) and the commitments and liabilities associated with that business, and to analyze the problem area in more depth.
The review conducted by the acquirer in an acquisition often is compared to the due diligence investigation conducted by an underwriter and its counsel in a securities offering.
An IPR Due Diligence is a valuation of a company’s intellectual assets in situations of start-up or merger and acquisition (M&A). The valuation has a qualitative and quantitative nature, where the qualitative part is an assessment
of the strength of the IP rights, and the quantitative part is an estimate of the market value of the IP rights.
PURPOSE OF DUE DILLIGENCE :-
Intellectual property due diligence focuses on the Target’s intellectual property assets and involves two main inquiries-
1. What is the strength of the Target’s intellectual property portfolio?
2. What are the potential liabilities associated with the Target’s continued and proposed business.
OBJECTIVES OF INTELLECTUAL PROPERTY DUE DILIGENCE:-
Due diligence has meaning only in the context of a particular transaction. The acquirer’s objective and sophisticated and the type of transaction, the scope of Target’s representations and warranties, and the viability of acquirer’s remedies for breaches of those representations and warranties will dictate the nature and the extent of the IP due diligence for a particular transaction.

IDENTIFICATION OF INTELLECTUAL PROPERTY ASSETS:-
Acquirer should obtain the following documents and information as a part of its intellectual property due diligence. Intellectual property due diligence will usually begin with a request for documents –
A. Review of limitation on the Target’s Intellectual Property Assets.
B. Are any of the intellectual property assets owned jointly with one or more third parties?
C. Are there any royalty obligations associated with any intellectual property licenses?
D. Are the intellectual property licenses assignable by the Target?
There are different kind of documents/information are required for the proper due diligence of the Intellectual property for that purpose the IP i.e. Patent, Trademark, Copyright etc. have required different documents/information’s that are described below:-

PATENTS :-
1. A list of all patents, utility and design, (both India and foreign) which are issued and applied for, together with copies of such patents and patent applications. The list should include the following information for each issued patent or pending patent application:-
a. Patent number
b. Inventors names
c. Date of application:-
d. Date of issue for issued patents. The term of protection for Indian patents generally ends 20 years from the application date.
e. Prior owner, if any, and how the patent was acquired by Target.
f. Have any assignments been properly recorded so that an accurate chain of title exists? Get copies of recorded assignments.
g. Country ( if foreign) .
h. Presence or absence of any security interests.
i. Have all required maintenance fees been paid?
i)Patent rights can lapse if government fees are not paid on a timely basis.
ii) In the U.S. these fees are called “maintenance fees’’ and are due 3-1/2, 7-1/2, and 11-1/2 years after the issuance of the patent.
iii) In the most other countries these fees are called “annuities” and are typically annual fees.
j. Has the Target taken any actions which could have created either a laches or equitable estoppels problem for the Targets in enforcing its own patent against a potential infringer?
k. Is this a “Key patent?” who was the inventor, and is the investor still employed by Target?
2. Is the Target aware of any potential blocking patents?
3. Has the target received any letters asserting that the Target is infringing any third party patent rights?
- It may be appropriate to obtain a patent infringement analysis or a patent validity analysis for certain important Target products or technologies.
- The fact that a product or process is patented does not mean that it cannot or does not infringe other patents. Patented technologies frequently do infringe other patents. Remember that a patent only gives the right to exclude others from exercising the patented technology.
4. In appropriate circumstances, an opinion letter from Target’s patent counsel regarding validity, infringement and other matters should be required.
5. Identify Target’s procedures for identifying and protecting inventions including procedures for identifying whether to file for patent protection, and if so in what counties, and for ensuring the timeliness of patent filings.
6. Has the Target enforced its patents in the past and, if so, how?
7. Has Target conducted any searches or analyses of competitors patent?
8. Are there any imminent bar dates or disclosures of new products that require new filings to avoid loss of rights?

TRADEMARKS:-
1. A list of all trademarks which are issued and applied for, together with copies any such trademark registrations and applications. The list should include the following information for each registered trademark or trademark applications.
a. Trademark numbers.
b. Class in which the trademark is or will be registered and whether the trademark is registered on the primary or secondary register.
c. Date of application.
d. Date of issue for registered trademark.
e. Prior owner, if any, and how the trademark was acquired by Target.
f. Have any assignments been properly recorded so that an accurate chain of title exists?
- Proper recording of transfers in the title are important because a purchase for value and because subsequent filings with the PTO which may be necessary to preserve the registration will not be accepted from any party which is not the record owner of the trademark.

g. Country (if foreign). Note that in most foreign jurisdiction trademark rights are acquired almost exclusive through local registration rather through use of the mark.
h. Presence or absence of any security interests.
i. Have all the Target conducted any searches of the trademark?
j. Has the Target conducted any searches of the trademark?
k. Is Target (owner of mark) using trademark in the same form and for the same product line as registered?
l. Has the trademark been abandoned?
- The period of non-use (ranging, in various jurisdictions, from three to five years) creates a rebuttable presumption that the trademark has been abandoned.
m. Determine the products on which each trademark is used actual usage with registered marks.

2. Has the Target taken any actins to monitor and enforce its trademarks and to prevent misuse of its trademarks by others?
- Trade mark protection can be lost if the trademark becomes general. Trademark protection can be lost if the trademark owner fails to file an affidavit of continued use between the fifth and sixth years after registration in the US, of fails to renew the trademark registration.
4. Has the target granted any licenses to its trademarks?
-All trademarks must be under the control of a single entity which supervises the quality of all products using the trademark. If Target granted a “naked” license to the trademark (one in which there is no provision of quality control), the Targets ownership of the trademark may be at risk.
5. Identify any products that are not covered by registered trademarks.

6. Has there been any non use of any Target trademarks? If so, which marks and for what periods of time?

7. Identify any products that are not covered by registered trademarks.

8. Has Target enforced its trademarks in the past?

9. What is Target’s policy for applying trademark notices to its products?

10. Does Target conducted trademark clearance? Does Target have any clearance procedures an any results or opinions?

11. Has Target registered any Internet domain names? If so, please list.

COPYRIGHTS:-
Because a copyright exits in all original works of authorship as soon as they are reduced to a tangible medium of expression, it will typically be impossible for a Target to list all of its copyrights. The Target should list all registered copyrights (but registration is not a prerequisite to protection any many companies do not register copyrights until there is litigation), copyrights in any of its products, an any other significant copyrighted works.

1. As to each such copyright, the Target should provide the following information:

a. Registration number, if copyright is registered.
b. Date of issue , if copyright is registered.
c. Due date of first publication, or if the work has not been published , date of creation.
d. Each author of a work may be a joint owner of work of the copy right.
e. Prior owner, if any and how the copyright was acquired by Target?
f. Have any assignments been properly recorded so that an accurate chain of title exits?
g. Most foreign countries do not require registration of copyrights.
h. For older copyright registrations, determine whether renewals have been obtained.
i. Presence or absence of any security interest.
j. Has the target included a copyright notice on each copy of the copyrighted work which it has distributed?
2. Has the Target granted any licenses to its copyrights?

3. Has the Target received any letters asserting the Target is infringing any third party copyright rights?

TRADE SECRETS:-

1. The continued value of trade secret information will depend on hw well the Target and its employees have protected the information. As a result, an investigation must be conducted as to the practices and procedures used by the Target to protect its own trade secrets and the trade secrets received from third parties in confidence.

2. Steps to maintain secrecy include:-
a. Internal security procedure
b. Disclosure to employees.
c. Disclosure to outsiders.
3. Determine whether the Target has granted any licenses to its trade secrets.
4. Identify Target’s documents retention policies and procedures.
5. What is the Target’s email policy?

REVIEW OF AGREEMENTS:-
Documents which are customarily reviewed as a pat of intellectual property due diligence includes such as all “license in” agreements for technology which is used by the Target in the course of its business, Distribution and sales representative agreement, any agreements with third party contractors etc. can be reviewed by council.

REVIEW OF INTELLECTUAL PROPERTY LITIGATION:-
Acquirer will want the Target to identify all litigation brought by or against Target during the past five years, whether currently pending or previously disposed of, in addition to any outstanding claims related to Target’s IP assets or any of the IP agreements identified by Target. Therefore Target should identify the IP litigations to know the nature of claim, Money value of the claim, any likelihood of an injunction preventing use of equipment etc.
The acquirer should take proper care while taking IP assets he can also get copies of any outstanding judgment, decrees or settlement agreements to which the Target is party.
In addition to requesting information form Target related to security interests, Acquirer should order UCC(Uniform Commercial Code) and federal searches to ascertain whether there are any mortgages or liens on the Target’s intellectual property.
INTERRELATIONSHIP WITH OTHER ASPECTS OF THE TRANSACTIONS:-
As result of the IP due diligence, Acquirer may ask the Target to make additional representations and warranties concerning certain matters such as list of all patents (jurisdiction in which issued), list of all application’s , list of registered copyrights etc. However, certain misrepresentations, such as lack of valid title to a key intellectual property asset, cannot be cured by money. Conversely, certain problems may never be discovered during due diligence and can only be addressed through adequate representation and warranties (eg. A claim of patent infringement that is brought six months after the closing). Intellectual property representation and warranties frequently survive for a longer periods than other representation and warranties.

HOW CAN ASTREA LEGAL HELPS:-
Astrea Legal Associates has the necessary expertise in-house to solve IPR due diligence on start-up companies, Mergers and acquisition, technological companies, public research institution, but since IPR Due diligence on exit-companies is very complex and work-intensive, it is performed together with M&A –specialist with other areas of expertise. (like C.S. etc.)
For further information please contact our Associate K.narayan of our firm by email knarayan@astrealegal.com to receive more information about this subject.
CONCLUSION :-
Intellectual Property due diligence generally provides vital information specific to future benefits, economic life and ownership rights and the limitations of the assets all of which affects final value. Therefore due diligence is prerequisite to the valuation process, regardless of the methodology used.
The increased profile, frequency, and value of intellectual property related transactions have elevated the need for all legal and financial professionals and IP owner to have thorough understanding of the assessment and the valuation of these assets, and their role in commercial transaction.

Associate
BBA, LL.B II
Email: knarayan@astrealegal.com
Office: Pune, India

Working as an associate with the firm since June 2011 under Prospective Law student trainee program. His area of interest is Arbitration and conciliation, Banking Regulations, Intellectual Property Rights. Also made a statute analysis of Food Safety and Standard Act,2006.
Contributes various articles such as on Banking laws, FSSAI (Food Safety and Standard authority of India),Valuation of IPR, Intellectual property due diligence in acquisition of technology companies.

Associate
LL.B, LL.M (Intellectual Property Rights)
Email: abhijeet.desai@astrealegal.com
Office: Mumbai, India.

LL.M, Intellectual Property Rights,University of Southampton, United Kingdom.Practicing as an Advocate in the Original and Appellate side of the Mumbai High Court. Contested variety of Civil, Criminal, Constitutional, Arbitration and Company Law matters. Also appeared before the CAT, MAT, DRT, and DRAT AND COMPANY Law Board. Constitution, Intellectual Property Rights, Service Law, Arbitration, Shipping, Income Tax, Drafting and Pleading

Consultant
B.Com,LL.B,Company Secretary
Email: sagar@astrealegal.com
Office: Pune, India.
Sagar has a Broad-based legal expertise, including experience in Company law, FEMA Laws, Excise Laws, Custom Laws, Securities Laws, Competition Laws, Mergers & Takeover, Arbitration, managing legal activities for the organization, Experience of drafting various agreements, Notices, Notice reply relating to Corporate Laws. He has joined the law firm as an Associate Advocate.

Versatile experience in Legal drafting and providing legal opinion regarding various issues and agreements. Statutory compliance of Various Companies related to shop Act, Contract labour Regulation Act, Provident Fund, Employee State Insurance, Bonus Act, Labour Welfare Act
Specialization: Bonus Act, Maternity benefit Act, Minimum Wages Act, Labour welfare Act, Contract Labour Act, Contract labour Regulation Act, Provident Fund, Employee State Insurance, Bonus Act, Labour Welfare Act

Associate
B.Com,LL.B
Email: grahate@astrealegal.com
Office: Pune, India.

Versatile experience in Real Estate,Sale,Co-operative law, Housing,Legal drafting. Provides legal opinion on complex legal issues and agreements.
Specialization: Family Laws, Contract , Transfer of property, Government agency, Revenue.

Associate
B.Com. LL.B, LL.M.
ashutosh@astrealegal.com
Office: Ranchi India
Civil, Corporate, Criminal, Real Estate, Family matter, Government, Revenue, Employment, Contract, Drafting, Real Estate Performance of Contract, Commercial Transaction, Land Acquisition, Banking & Finance, Arbitration & Dispute Resolution, Industrial & labor, Agency, License & Registration, Energy & Electricity, Lease & licenses, Mortgage, Sale deed, Partnership, Hypothecation, Exchange, Indemnity, Assignment, Power of Attorney, Will & Probate, Notice, Affidavit, Receipt, Contracts & Agreement, Real Estate documents.

1. Mode of Enforcement of Foreign Judgments
A foreign judgment which is conclusive under Section 13 of the Code of Civil Procedure, 1908, can be enforced in India by:
1 .Instituting a suit on such judgment; or
2. By instituting execution proceedings.
A foreign judgment may be enforced by instituting a suit on such foreign judgment. The general principle of law is that any decision by a foreign court, tribunal or quasi-judicial authority is not enforceable by a country, unless such decision is embodied in a decree of a court of that country. A suit on a foreign judgment must be filed within a period of three years from the date of the judgment.

1. Under S. 44A of the CPC, a decree of any of the Superior Courts of any reciprocating territory are executable as a decree passed by the domestic Court. Therefore in case the decree does not pertain to a reciprocating territory or a superior Court of a reciprocating territory, as notified by the Central Government in the Official Gazette, the decree is not directly executable in India. In case the decree pertains to a country which is not a reciprocating territory then a fresh suit will have to be filed in India on the basis of such a decree or judgment, which may be construed as a cause of action for the said suit. In the fresh suit, the said decree will be treated as another piece of evidence against the defendant.
However in both cases the decree has to pass the test of S. 13 CPC which specifies certain exceptions under which the foreign judgment becomes inconclusive and is therefore not executable or enforceable in India.

Case law
1. In the case of R.M.V. Vellachi Achi v. R.M.A. Ramanathan Chettiar, AIR 1973 Mad. 141, it was alleged by the respondent that since he was not a subject of the foreign country, and that he had not submitted to the jurisdiction of the Foreign Court (Singapore Court), the decree could not be executed in India. The Appellant, in defense of this argument, stated that the Respondent was a partner of a firm which was doing business in Singapore and had instituted various suits in the Singapore Courts. Therefore, the Appellant argued, that the Respondent had accepted the Singapore Courts jurisdiction. The Court held that it was the firm which had accepted the jurisdiction of the foreign Court and the Respondent, in an individual capacity, had not accepted the jurisdiction. This was one of the reasons for which the High Court held that the decree against the Respondent was not executable.

2. The High Court in the above case had referred to a decision of the Madras High Court in the case of Ramanathan Chettiar v. Kalimuthu Pillai AIR 1914 Mad. 556, which lays down the circumstances when the foreign courts would have jurisdiction under this Section. The circumstances mentioned are as follows:

a) Where the person is a subject of the foreign country in which the judgment has been obtained against him on prior occasions.
b) Where he is a resident in foreign country when the action is commenced.
c) Where a person selects the foreign Court as the forum for taking action in the capacity of a plaintiff, in which forum he is sued later.
d) Where the party on summons voluntarily appears
e) Where by an agreement a person has contracted to submit himself to the forum in which the judgment is obtained.
2. Thus India’s Code of Civil Procedure, 1908 (Code) provides the statutory framework for the enforcement of judgments and the execution of decrees passed by competent courts in foreign countries. Under Section 44-A of the Code, a judgement-creditor with a certified copy of a foreign judgment can apply to an Indian district court for enforcement of the judgement as if it were passed by the district court itself. The application must be filed under Order XXI of the Code within three years of obtaining the judgment from a foreign court, as held by the Bombay High Court in the case of Algemene Bank Nederalnd vs SD Choksi, AIR 1990 Bom 170.
3. To be enforceable in India, foreign judgments must be passed by superior courts in reciprocating territories notified in the official gazette by the Government of India (GOI). The Supreme Court held in the case of Moloji Nar Singh Rao vs Shankar Saran AIR 1962 SC 1737 that a foreign judgment which does not arise from the order of a superior court of a reciprocating territory cannot be executed in India. It ruled that a fresh suit will have to be filed in India on the basis of the foreign judgement.
4. India’s courts also recognize and enforce ex-parte foreign judgments. In the case of Sivagaminatha vs Natraja AIR Mad 385, the Madras High Court held that the decree of a foreign court passed ex-parte would be binding, provided the evidence was taken and the decision was based on consideration of the evidence.
5. To avoid procedural delays, a judgment-creditor must ensure that an application for enforcement of a foreign judgment is filed before a court of competent jurisdiction and all parties necessary for its enforcement in India are made part of the proceedings.
6. Also, before making an application to enforce the judgment, the judgment-creditor should ascertain the assets of the judgment-debtor and the rights of third parties vested in those assets.
7. Our case falls under section 39 sub-clause b of cpc that is
39. Transfer of decree.

(1) The Court which passed a decree may, on the application of the decree-holder, send it for execution to another Court 1[of competent jurisdiction]
(a) if the person against whom the decree is passed actually and voluntarily resides or carries on business, or personally works for gain, within the local limits of the jurisdiction of such other Court, or
(b) If such person has not property within the local limits of the jurisdiction of the Court which passed the decree sufficient to satisfy such decree and has property within the local limits of the jurisdiction of such other Court.

The foreign judgment/ decree which can be executed could only be for payment of a sum of money and cannot be for an immovable property. The claim of money which is passed in a foreign currency could provisionally be claimed in Indian rupees converted at the rate prevailing on the institution of the proceedings.
It is manifestly clear that a foreign judgment and decree in India can only be executed if the same is passed by the courts of reciprocating territory and should pass the seven tests as laid down in Section 13 of the Code of Civil Procedure, 1908.

Abuse of Dominance under the Indian Competition Regime

Avinash Tripathi
Consultant Associate – Astrea Legal Associates

1. Introduction
Fairness and level playing fields for all the participants in the markets are absolutely essential for its sustainability and development. When there is perfect competition in the market, the consumer is sovereign, as his welfare is maximised. However, in reality the markets are imperfect and the invisible hands in the Adam Smith’s theory not always favours the consumer’s interest. Consequently we require a external regime to maintain contestability and fairness in markets.
Thus all modern competition laws contain specific provisions against anti-competitive and monopolistic behaviour. The Sherman Act, 1890, to which the origin of competition law is traced, contains specific prohibition against monopolisation. Again Article 82 of the EU treaty prohibits abuse of dominance. One of most important objective of The Competition Act, 2002 (hereinafter referred as the Act) like other competition regimes in the world is to detect and prevent abusive conducts by dominant enterprises .
2. Abuse of Dominant Position
Section 4(1) of the Act prohibits abuse of a dominant position by an enterprise or group. In order to completely understand this section, we first need to address the issue what the terms enterprise and group means?
2.1 Enterprise – Definition
The Act provides a quite lengthy definition been for the term in the following words “Enterprise means a person or a department of the Government, who or which is, or has been, engaged in any activity, relating to the production, storage, supply, distribution, acquisition or control of articles or goods, or the provision of services, of any kind, or in investment, or in the business of acquiring, holding, underwriting or dealing with shares, debentures or other securities of any other body corporate, either directly or through one or more of its units or divisions or subsidiaries, whether such unit or division or subsidiary is located at the same place where the enterprise is located or at a different place or at different places, but does not include any activity of the Government relatable to the sovereign functions of the Government including all activities carried on by the departments of the Central Government dealing with atomic energy, currency, defence and space .
In simple language the term means a person (including an individual and every artificial judicial person) or a government department engaged in any kind of business activity. The definition can be explained using the following diagram –

2.2 Group – Definition
On the other hand the term group is defined under the Act to mean two or more enterprises which, directly or indirectly, are in a position to —
(i) Exercise twenty-six per cent. or more of the voting rights in the other enterprise; or
(ii) Appoint more than fifty per cent. of the members of the board of directors in the other enterprise; or
(iii) Control the management or affairs of the other enterprise ;
The term group was introduced in the Act by an amendment in 2007, with a view to incorporate the concept of “Collective dominance” quite prevalent in the west. Under this concept a dominant position need not be held by a single undertaking. Separate undertakings may be found to hold a dominant position together where certain conditions are met. After this amendment the conducts of such undertakings enjoying collective dominance also comes under the purview of section 4 of the Act.
It important to understand that, it is not in itself illegal for an undertaking to be in a dominant position and such a dominant undertaking is entitled to compete on the merits. However, according to many case decided by the courts it is clearly established that the undertaking enjoying a dominant position has a special responsibility not to allow its conduct to impair genuine undistorted competition on the relevant market . In order to successfully establish the claim of abuse of dominant position, three questions need to be answered, viz.-
• What is the scope of relevant market for the alleged undertaking?, and
• Whether the alleged undertaking enjoys dominance in such relevant market or not?, and finally
• Whether the conduct of the alleged undertaking can be considered as abusive or not?
If the answer to the last two questions are in affirmative, the undertaking can be prosecuted for abusing its dominant position, prohibited by section 4 of the Act.
3. Relevant Market
From the point of abuse of dominant position, the first and foremost step is to define the scope of relevant market in which the alleged firm competes. In order to do that the term market has to be understood first. The term market has not been defined under the Act but in common parlance it means the place where sellers and buyers meet and includes the whole mechanism through which exchange of goods and services takes place for consideration. The relevant market for an undertaking is that part of whole market, which can influence or be influenced by the conduct of an undertaking.
It important to understand that relevant market does not exist in abstract; it exists in relation to an undertaking. Basically, the exercise of market definition consists in identifying the effective alternative sources of supply for the customers of the undertakings involved, in terms both of products/services and of geographic location of suppliers. The European Commission’s Notice on the “Definition of relevant market for the purposes of Community competition law” prescribes three methods for defining relevant market, these methods are –

Demand substitution
Under the method of demand substitution, a list of products capable of acting as substitutes for the product in question is prepared. Thereafter, the commission tries to find out whether the consumers of the product in question would switch to other alternatives if the relative price of such product is increased by a hypothetical small but permanent amount, generally in range of 5 % to 10 %. If the increase in relative price result in product substitution then the entire range of alternatives the consumers have relied upon are included in the relevant market.

Supply substitution
The method of Supply substitution may also be taken into account when defining the relevant markets in those situations in which its effects are equivalent to those of demand substitution in terms of effectiveness and immediacy. Under this method all those product substitutes are included in the relevant market, suppliers of which are able to switch production to these substitutes and market them in the short term without incurring significant additional costs or risks in response to small and permanent changes in relative prices. However, under this method if producing alternatives would require significant adjustment to existing tangible and intangible assets, additional investments, strategic decisions or time delays, these alternatives will not be included in the relevant market.

Potential competition
The third source of competitive constraint, potential competition, is not taken into account when defining markets, since the conditions under which potential competition will actually represent an effective competitive constraint depend on the analysis of specific factors and circumstances related to the conditions of entry. If required, this analysis is only carried out at a subsequent stage, in general once the position of the companies involved in the relevant market has already been ascertained, and when such position gives rise to concerns from a competition point of view.

The expression “relevant market” on the other hand has been defined under section 2(r) and 19 (5) to mean a market which may be determined by the Competition Commission of India (hereinafter referred as the Commission) with reference to either or both –
• Relevant product market, or
• Relevant geographic market.

Thus, the Act defines relevant market as the combination of relevant product and geographic markets. The Supreme Court of United States defines the relevant market as the area of effective competition within which the defendant operates .
It is pertinent to note that it is not mandatory for the commission to consider both the aspect while determining the relevant market. The commission can even consider, either relevant product market or relevant geographic market while defining the relevant market for a firm.
3.1 Relevant Product Market
The expression “relevant product market” has been defined under the Act as “market comprising all those products or services which are regarded as interchangeable or substitutable by the consumer, by reason of characteristics of the products or services, their prices and intended use .”
Relevant product market thus includes all reasonable substitutable products or services of nearby competitors, to which consumers could turn without compromising substantially with their needs. A good example of this would be the market of toothpastes and tooth powder. Even though they are quite different products but acts as a competitive restrain on each other and thus part of same relevant product market. The Act prescribes certain factors and all or any of them can be considered by the Commission while defining the relevant product market. These factors can be listed as follows –
(a) physical characteristics or end-use of goods;
(b) price of goods or service;
(c) consumer preferences;
(d) exclusion of in-house production;
(e) existence of specialised producers;
(f) classification of industrial products.
Hoffman – La Roche Case -
In this case, the defendants were seller of inter alia Vitamins C and E. These two products were mainly used for two purposes –
• Bio- nutritive use or additives to food stuffs, under which both the products performed different functions and could not substitute each other in respect of function.
• Technological use, under which their use as anti-oxidant and fermentation agent were interchangeable.
The defendants contested that due to the technological use Vitamins C and E are part of much larger market comprising of other products suitable for the same and the Commission has exaggerated its share in the said market. The court did not agree and held that each of these groups must be placed in separate market, one comprising of vitamins for bio-nutritive use and other vitamins for technological use.
Continental Can Case –
In this case the court applied the supply side substitution while defining relevant market. In this case the defendants contended that the market for light containers for containers for canned meat products, the market for light containers for canned seafood and the market for metal closures for the food packing industry, other than crown corks are different from each other and must be considered separately. The court rejected their contention and held that all these market formed part of one “light metal container market” and not there different types of market applying the supply side substitution.
The court further observed that In order to be regarded as constituting a distinct market, the products in question must be individualized, not only by the mere fact that they are used for packing certain products, but by particular characteristics of production which make them specifically suitable for that purpose. Consequently, a dominant position on the market for light metal containers for meat and fish cannot be decisive, as long as it has not been proved that competitors from other sectors of the market for light metal containers are not in a position to enter the market, by simple adaption, with sufficient strength to create serious counter weight.
3.2 Relevant Geographic Market
Geographic dimension involves identification of the geographical area within which competition takes place. Relevant geographic markets could be local, national, international or occasionally even global, depending upon the facts in each case. Some factors relevant to geographic dimension are consumption and shipment patterns, transportation costs, perishability and existence of barriers to the shipment of products between adjoining geographic areas. For example, in view of the high transportation costs in cement, the relevant geographical market may be the region close to the manufacturing facility. The Act defines the term “relevant geographic market” to mean a market comprising the area in which the conditions of competition for –
(a) Supply of goods or provision of services, or
(b) Demand of goods or services
are distinctly homogenous, and can be distinguished from the conditions prevailing in the neighbouring areas. The Act also prescribes some factors and any or all of these factors can be considered by the Commission while defining the scope of relevant geographic market, these factors are –
(a) regulatory trade barriers;
(b) local specification requirements;
(c) national procurement policies;
(d) adequate distribution facilities;
(e) transport costs;
(f) language;
(g) consumer preferences;
(h) need for secure or regular supplies or rapid after-sales services.
4. Dominant Position
After determining the scope of relevant market the next question which needs to be answered is whether the alleged enterprise or group enjoys dominance in that relevant market? The concept of dominance is broader than economic power over price. It is not the same as economic monopoly, although a monopoly would clearly be dominant . The Act first provide a definition of dominant position and also list some factors, all or any of which can be considered by the Commission while inquiring whether an enterprise enjoys a dominant position or not under section 4.
4.1 Definition
The Act defines dominant position to means a position of strength, enjoyed by an enterprise, in the relevant market, in India, which enables it to—
(i) operate independently of competitive forces prevailing in the relevant market; or
(ii) affect its competitors or consumers or the relevant market in its favour.
This definition has two aspects first defines the dominance in terms of ability of an undertaking to conduct its business irrespective of competitive force or restraints in the market and the other aspect defines the dominance in terms of ability of an undertaking to influence the competitors, consumers or relevant market in its economic interests.
As observed in Report of High Level Committee on Competition Policy and Law “This definition may perhaps appear to be somewhat ambiguous and to be capable of different interpretations by different judicial authorities. But then, this ambiguity has a justification having regard to the fact that even a firm with a low market share of just 20 per cent with the remaining 80 per cent diffusedly held by a large number of competitors may be in a position to abuse its dominance, while a firm with say 60 per cent market share with the remaining 40 per cent held by a competitor may not be in a position to abuse its dominance because of the key rivalry in the market. Specifying a threshold or an arithmetical figure for defining dominance may either allow real offenders to escape (like in the first example above) or result in unnecessary litigation (like in the second example above). Hence, in a dynamic changing economic environment, a static arithmetical figure to define “dominance” will be an aberration. Hence with such broad definition, the authorities or Tribunals concerned have the freedom to fix errant undertakings and encourage competitive market practices even if there is a large player around.”
The European Court of Justice in the case of United Brands case has defined the term dominant position to mean “a position of economic strength enjoyed by an undertaking which enables it to prevent effective competition being maintained on the relevant market by affording it the power to behave to an appreciable extent independently of its competitors, its customers and ultimately of the consumers.” This definition has been reiterated and relied upon in a number of subsequent decisions.
4.2 Factors for Determination of Dominant Position
While assessing the dominance of an undertaking it is important to consider all the constraints present in the market, which hinders its ability to act independently and affect the relevant market in its favour. The Act lists some factors, all or any of which can be considered by the Commission while inquiring whether an enterprise enjoys a dominant position or not. These factors help the Commission to precisely and accurately assess the dominance of alleged undertaking under the relevant market by providing an objective point of view. These factors are –
(a) market share of the enterprise;
(b) size and resources of the enterprise;
(c) size and importance of the competitors;
(d) economic power of the enterprise including commercial advantages over competitors;
(e) vertical integration of the enterprises or sale or service network of such enterprises;
(f) dependence of consumers on the enterprise;
(g) monopoly or dominant position whether acquired as a result of any statute or by virtue of being a Government company or a public sector undertaking or otherwise;
(h) entry barriers including barriers such as regulatory barriers, financial risk, high capital cost of entry, marketing entry barriers, technical entry barriers, economies of scale, high cost of substitutable goods or service for consumers;
(i) countervailing buying power;
(j) market structure and size of market;
(k) social obligations and social costs;
(l) relative advantage, by way of the contribution to the economic development, by the enterprise enjoying a dominant position having or likely to have an appreciable adverse effect on competition;
(m) any other factor which the Commission may consider relevant for the inquiry.
These factors can be classified into three broad categories:
• Ability to influence the relevant market, and
• Features and structure of market, and
• Discretionary factor
The first category includes the factors from clause (a) to (h). This category objectively analyse inter alia, the market power of an undertaking, its ability to influence the market and restrain the competition. On the other hand the factors under clause (i) to (l) fall in the second category. In order to completely understand the effects of an alleged dominant undertaking on the relevant market, it is necessary to understand the conditions and structure of the relevant market in which the dominant undertaking operates, the second category seeks to do the same. The last but certainly not least, third category which consists of only clause (m) seeks to provide certain extent of discretionary power to the commission, to include certain factors relevant for assessing dominance of an undertaking but not included in the preceding clauses.
It is pertinent to note that dominance of an undertaking in relevant market is a question of fact and selection of above mentioned factors for assessing dominance will depends solely upon facts and circumstances of each case. Some factors quite relevant in a case can be futile in other.
5. Abusive Conduct
After the dominance has been established the next question which needs to be answered is whether the conducts of the alleged enterprise or group can be considered as abusive? The Act places a special responsibility on any enterprise which enjoys dominant position not to conduct its business in a manner prohibited under the section 4(2).
In a layman’s language abusive conducts includes all the acts of dominant undertaking which are a deviation from normal practice and result in hindering the maintenance or development of the level of competition still existing in the market. It must be noted that the acts prohibited under the section are not punishable per se, as the same acts will not amount to contravention of section 4 if committed by a firm not dominant in the relevant market. It also pertinent to point that list of acts under section 4(2) is exhaustive in nature and no action can be taken if the conduct of an undertaking does not fall within the subsection. It is not necessary to show that the abuse was committed in the market which the undertaking dominates. In certain circumstances, prohibition under section 4 may apply where an undertaking that is dominant in one market commits an abuse in a different but closely associated market. This principle was set out by the European Court in the case of Tetra Pak II.
The concept of abuse is an objective concept relating to the behaviour of an undertaking in a dominant position which is such as to influence the structure of a market where , as a result of the very presence of the undertaking in question , the degree of competition is weakened and which , through recourse to methods different from those which condition normal competition in products or services on the basis of the transactions of commercial operators , has the effect of hindering the maintenance of the degree of competition still existing in the market or the growth of that competition.
Raghavan’s Committe Report provided some key questions for adjudication on abuse of dominance, and include :
• How will the practice harm competition ?
• Will it deter or prevent entry ?
• Will it reduce incentives of the firm and its rivals to compete Aggressively ?
• Will it provide the dominant firm with an additional capacity to raise prices ?
• Will it prevent investments in research and innovation ?
• Do consumers benefit from lower prices and/or greater product and service availability ?
Although there is no classification of abusive conducts under the Act, but under the existing competition laws across the world, abuse of dominant position are generally categorised under the following heads –
• The first relates to actions which exploits customers or suppliers (for example excessively high prices, restricting quantities etc.), or
• The second relates to conducts which amounts to exclusionary behaviour and protection of dominant position, because it removes or weakens competition from existing competitors, or establishes or strengthens entry barriers, thereby removing or weakening potential competition.
Under the Act following conducts of a dominant enterprise or group are considered abusive –
• Imposing unfair or discriminatory price or condition in purchase or sale
• Predatory Pricing
• Limiting production, technical or scientific development to the prejudice of consumers
• Denial of market access in any manner
• Conclusion of contract subject to supplementary obligations, which by their nature or according to commercial usage have no connection with the subject of such contracts.
• Use of position in one relevant market to enter into or protect other relevant market.
5.1 Discriminatory or Unfair Pricing and Conditions of Sale
The term unfair has not been defined under the Act, but in common parlance means something which is not fair and can’t be justified. The Act prohibits unfair pricing and conditions in sale. The European Court of Justice in the United Brands case held that charging excessive prices which has no reasonable relation to the economic value of the product supplied is unfair pricing.
The Act also provides that when some enterprises or consumers are given some favourable treatment without any proper justifications, it is illegal and anti-competitive. This type of discriminatory behaviour can be of any form like price, terms of sale, quality, quantity, and may in some circumstances extend to refusal to deal.
5.2 Predatory Pricing –
The traditional theory of predatory pricing is that the predator, already a dominant firm sets prices so low for a sufficient period of time that its competitors leave the market and others are deterred from entering and the losses incurred due to the low prices, which like any investment, will be recovered by future gains. This theory was later supplemented by the argument that the benefits of predation were not limited to the market where it predated .
Predatory Pricing has not been mentioned specifically in the competition laws of most of the jurisdictions across the world as amounting to “an abuse of dominance”. However, under the Act, predatory pricing of goods or services has been expressly mentioned as amounting to an abuse of dominance if engaged in by a dominant enterprise. Distinguishing predatory behaviour from legitimate competition is difficult. The distinction between low prices which result from predatory behaviour and low prices which result from legitimate competitive behaviour is often very thim and not easily ascertainable .
The term has been defined under the Act to mean the sale of goods or provision of services, at a price which is below the cost, as may be determined by regulations, of production of the goods or provision of services, with a view to reduce competition or eliminate the competitors. So there are two essential conditions for establishing predatory pricing –
• Sale of goods or provision of services, at a price which is below the cost, and
• With an intention to reduce competition or eliminate the competitors.
Now this definition does not prescribe any specific type of cost per se but leave it to be determined by regulations made under the Act. This issue is addressed by the Competition Commission of India (Determination of Cost of Production) Regulations, 2009. The regulation provided that “Cost” in the Explanation to section 4 of the Act shall, generally, be taken as average variable cost , as a proxy for marginal cost . Provided that in specific cases, for reasons to be recorded in writing, the Commission may, depending on the nature of the industry, market and technology used, consider any other relevant cost concept such as avoidable cost, long run average incremental cost, market value.
NSE Case –
In this case the Commission acting on a complaint by the MCX Stock Exchange (hereinafter referred to MCX-SX), ordered an investigation into the alleged misuse of dominant position by the National Stock Exchange(hereinafter referred to as NSE), the country’s largest bourse. The investigation, carried out by a director general (DG) of CCI, has found that NSE violated Section 4(2)( a)( ii), and Section 4(2)( e) read with 4(1) of the Act.
The MCX-SX had alleged that NSE was indulging in unfair practices or predatory pricing by waiving the transaction fee on currency derivatives. The MCX-SX contended that NSE has waived its transaction fee on currency derivatives and instead, charges a fee of Rs 2/ Lakh on the turnover in its derivatives segment. Due to NSE’s waiver MCX-SX is also unable to levy such a fee leading to significant losses and new investors are not likely to be attracted in the market of currency derivatives.
NSE, in its reply to the commission, contended that the intention to eliminate competition is an important ingredient of predatory pricing, and the fee waiver in the new currency derivative segment, referred to in the allegation, is in the nature of introductory pricing with no intention to eliminate competition .
The commission in its decision observed that “based on evidence and after considering the arguments of both information provider (MCX-SX ) and NSE, it is proved beyond reasonable doubt that NSE has the design of eliminating competition, the commission said in its concluding remarks . The NSE had used every tactics to harm competition by using its dominant position in the relevant market (stock exchange space) and has also protected its dominant position in CD (currency derivatives) segment by using its monopoly revenues from other segments .”
5.3 Limiting Production, Technical or Scientific Development
Under the Act a conduct of an enterprise which results in limiting production, technical or scientific development to the prejudice of consumers is prohibited.
5.4 Denial of Market Access
A dominant undertaking with a view to exclude competition from the market and conducting its business in a way other than legitimate competition on the merits is a violation of section 4 of Act. In the case of United States v. Griffith et al , four affiliated corporations operating motion picture theatres in numerous towns and having no competition in some of these towns used their buying power to obtain exclusive privileges from the film distributors which prevented the competitors from obtaining enough first or second run films to operate successfully. Subsequently the Supreme Court of the United States held it unlawful for the operator of a circuit of motion picture theatres to use his monopoly in towns he has no competitors to obtain exclusive rights to films for towns in which he has competitors.
5.5 Supplementary Obligations having no Connection with the Subject Matter of Contracts
Under the Act forcing supplementary obligations by their nature or commercial usage have no connection with the subject matter of the contract are anti-competitive prohibited by section 4 of the Act.
In the case of Jefferson Parish Hospital v Hyde the Supreme Court of United States observed that “tying” arrangements need only be condemned if they restrain competition on the merits by forcing purchasers that would not otherwise be made.
5.6 Using Dominance to Enter into other Relevant market
The Act prohibits an undertaking from using its dominant position in one relevant market to enter into, or protect, other relevant market. In NSE case, the Commission held that by monopolistic revenue from other relevant market, the NSE has tried to protect the relevant market of currency derivatives.
6. Remedies
After the abuse of dominance has been established the competition authorities can pass any of the order listed below –
1. A cease and desist order,
2. Impose penalty which may be up to 10% of the annual turnover,
3. Direct the enterprises concerned to abide by such other orders as the authority may pass and comply with the directions, including payment of costs, if any,
4. Pass any other order as it may deem fit,
5. Direct the division of a dominant enterprise, and
6. Awarding compensation but applicable only on Competition Appellate Tribunal.
7. Conclusion
After adopting substantial structural adjustment in 1991, India embarked on the path of market liberalization, and consequently it increasingly relies upon market rivalry as the organizing principle for economic activity. The seminal role of markets in ensuring allocation of resources has generally been understood to be efficient. Nevertheless, considering that markets are imperfect and many a time prone to failures, the role of competition law and policy can hardly be overemphasized. In the end, to conclude it can be said that prohibition on abuse of dominant position is absolutely necessary for preserving fair competition in economy and especially for a developing economy like ours.