Amazon and Flipkart found violating Competition law in India-DG investigation report out
Comment- This CCI order raises an important issue which places the manner of enforcement of intellectual property rights in India vis-à-vis the competition law under question. The CCI order gives a prima facie impression as if the CCI is entering into the domain of fixation of royalties for sub-licensing of Bt. cotton seed patents, but a careful reading would show that the CCI has referred the allegation of abuse of dominant position/market power of Monsanto mainly due to Monsanto refusing to honor the royalty and trait values fixed by various State Governments besides placing unfair and discriminatory conditions on the seed producers as compared to Monsanto’s subsidiaries/group companies in India.
Majority Order
The CCI by its order dated February 10, 2016 has initiated a detailed investigation into the allegedly excessive royalty fee charged by Monsanto, Inc. (USA) through its subsidiary in India, Mahyco Monsanto Biotech (India) Ltd. (Mahyco) for licensing of its patented Bt. Cotton seeds technology to Indian seeds companies.
The investigation has been ordered in pursuance to the reference made by the Ministry of Agriculture & Farmers Welfare (MOA&FW), Govt. of India as well as cases filed by several other seeds producers.
It has been alleged that seed producers entered into sub-license agreement with Monsanto for procuring its Bt. cotton technology in consideration of an upfront one time non–refundable fee of INR 50 lakhs and recurring fee called as ‘Trait Value’. The ‘Trait Value’ is the estimated value for the trait of insect resistance conferred by the Bt. gene technology. It forms a significant portion of the Bt. cotton seed prices. It is stated that the trait value is determined by Monsanto on the basis of Maximum Retail Price (MRP) of 450 gm. seed packet, in advance for each crop season.
It is alleged that in the year 2005, the trait value fixed by Monsanto was INR 1250/- per packet which led to high value of Bt. cotton seeds manufactured using the said technology i.e. Rs.1700/- – INR 1800/- per packet. This was allegedly very high in comparison to the price of non-Bt. cotton seeds which were available for Rs.300/- per packet.
It was noted by the CCI that Mahyco, entered into a “Supplementary and Release of Claims Agreement” with the Indian companies in 2007 and started charging INR 148.15/- per packet on an MRP of INR 750/- per packet as the trait value. Thereafter various State Governments have come up with their own legislations regarding fixation of MSP and trait values.
The seed companies have made representations to Monsanto for settlement of payment from 2010 onwards in line with the order of Bombay High Court dated June 17, 2015 in WP. No.3255/2015. However, Monsanto has allegedly invoked arbitration proceedings before the Hon’ble Bombay High Court seeking interim reliefs against the seed companies to deposit trait value for the year 2015-16 as estimated by it. The same is pending for adjudication.
It has been alleged in the reference of MOA&FW that Monsanto has issued notices to Informants asking them to withdraw their claims which was followed by termination notices. It has been alleged that Monsanto is relying on such termination notices to compel other seed companies (sub-licensees) to pay excessive and extortionary trait value. It was alleged that the conditions of sub-licence regarding disposition of inventory are unfair and restrict the ability of the Informants to deal with a new technology provider even if it’s available at a lower cost. Lastly, it was considered that the subsidiaries of Mosanto in India are receiving the technology without entering into any sub-licencing agreement.
The CCI considered that the relevant market in the present case should be that of market for ‘provision of Bt. cotton technology’. Bt. cotton has the inherent ability to fight cotton pests. The said technology is different and more efficient from traditional methods of pest control used in cultivation of cotton seeds such as the use of cotton sprays. The conditions of competition throughout India for the aforesaid products are homogenous and the relevant geographic market in the present case should be India.
Out of the 1128 Bt cotton hybrids approved by the Genetic Engineering Appraisal Committee till May, 2012, 986 hybrids were incorporated with Bt technology sub-licensed by Monsanto. Therefore it appears that Monsanto has significant market share in the upstream relevant market, thus prima-facie enjoying dominant position in the market.
The CCI took note of the fact that various terms and conditions in the sub-licensing agreement appear to be stringent and unfair, particularly in light and would have the effect of denial of market access to the seed manufacturers, given their dependence on MMBL for Bt cotton technology. The CCI noted that imposition of such conditions for notification coupled with stringent termination conditions not only discourages the sub-licensees from dealing with the competitors, but also amounts to restriction of development of alternate Bt cotton technologies. Further, charging of trait value payable on the basis of MRP of the seed packet apparently has no economic justification in light of the fact that performance of the Bt cotton crop depends not only on the BT cotton technology but also on other factors like genetic composition, climatic conditions etc. and appears to be unfair.
It is not clear whether the group entities are being subject to similar pricing and stringent sub-license agreements. Any discrimination on this account has the potential to distort the level playing field in the downstream Bt cotton seeds market and needs to be examined.
The termination conditions are found to be excessively harsh and do not appear to be reasonable as may be necessary for protecting any of the IPR rights, as envisaged under Section 3(5) of the Act. The CCI noted that such agreements discourage and serve as a major deterrent for the sub licensee from exploring dealing with competitors. The agreements thus, have the effect of foreclosing competition in the upstream Bt Technology market which is characterised by high entry barriers. In view of these aspects, the agreements entered by MMBL with sub-licensees appear to be causing appreciable adverse effect on competition in Bt cotton technology market in India, in terms of Section 3(4) r/w Section 19(3) of the Competition Act, 2002 (Act).
Thus, the CCI found a prima-facie case of violation of Section 4(2) and Section 3(4) of the Act. The DG has been directed to investigate the matter and complete the matter within 60 days from the date of receipt of this order.
The Dissenting Order–
In its minority order, Mr M.S. Sahoo, Member of the CCI, made reference to the sub-licensing agreements entered prior to enforcement of the Act and held that the same cannot be analysed for a violation of the Act. As regards sub-licensing agreements of 2015, the minority order was of the view that the royalty fee charged by Monsanto can be considered excessive only when it is higher than the competitive prices, namely, prices in different geographical market for the same product or prices charged by competitors in the same product market. Neither of the cases referred to the CCI provides any of these. The rate of trait fee is not higher than those applicable prior to the enforcement of the Act. Hence the trait fee applicable in 2015 cannot be considered excessive for a violation of Section 4(2)(a)(ii) of the Act. Moreover, the Minority order noted , since the Central Government has decided to fix the prices for the seeds as well as the Traits under section 3 of the Essential commodities Act,1955, nothing survives in the reference.
As regards imposition of unfair condition by Monsanto restricting seed manufacturers from obtaining similar technology from competitors, the minority order observed that these clauses require seed manufacturers to notify to Monsanto, if they wish to develop seeds on a trait available with competitors. These do not prohibit Informants or restrict their ability to engage with competitors; these merely require a notification to Monsanto. The minority order found that there is no merit in warranting an investigation under Section 26(1) of the Act.
(Source: CCI: Order dated February 10, 2016. For full text see CCI website)
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