Competition Commission balances IP rights and anti-competitive practices in car spare parts case

India

In Kataria v Honda Siel Cars India Ltd (July 27 2015), the Competition Commission of India has imposed a penalty of Rs420.26 crores on Hyundai Motor India, and asked two other car manufacturers - Reva and Premier - to cease and desist from engaging in anti-competitive practices with regard to car spare parts. The Competition Commission had already imposed penalties on 14 other car manufacturers in an order dated August 25 2014, but the case against Hyundai, Reva and Premier remained pending.

A complaint was filed in January 2011 against three car manufacturers, whereby the latter did not make genuine automobile spare parts manufactured by them freely available in the open market, and restricted independent original equipment suppliers from selling the parts/components in the open market. The complainant alleged that such practices were in direct contravention of Section 3 and Section 4 of the Competition Act 2002 (India), which prohibit anti-competitive agreements and the abuse of a dominant position, respectively.

Following a further investigation ordered by the Competition Commission, 14 other automobile manufacturers or original equipment manufacturers (OEMs) were brought under the review of the Competition Commission.

The manufacturers relied on the exemption set forth in Section 3(5) of the act, which allows IP rights owners to lay down reasonable conditions necessary for the protection of their rights under various IP statutes, such as the Copyright, Patents, Trademarks and Designs Acts. Since the passing of the Competition Act, the nexus between IP rights and competition has been a subject of constant debate among experts. However, in the present case the Competition Commission held that none of the parties could rely on the exemption for the following reasons:

  • The parties had failed to submit the documentary evidence necessary to successfully establish IP rights in India with respect to the various spare parts; and

  • The restrictions imposed did not qualify as reasonable conditions necessary for the protection of any of their rights.

The Competition Commission first observed that none of the manufacturers owned any registered IP rights for their spare parts in India so as to avail themselves of the exemption. The commission noted that, even if the parent companies of the OEMs held such rights in other territories, IP rights are territorial in nature and would not offer any protection in India. The commission further stated that it was not the competent authority to decide whether a patent/trademark registered in another country is valid in India. Some of the manufacturers claimed that drawings/know-how/specifications would also be conferred IP protection as trade secrets and confidential information. However, since trade secrets and confidential information were not amongst the categories listed in Section 3(5) of the act, the commission opined that the exemption could not be claimed in this respect.

The Competition Commission further held that, even if that were the case, the mere selling of spare parts, which are manufactured end products, would not necessarily compromise the IP rights held by the OEMs in such products. This observation does, to some extent, limit the scope of Section 3(5), which will worry many companies. However, the ruling presents certain benefits, and precautions and safety measures may be taken by manufacturers - particularly those with a vast secondary market for spare parts - in order to protect their brand image and product quality:

  • One of the main reasons why there are significant sales of counterfeit spare parts is the poor/scarce availability of such parts. The present ruling is likely to dampen the counterfeit market. Since counterfeiting usually affects the OEMs' intellectual property, it hampers the brand's value, in addition to feeding into the aftersales business.

  • There will be more potential for manufacturers to develop the spare parts aftermarket business.

  • The manufacturers may impose pre-conditions on the contractual relationships with the suppliers by subjecting the spare parts they wish to sell to the same safety standards, and may license their safety check methodology for a royalty fee.

  • The manufacturers may require that suppliers label the genuine spare parts sold by them directly to safeguard their brand image and develop goodwill in the market.

  • In contracts with customers, the manufacturers may limit the warranty against the use of faulty or defective parts sold by their suppliers.

It is important that all intellectual property (whether trademarks, copyright, patents or designs) pertaining to commercial products, including individual components, be protected and enforced in India; all technology transfer agreements and contracts entered into should pertain to intellectual property protected in India.

Prachi Agarwal, Anand and Anand, New Delhi  

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