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23 January, 2019
While competition authorities have investigated and penalised dominant firms for abusing their strength in relevant markets, such findings have usually been of the more contemporary forms that abuse can take. One unconventional method which has resurfaced recently in developed anti-trust jurisdictions is abuse by initiating frivolous litigation. While the Competition Commission of India (CCI) grapples with its first couple of alleged instances of frivolous litigation, a few issues arise for consideration. Firstly, the legal standards developed to assess whether the litigation is frivolous by other more advanced jurisdictions than the Indian jurisdiction are to be understood from a theoretical perspective. Secondly, the applicability of these legal standards within the framework of the Indian competition legislation, i.e. the Competition Act, 2002 (Act) is to be assessed and may need a detailed exploration.
Frivolous Litigation as an Abuse of Dominance
In general terms, litigation is termed as a sham when it is initiated by a dominant undertaking to cause anti-competitive harm, via the inappropriate use of adjudicatory / government processes or legal rights. Usually, the aim behind any 'sham' litigation is to either subdue a competitor by increasing operational costs or to delay the entry of a competitor in the market by an abuse of governmental processes.
The resultant effect is that the competitor is forced out from the relevant market or its entry into potential markets is foreclosed. When a party's initiated litigation is not a justifiable recourse under law or may not be backed by a valid cause of action, such litigation is termed as frivolous and may become an abuse of dominance. In cases where sham litigation has been proven, it is seen that the entity abusing its dominance usually has much economic prowess, which remains undaunted by the meagre expense of initiating litigation.
In the more mature anti-trust jurisdictions such as the U.S. and the E.U., 'frivolous litigation' as a form of abuse has gained a sense of definition from dictums laid down in case laws. It is also seen that the outcry of litigation being frivolous / vexatious in nature arises most in cases entailing an enforcement of intellectual property rights, owing to the contentiously subjective and evolving nature of such rights as well as the huge potential of monetary revenue which can be generated from their usage. Therefore, such cases usually present a complex factual matrix in which maintainability is seldom an issue, as litigations entailing enforcement of intellectual property rights involve contentious questions of law, and are likely to be adjudicated as preliminarily meritorious and as having a basis.
Foundations in the jurisdiction of United States
In the United States, the idea of 'frivolous litigation' as a form of abuse can be traced back to the Noerr-Pennington doctrine, which derives its name from two cases decided by the Supreme Court in the 1960s, Eastern Railroad Presidents Conference v. Noerr Motor Freight, Inc.2 (Noerr) and United Mine Workers of America v. Pennington3 (Pennington). In Noerr, trucking companies and their association sued a group of railroads alleging that the railroads wanted to monopolise the freight business. Truckers alleged that railroads had engaged a public relations firm, to carry out a publicity 'smear' campaign, to create distaste in the minds of the general public and influence legislation, eventually getting the government to veto a bill which would have permitted truckers to carry heavy loads across the state. The United States Supreme Court (SCOTUS) held that antitrust laws were not violated by the railroads' mere attempt to influence the passage or enforcement of laws. Mere solicitation of government activity was not violative of anti-trust laws, irrespective of the incidental effects of such activity being anti-competitive. Similarly, in Pennington, it was held that concerted efforts to influence public officials did not violate antitrust laws even though it might have intended to eliminate competition.
Thus, as per the Noerr-Pennington doctrine, antitrust laws could not to be used as devices to prevent individuals from expressing their grievances to their elected officials and adjudicatory bodies. Petitioners were immune from antitrust liability if the conduct was valid.
Thereafter, in Professional Real Estate Investors v. Columbia Pictures Industries4 (PREI), an exception of 'sham' litigation to the Noerr-Pennington doctrine was evolved. While PREI ran a resort hotel which had video disc players installed and had a library of motion pictures, PREI would rent them to guests for in room viewing and also wanted to rent them to other hotels. While Columbia Pictures sued for copyright infringement from renting of videodiscs for viewing in hotel rooms, PREI alleged this litigation was 'frivolous'. The Court of Appeals for the Ninth Circuit brought forth a definition by characterising 'sham litigation' as "one of two types of abuse of judicial process: either misrepresentation in the adjudicatory process or the pursuit of a pattern of baseless, repetitive claims instituted without probable cause and regardless of the merits." As PREI had alleged neither, its case did not stand. This decision was appealed to the SCOTUS, which laid down the two pronged test. Firstly, the lawsuit must be objectively baseless in the sense that no reasonable litigant could realistically expect success on the merits. Secondly, the court had to decide whether the baseless lawsuit concealed an attempt to interfere directly with the business relationships of a competitor through the use of the governmental process as opposed to the outcome of that process as an anticompetitive weapon.
In more general terms, activity ostensibly directed towards influencing governmental action did not qualify for immunity under the Noerr-Pennington doctrine if it was a mere sham to cover an attempt to interfere directly with the business relationships of a competitor.
Analogous tests of the European Commission
In the EU, Article 102 of the Treaty on the Functioning of the European Union (TFEU) prohibits any abuse by undertaking(s) dominant within the internal market or in a substantial part of it, as incompatible with the internal market in so far as it may affect trade between EU member states. In ITT Promedia v. Commission (ITT Promedia), Promedia complained that Belgacom, a Belgian public sector undertaking had the exclusive right to operate telecommunications and had abused its dominance by denying rights to publish commercial telephone directories. Promedia brought action before the local Belgian courts on performance of contractual obligations and to seek damages, where Belgacom brought counterclaims. Subsequently, Promedia brought proceedings before the EC, in which it asserted that Belgacom had abused its dominance by initiating vexatious litigation before Belgian Courts. As Belgacom responded to the litigation to assert its rights, Belgacom's actions were qualified as reasonable, and therefore, not abusive.
The EC held bringing of an action to be a fundamental right of access to a judge, was not an abuse unless:
- A dominant undertaking brought an unreasonable action not to establish its rights but to harass the opposite party, and
- Such action was conceived as a part of a plan to eliminate competition.5
The EC's decision was contested before the European Court of First Instance (General Court / GC) which coined the term 'the two cumulative criteria' already underlying in the EC's decision, now widely used as a litmus test to check the frivolity of litigation.
The General Court noted that in terms of the first criteria, the action must objectively be unfounded, manifestly. The second criterion required that the motive behind the litigation must be to eliminate competition. Both these criteria must be fulfilled in order to establish an abuse. Notably, by merely being unmeritorious, litigation does not constitute an abuse of dominance unless it has an anti-competitive object. Equally, litigation which may reasonably be regarded as an attempt to assert rights vis-à-vis competitors is not abusive, irrespective of the fact that it may be part of a plan to eliminate competition.6 The two cumulative criteria have made it simpler for adjudicating authorities to assess the frivolousness of alleged and controversial proceedings. The twin pronged tests in PREI and ITT Promedia are fairly similar – the first prong in both cases requires an objectiveness assessment whereas the second prong requires a subjective assessment. However, if one was to distinguish, EC's approach in the 'two cumulative criteria' takes into account the intention of the vexatious litigator and weighs it higher than the effect.
Interestingly, before the General Court, ITT Promedia had only challenged the application of the test and not the test itself. Therefore, the General Court restrained itself to adjudicating on the application of the 'two cumulative criteria' and not on the correctness of the criteria.
However, the General Court's decision invariably meanders into a qualitative assessment of the two cumulative tests, and sets out inadvertent jurisprudence useful for assessment of future claims of litigation being vexatious. Notably, the GC's decision in ITT Promedia allocates importance to the litigant's right to access courts. The decision held that a test which carved out an exception to the general principle of access to courts should be construed strictly, so that the general principle was not curtailed in any manner.
AstraZeneca – Fraudulent acquisition of rights
In AstraZeneca7, the issue revolved around fraudulent acquisition of exclusive IP rights, which caused competitive harm and distorted market forces. One of the major products marketed by AstraZeneca (AZ) was 'Losec'. Companies namely Generics and Scandinavian Pharmaceuticals complained that AZ's conduct was preventing them from entering the markets, preventing them from producing generic versions of the drug in European Economic Area (EEA).
The EC found AZ to have commuted two forms of abuse – firstly, AZ made misleading representations before patent offices / national courts of several European Countries and induced them to provide AZ with a supplementary protection certificate (SPC) to which it was not entitled and; secondly, AZ had taken steps to delay the marketing of general medicinal products as well as to prevent parallel imports of Losec substitutes by exploiting loopholes in the legal system. 8 Generics would have been cheaper and imports would have disrupted the monopoly. The second abuse, i.e., switching customers from AZ's one product to another is not of relevance here.
SPC Regulations allowed patentees to extend the age of patents by up to five years. Due to regulatory approvals, patents were granted much later than the date of the launch of the commercial product. To compensate investors for the unpatented duration and delay entry of generics, SPCs were provided. AZ applied to patent offices of several European nations for extending the life of 'Losec'. These applications were misleading and only intended to gain a longer life of the patent, than it was entitled for.
SPCs were granted from the 'first authorisation' date. While AZ had attempted to bank upon a legal confusion, AZ interpreted 'first authorisation' date in the SPC Regulations to be the date of completion of all administrative steps necessary to launch the product – when the national authority approved the price of the product, it could be marketed. However, AZ's documentation made it evident that the company understood the correct meaning of 'first authorisation' – obtaining approval only with regard to safety of the product. This was deduced from AZ's patent department's communications with patent agents in different countries.
A novice CCI's legal conundrum
The CCI is deciding its initial few claims of litigation being allegedly frivolous. While CCI has adjudicated one such complaint, the investigation of the other is underway.
In Biocon v. Roche, the CCI was cautious in assessing whether the litigations filed by Roche against Biocon were frivolous or not.9 Biocon alleged that while it attempted to introduce a generic version of its blockbuster cancer drug, a bio-similar of Roche's drug 'Trastuzumab', Roche filed a frivolous civil suit against the Drugs Controller General and Biocon, attempting to stall its entry into the market.
While Biocon was injuncted from claiming similarity with Roche's drug or relying upon the descriptive material, the Delhi High Court eventually permitted Biocon (through its first order) to manufacture and market its version of the drug with certain restrictions. Biocon has also however alleged that Roche indulged in badmouthing its product by making references to the High Court's order and misinformed doctors and hospitals about the pending suit which was favourable for Biocon. Biocon grieved that Roche's shrewd measures had caused setbacks in government's procurement criteria and by being dropped out of tenders.
Roche contested the maintainability of proceedings before CCI, citing the pendency of the lis in the form of the civil suit before the High Court. The CCI held that the reliefs available before itself and the High Court were distinct and not mutually exclusive. It also recognised the right to bring civil litigation to defend legal rights and found that an unsuccessful attempt did not make the litigation frivolous. While relying upon the 'two-tiered process' from PREI v. Columbia Pictures, the CCI found that the legal battle was long drawn and heavily contested, it wasn't a sparing case where litigation could be held to be baseless, objectively.
In Bull v. JCB however, the CCI has adopted a whole different approach. Bull Machines approached the CCI alleging that another construction equipment manufacturer, JCB had abused its dominance by initiating litigation in bad faith before the Delhi High Court. In the controversial litigation, JCB had alleged an infringement of its design rights. While JCB in its suit had averred that Bull's machine infringed JCB's IPR and sought a stay over the production and sale of such machines, Bull alleged malice behind the suit.
In CCI's prima facie order, JCB was found to be dominant in the market for manufacture and sale of backhoe loaders in India. Appearing to agree with Bull that the 'injunction' was obtained on baseless grounds and misrepresentations, the CCI notes10 that 'predation through abuse of judicial process presents an increasing threat to competition, particularly due to its relatively low anti-trust visibility'. No further discussion ensues on the method of determining the same.
At this stage, a possibility of contradictory findings cannot be ignored; where the CCI or the DG were to conclude that JCB's litigation was frivolous, and subsequently the Delhi High Court were to rule in favour of JCB in the underlying litigation. While one hopes that sound judgement will prevail and such a situation would be avoided, CCI in passing its prima facie order, has not postponed the consideration of anti-trust claims while the underlying litigation is resolved.
The CCI may consider adopting a mechanism along the lines of that developed in the US, where the antitrust investigation is stayed until the outcome of the underlying intellectual property suit. Courts have found it to be sensible to stay proceedings in respect of the vexatiousness of litigation, as such litigations are largely based on the efficiency of the intellectual property litigation itself. This means that if the patent / copyrights are found to be valid, the question of the litigation being baseless goes out the window. This would also eliminate the possibility of inconsistent results and the duplication of the exercise of appreciating evidence which is a voluminous, time consuming and expensive process in antitrust cases.
As the CCI usually looks at the more advanced jurisdictions, it is logical that analysis of the 'two cumulative criteria' has found its way in Biocon's case. However, confusion persists around whether the CCI should apply the 'two cumulative criteria' at the prima facie stage or not, while asking for an investigation. For instance, in JCB's case, merely on Bull's allegations that the underlying patents were illegitimate and that the stay was granted on misrepresentation, CCI formed a prima facie opinion, without applying the test, of JCB's litigation being abusive.
Lastly, much wisdom can be borrowed from the Supreme Court's recent judgement in CCI v. Airtel11. While the issues in this case revolved around overlapping jurisdictions of CCI and Telecom Regulatory Authority of India (TRAI), the Court's ruling is significant for cases of frivolous litigation. The Court noted that as the dispute between the parties arose out of telecom contracts between the telecom operators, a determination had to first be made on the conduct of the parties under the TRAI Act by TRAI / Telecom Dispute Settlement Appellate Tribunal, before the CCI could investigate cartelisation and other anti-competitive practices. While the decision remains controversial for curtailing CCI's investigative powers, its applicability to cases where the 'underlying litigation' is in question is crystal clear.
For further information, please contact:
Chandramauli Dwivedi, L&L Partners
cdwivedi@luthra. com
Footnotes
* Chandramauli Dwivedi is an associate placed with the competition law practice group of L&L Partners Law Offices. Having graduated from National Law University Odisha in 2016 with Honours, he regularly acts for clients in ongoing litigation in all major forums. He has represented clients from various sectors such as steel, healthcare, alcoholic beverages, construction equipment, pharmaceuticals, airlines, cement and paper industry. Views expressed are his own.
2 E.R.R. Presidents Conference v. Noerr Motor Freight, Inc., 365 U.S. 127 (1961)
3 United Mine Workers of Am. v. Pennington, 381 U.S. 657 (1965)
4 Professional Real Estate Investors v. Columbia Pictures Industries; 508 U.S. 49 (1993).
5 ITT Promedia v. Commission; Case T-111/96 ; Para 30 of the judgement of the Court of First Instance
6 Ibid; Para 56
7 AstraZeneca v. Commission; Case T-321/05.
8 Case COMP/A. 37.507/F3 . AstraZeneca, relating to a proceeding under Article 82 of the EC Treaty and Article 54 of the EEA Agreement, 2005 at para 5
9 Biocon Limited and Hoffman La-Roche AG; Case No. 68 of 2016
10 Bull Machines and JCB India; Case No. 105 of 2013 at Para 15
11 Competition Commission of India v. Bharti Airtel Ltd. & Ors.; judgement dated 05 December 2018, in C.A. No. 11843 to 11852 of 2018.
