[Aryan Birewar, Rishabh Guha, and Dhanshitha Ravi are 4th Year BBA LLB (Hons.) students at Symbiosis Law School, Pune]
On 27 April 2023, the National Company Law Appellate Tribunal (“NCLAT”) passed an Order (“the Order”) favouring ITC Pvt. Ltd., reversing the penalty that was levied on it by the Competition Commission of India (“CCI”) for not notifying a combination under section 43A of the Competition Act, 2002 (“the Act”). This was pertaining to ITC’s acquisition of trademarks and related assets of Johnson and Johnson’s (“J&J Pvt. Ltd.”) ‘Savlon’ (hereinafter, Transaction I) and ‘Shower to Shower’ (hereinafter, Transaction II), through two separate trademark purchase agreements dated 12 February 2015.
This post examines the reasons as well as implications of NCLAT’s decision to reverse the penalty levied by the CCI. This includes a breakdown of how trademark assignment is classified for the purposes of Combinations and also analyses the scope of Item 3, Schedule I of the Combination Regulations, 2011, vis-a-vis trademark assignments. Finally, it delves into whether retrospective application can be afforded to the MCA Notification of 2017 and the implications of the same.
Contextualizing Trademark Assignments under Merger Control
A Combination, for the purpose of section 5 of the Act, is limited to the acquisition of one or more enterprises by one or more persons. An ‘Enterprise’, in turn, is defined under section 2(h) as any person or governmental department engaged in the activity of storage, production, or distribution of articles, goods, or services.
The CCI order dated 11 December 2017 held that trademark assignments fall within the ambit of ‘transfer of assets’ under the Act. This holding stems from the scope of acquisition, given under section 2(a)(i) of the Act, i.e., acquisitions include the acquisition of shares, voting rights, and assets of the enterprise. The characterization of ‘assets’ found under Explanation to section 5(c) includes registered trademarks, GIs, copyrights, patents, etc. By reading section 2(a)(i) with the Explanation to section 5(c), the CCI concluded that the purchase of the trademarks resulted in the purchase of the assets of J&J Pvt. Ltd., thereby constituting an ‘Acquisition of Enterprise’.
Furthermore, a reading of section 2(a)(ii), which brings ‘Control over Assets’ also within the meaning of ‘Acquisition’ for the purposes of combinations, further solidifies the intent of bringing trademarks under the realm of combinations. Even the European Commission in Otto/Primondo Assets (2010), categorically held that contractual purchase of intangible assets like trademarks, copyrights, domain names, etc. constitutes ‘Assets’ for the purposes of Article 3(1)(b) of EU Merger Regulation, 2004. This flows from the logical deduction that the trademarks are economic value-carrying assets, which will generate revenue for the assignee company. Drawing this to the Indian regime, the CCI in United Spirits, as early as 2013, approved the combination involving a trademark assignment along with technical know-how, undertaking a subjective evaluation of the potential effects of competition.
Hence, this showcases the need for affording a purposive interpretation to section 5 of the Act. This is because any literal construction that excludes intangible assets could render the principle of merger control redundant, as rightly held by the CCI and upheld by the NCLAT order.
Validity of Exemption Claim under Combination Regulations
Schedule I of the Combination Regulations enlists types of acquisitions that lack the ability to cause an Appreciable Adverse Effect on Competition (“AAEC”) in the relevant market, thereby being exempted from the notification requirement. ITC Ltd. made a claim under Item 3 Schedule I of the Combination Regulations, 2011, which was rejected by the CCI in its entirety.
This must be analysed in seriatim to decipher the rationality of the CCI’s stance, given that the NCLAT has only addressed the question of penalty imposition. The validity of the said claim rests upon the satisfaction of the following criteria:
(i) Acquisition must not be directly related to the business of the acquiring party or
(ii) Acquisition in the ordinary course of business (“OCB”), not leading to control over the enterprise whose assets are acquired.
Firstly, it is important to ascertain what constitutes a ‘direct relation’ to the business of an enterprise. There are two ways to determine the same. One being the substitutability test, evaluated in accordance with the relevant product market of the goods or services in question. This creates a strict segmentation, granting blanket protection from the notification requirement since, strictly speaking, ITC is neither involved in the production of handwashes nor prickly heat powder that automatically allows it to avail the exemption. On the other hand, the second approach (preferred approach) offers a liberal connotation to ‘direct relation’, which is based on the principle that an acquirer naturally acquires enterprises having ‘overlapping product lines.’ This line of reasoning was adopted by the CCI in Schneider Electric and Larsen Toubro (2019), wherein it held that even though some of the target entity’s products were not substitutable, they can still be grouped as “overlapping products under one or more clusters based on their choice as portfolio/cluster”. Thus, the decision of the CCI to conclude that the trademark assignments were ‘directly related’ to the business of the acquirer in terms of falling under ‘personal care products’ is justified, rendering it ineligible to claim this exemption.
Secondly, whether the acquisition of such a trademark qualifies as a transaction done in the OCB would require reference to the Telecom Spectrum Case, wherein the CCI delineated OCB as “frequent, routine, and usual revenue transactions”. The said Transactions I & II were short-term and did not affect the operating capacity of the enterprise as ITC was not in the business of purchase or sale of registered trademarks. Thus, this substantiates the reasoning followed by the CCI to disallow ITC from claiming this exemption as well.
Thirdly, the condition regarding ‘control’ over the enterprise creates a precarious situation while examining it from the perspective of trademark assignment. Explanation (a) to section 5 of the Act categorically defines ‘control’ as controlling the management or affairs of the company. The Competition (Amendment) Act, 2023 has amended the interpretation of ‘control’ to include the exercise of ‘material influence’ over the commercial and strategic decisions of the target company. Therefore, the primary question is whether the trademark assignment catapults in the exercise of material influence by the acquirer over the target company.
Surprisingly, neither the CCI nor the NCLAT addressed the implications of trademark assignment on the acquirer-target entity equation. But if we undertake a conjoint reading of Section 2(1)(b) and 37 of the Trademarks Act, 1999 it can be argued that trademark assignments solely transfer ownership rights and goodwill with respect to the mark. The test of control, as per section 5 of the Act, requires the acquirer to be able to dictate commercial decisions of the target entity. Since trademark assignments do not affect the decision-making capacity of the target entity, the test of control enshrined in section 5 of the Act remains unsatisfied. Though if read separately, such a ‘control’ requirement would open a pandora’s box in terms of enabling all such trademark assignments from benefiting this exemption, the same cannot be exploited since the OCB requirement goes hand in hand with the ‘control requirement’, making it harder to claim such an exemption. Even in the present case, though purchasing the trademarks of Savlon and Shower does not lead to ‘control’, the OCB requirement is still not satisfied.
Hence, the failure to satisfy the statutory criteria renders ITC Ltd. unable to claim the exemption benefit under Item 3, Schedule I of the Combination Regulations, 2011.
Affording Retrospectivity to the De Minimis Threshold
The De Minimis threshold set by the Ministry of Corporate Affairs (“MCA”) Notification dated 4 March 2016 exempted combinations from notifying CCI if the assets and turnover with the transferor company fall below Rs. 350 crores and Rs. 1,000 crores, respectively. A clarificatory notification dated 27 March 2017 was issued to clarify that the assets and turnover of the portion of the target entity being acquired will only be relevant for the purpose of the exemption, as opposed to the previous regime that considered the entire assets and turnover the acquirer as well as acquired parties. Given the trademark assignments, in the present case, took place on 12 February 2015, the question of retrospectivity is significant to claim the exemption.
NCLAT’s decision of choosing to afford the retrospective application of the MCA’s clarification is justified and attributable to the contemporary approach adopted by courts in interpreting such notifications, as opposed to the CCI, which blindly categorised it as a ‘substantive change’ and held the contrary. The NCLAT’s decisions can be rooted in the following trends in interpretation:
- Absence of Wording in the Clarification: The CCI took the stand that the MCA clarification did not ‘explicitly’ provide for retrospective applicability explicitly. But this can be countered by the rationale laid in the case of Mithilesh Kumari v. Prem Behari Khare, wherein the Supreme Court held that the absence of a specific wording does not oust the possibility of retrospective applicability.
- Precedence to Legislative Intent: In the case of JP Bansal v. State of Rajasthan, the Supreme Court held that courts must provide consideration to object-based reading of the law to understand the reasons behind the enactment. As seen in the case of Eli Lilly White & Co. v. CCI, NCLAT held the legislative intent behind De Minimis Exemption to incentivize ‘Ease of Doing Business’ and lessen the administrative burden of CCI. In the present case, retrospectively applying the exemption will only provide the said benefits to increasing number of combinations.
- Test of Detriment: The retrospective applicability must not lead to benefit to one to the detriment of the other party. In the case of Commissioner of Income Tax, New Delhi v. Vatika Township, the Supreme Court held that any clarificatory amendment that confers certain benefits on some parties without inflicting harm on others must be applied retrospectively. In the present case, by approving combinations passing the required threshold, the economic and administrative objective of De Minimis Exemption is being met without any other party being adversely affected, considering that even parties on whom the penalty was levied can approach the court to get it reversed.
Hence, the NCLAT rightly held the exemption to be retrospectively applicable, and CCI’s rigid stance with respect to disallowing retrospective application is outdated.
Conclusion and Suggestions
Though it was right on the part of NCLAT to have reversed the penalty imposed by the CCI, there is still much ambiguity caused by NCLAT refraining from commenting upon certain crucial aspects regarding IPR assignments. For instance, it was important for it to have commented upon the method to deal with trademark assignments considering the exemptions under Item 1 Schedule 3, specifically the ‘lack of control over enterprise’ requirement. Even though this provision specifies that the acquisition of assets that represent “substantial business operations” (irrespective of whether such assets are organised as a separate legal entity or not) are disallowed from availing the exemption, there is still a lot of ambiguity in this regard since even the Competition Amendment Act, 2023 introduces this term, it does not define the same. This must be done as soon as possible since trademark assignments such as the present case require such contextualization.
Furthermore, with regards to affording retrospective applicability, one cannot deny the floodgates argument, which will be inevitable for cases in which CCI had imposed a penalty for notification based on entire assets and turnover. An evident example would be the SRF-DuPont deal, wherein the CCI levied a penalty of Rs. 10 lakhs without considering the portion of the business of Du Pont (only pharmaceutical propellants) being acquired and considered the entire asset/turnover. Even if companies decide to approach the NCLAT to reverse the order of penalty, it must be noted that the Competition (Amendment) Act, 2023, requires the Appellant to deposit 25% of the penalty amount to file an appeal. This creates a financial impediment that inhibits companies from approaching the NCLAT.
Thus, even though the reversal of penalty is warranted in the present case, this landmark judgment has conclusively ruled regarding the classification of IPRs as assets. However, it falls short of addressing the substantive questions concerning the intersection of IPR assignments and combination with respect to availment of the notification exemption.
– Aryan Birewar, Rishabh Guha, and Dhanshitha Ravi