In a recently released order, the Competition Commission of India (CCI) has imposed a token penalty of INR 5 lakhs (approx. USD 7800) on ITC Limited (ITC) for its failure to notify a combination. The combination relates to ITC’s acquisition of the trademarks “Savlon” and “Shower to Shower”, along with other related assets, from Johnson & Johnson by way of two separate asset purchase agreements entered into on 12 February 2015.
In its order, the CCI has held that trademarks are assets for the purposes of the Competition Act, 2002 (as amended) (Competition Act). Further, the order also re-emphasises the position that the Indian merger control regime relates to not only an acquisition of one or more enterprises but also acquisition of control, shares, voting rights or assets of another enterprise. In the event the jurisdictional thresholds prescribed under Section 5 of the Act are met, such an acquisition requires prior notification to, and approval from, the CCI.
ITC submitted that the transaction was exempt under Item 3 under Schedule I of the Competition Commission of India (Procedure in regard to the transaction of business relating to combinations), 2011 (as amended) (Combination Regulations). Item 3 under Schedule I of the Combination Regulations provides an exemption for acquisition of assets not directly related to the business activity of the party acquiring the assets or made solely as an investment or in the ordinary course of business so long as such an acquisition inter alia does not lead to acquisition of control of the enterprise whose assets are being acquired (Item 3 Exemption).
ITC argued that purchase of trademarks was not directly related to the business activity of ITC as it was not present in the relevant markets which relates to antiseptic liquid, antibacterial soap/ hand wash and prickly heat powder. ITC further argued that such acquisition was in the ordinary course of business of ITC and did not lead to control by ITC over the enterprise from whom the trademarks were acquired.
In this regard, the CCI disagreed with their view and held that although ITC did not operate in the product categories relating to the two trademarks, it was present in the business of personal care products, which includes antiseptic liquid or antibacterial soap/ hand wash or prickly heat powder. The CCI also stressed the fact that acquisition of trademarks from a competitor cannot be seen as an acquisition made in the ordinary course of business given that while ITC is operating in the business of selling personal care products, it is not in the business of selling/purchasing intellectual property rights relating to such products.
ITC also contended that since the consummation of this transaction, the Government of India had by way of a notification dated 27 March 2017 (MCA Notification) modified the rules governing notifiability of asset acquisitions. It was argued that per the MCA Notification, in the event of asset acquisition, only the value of assets and turnover derived from the target assets need to be considered for the purposes of the de minimis exemption. Thus, it was argued that applicability of the MCA Notification would make the transaction exempt from the notification requirement.
In this regard, the CCI observed that whilst the show-cause notice in relation to the Section 43A proceedings in this case was issued by the CCI on 29 March 2017, i.e., post notification of the MCA Notification, operation of such notification would not have a retrospective application as the transaction documents (i.e., the asset purchase agreements), triggering notification requirement, were signed on 12 February 2015.
While in the future, similar transactions relating to acquisition of intellectual property in particular and assets in general may be exempt on account of the MCA Notification, nonetheless, this case unequivocally establishes that intellectual property rights are assets for the purposes of the Act. This order also sheds light on the scope of applicability of the Item 3 Exemption particularly in cases where the acquirer and the target company operate in the same or similar markets.
* The authors were assisted by Neelambera Sandeepan, Senior Associate. .