Intellectual Property Rights v/s Consumers' Rights

Priyanka Sardana and Vijay Sardana

In the recent past many food safety incidents – like pesticide residues in carbonated beverages, contami-nation in chocolate, etc. – were discussed.

The investigation in these cases went ahead and never reached convincing end. There were many reasons for it. One of the major reasons is intellectual property right of the company on product formulation.

We had have an opportunity to go through these cases closely. There were various angles to the case but one of the justifications given by the companies that “we are global company and provide the best to suite the local market requirements”, needs discussion.

Who should decide the limit of Intellectual Property Rights where public health is at stake? Are the companies justified in claiming Intellectual property right at global level when they may not be using different formulations in different markets because of local conditions and may not be using the patented technology at all?

The questions, which should be asked from the companies, is it justified to treat quality and safety standards in different territories differently or as separate markets when it comes to food safety?

Very often the answer is yes, because despite the progress in trade liberalization, advances in communications and the globalization of the economy, there still remain today important differences in the economies and cultures, legal and regulatory systems, and the level of wealth and development of different countries and regions. Depending upon the target consumers and various other parameters, companies generally continue to treat different territories as separate markets. How these markets are defined and the extent to which they are considered as distinct depend on the product to be marketed and its business sensitivity to market and prevailing legislation and regulatory conditions of the market. The question being asked is, when it comes to food safety and public health what should be the approach?

Are there legitimate reasons for food businesses to differentiate food products for different markets on food safety parameters?

Different territories have often different technical and safety standards, physical and climatic conditions, and market environments. Depending on the type of product, these often oblige companies to tailor their products for that specific territory.

This can apply to products of all categories: seeds may have to be conditioned differently for different climatic conditions and soil reasons; food products may be subject to different safety and technical requirements in different countries; for products heavily dependent on sensory properties i.e. brand image and presentation, colours, designs, formulations or names may vary according to the taste and cultural sensitivities in different countries (e.g. chocolate, coffee and perfumes, to take a few examples, are formulated differently to suit the taste and climatic conditions in different markets). Many of these parameters are also covered under IPR regime.

Again depending on the sector and products, companies price their goods differently according to the market conditions and the costs of bringing the product to that particular market. The reality is that price differentials do exist and they are due to very important factors, which have nothing to do with the exhaustion regime. These include different tax regimes, employment, price control regime, social security charges, the general state of the local economy, marketing and promotional expenditure, differences in legal protection and royalties paid etc. High tariffs and subsidies still exist around the world, and distort pricing in a way that leaves brand owners at the mercy of parallel traders. Some sectors, such as the food, agriculture and pharmaceutical sectors, are also subject to government price control regimes and are not able to control price differentials for their products.

Many other regulations like labeling laws also impact the product presentation of the food.

Why companies prevent free movements of goods from one market to another in globalized market?

Food regulations do play a role and liability id of the brand owner. Manufacturers have responsibility for the distribution of their products in different markets for the same reasons, which require them to tailor their products to each market. If products not destined for a particular market are sold there, they may not conform to the appropriate safety, technical, regulatory norms, with the resultant safety and health risks this entails. For example, fruit juice, flavoured milks, confectionaries are sold to a different specification in the India than other parts of the world. The arguments can have many dimensions. This means that food marketed in the USA or Europe or Japan under a recognizable brand name may be inferior to the quality of food marketed under the same brand in India or vice versa.

The same problem can arise in the market for foodstuffs where some countries have different standards regarding additives, and consequently parallel traded goods might actually be illegal, with the potential to damage the reputation of the brand in those countries.

The presentation or form of such products may also not correspond to another market’s culture, taste or expectations, so that products relying heavily on brand reputation may suffer from negative effects on its brand image.

In addition, the inability to control and trace products makes quality control by companies much more difficult. This has particularly serious consequences when this involves products with health and safety implications such as drugs, foodstuffs, chemicals, etc.

The distribution of different versions of a product on the same market also brings high risks of customer confusion, which, in addition to being detrimental for the consumer, could cause brand image to suffer.

Distribution control is essential for Profits and Corporate Strategy

Irrespective of Intellectual property rights, companies require organized distribution systems to be able to distribute their products in an orderly way. In many sectors, distribution arrangements are made on a territorial basis and distributors agree to distribute products on the basis of exclusivity in that territory to some degree. Not being able to control the flow of goods from one market to another would can serious disruption to the distribution systems set up by businesses.

In some industries, the timing of product launches (e.g. the movie industry relies on sequential distribution of their audiovisual works) in different markets is essential to their success. The inability to control flows of products between market would severely impede businesses abilities to control the timing of the marketing of their products.  The classical case of destruction of edible oil industry in India is due to the free flow of imported oil under free trade agreements.

Improper handling of Intellectual Property leads to confusion

Orderly distribution also makes it easier to detect counterfeit and pirated goods. Customs officials would find it increasingly difficult and certainly more time-consuming to distinguish between legitimate parallel imports and unlawful counterfeit copies as counterfeiters/pirates often disguise counterfeit/pirated material as parallel imports (where these latter are legal), making it much more difficult, if not impossible, for customs and enforcement authorities to detect such products. In addition, parallel imported products are very often used as masters for counterfeited/pirated ones.

IPR issues and Effects on consumers

Very often the argument is lower taxes and competition due to opening the borders will reduce the prices. Experiences in most of the free market economies are not giving any such confidence.

One of the main arguments for moving towards a regime of international exhaustion is that it will increase competition, thereby leading to a general reduction in prices for consumers. It is not clear whether this will really be the case as the commercial incentive for parallel trading is the ability to profit from the margin between the lower priced market and the higher priced market. It is therefore more likely that the parallel trader will keep the difference in prices as profit rather than pass it on to the consumer in the form of a cheaper price.

Parallel trading will reduce the incentive for the authorized distributor, if not the intellectual property right owner himself, to sustain levels of investment in pre-sale and post-marketing services, and parallel importers themselves have no long-term interest in investing in these services. A regime, which allows parallel trading, may therefore result in a reduction of such services for consumers.

Food Trade and IPR

Price is not the only criterion of importance to consumers. Consumers also want choice and goods, which respond to local market requirements. As mentioned above, reduced financial returns from internationally successful products caused by parallel trading may jeopardize the funding of research and development of commercially riskier products, thereby reducing the range of products available to consumer. Price differentials also allow the manufacturers to serve more markets and, in particular, low price markets whose consumers would not be served by parallel trading.

When goods tailored for one market find their way into another, there may be safety implications depending on the type of goods: goods of different specifications might find their way into markets where they may be unsafe as a result. For example, instruction leaflets might be in the wrong language, necessary information about allergic components service might not be available, or the product may not comply with local food safety or technical requirements, thus endangering the consumer.

Consumer confusion may also result from having two or more versions of the same product in the same market.

 

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