Market segmentation: proposed legislative amendments pose threat to IP owners

Over the past decade, India has made a sustained effort to streamline its IP laws in relation to patents, trademarks and designs and has nurtured a statutory basis for new forms of intellectual property such as geographical indications and integrated circuits. However, the same effort has not been made with regard to the copyright legislation. This can perhaps be explained by the fact that the energetic Ministry for Commerce and Industry is the nodal ministry for the Trademarks Act 1999, the Patents Act 1970 and the Designs Act 2001, while the Copyright Act 1957 is overseen by the Ministry of Human Resources Development. But the fact remains that substantive amendments to the Copyright Act have been delayed for the past decade, while the statutory framework for other forms of intellectual property has seen far-reaching changes.

In December 2009 the government finally announced amendments to the Copyright Act. The Copyright (Amendment) Bill 2010 was quickly opposed by various interested industry groups and other stakeholders and then referred to the Parliamentary Standing Committee for Human Resources Development.

On 23rd November 2010 the standing committee presented its report to Parliament. The report deals with various issues, including some contentious ones such as the film industry-centric provisions, which took centre stage during the consultation process. The controversy around such provisions overshadowed the serious discussions surrounding another provision which has the potential to alter radically the established international practice of territoriality in the use of copyright works such as books, music and films by copyright owners. The bill seeks to amend Section 2(m) of the act, which defines the term "infringing copy", by inserting the following clause: "provided that a copy of a work published in any country outside India with the permission of the author of the work and imported from that country into India shall not be deemed to be an infringing copy."

The publishing, broadcasting, music, software and film industries, as well as prominent Indian and foreign authors, have objected strongly to the proposed amendments. Underlying the objections is the scheme of copyright licensing which has long recognised that a copyright owner may choose to segment or divide its rights in terms of the licence term, and may divide the territories where the work may be exploited. This practice of market segmentation is anchored to the principle that markets and market conditions differ and thus require different treatment in terms of pricing and the manner of exploitation. In addition, market segmentation is used by different industries in keeping with that particular industry's practices - for example, the film industry internationally follows the "windows" system of film exploitation, which provides that a film will be released first in cinemas, then through digital download, cable and direct to home television (ie, through video-on-demand or pay-per-view) and finally on DVD. This practice of phased availability is further segmented according to territory: namely, priority territories see films being made available more quickly than others via the various formats and platforms. This practice also seeks to address the scourge of piracy by controlling methodically how films are handled in various territories.

Similarly, the print publishing industry also routinely segments the exercise of copyrights on the basis of territory. The principle of segmentation seeks to deliver low-priced editions in developing countries where the social and market conditions mandate a divergence from the prices charged in developed countries. Segmentation is already statutorily recognised in India, where assignments or licences may be limited both in terms of time and territory, as well as by other provisions of the act. The courts have recently clarified that the Copyright Act applies the principle of national exhaustion and not international exhaustion. In trademark and patent law, the principle of exhaustion refers to the inability of a rights owner to interfere in the dealing of a patented product or a product marked with a particular trademark once it has been sold under the owner's authority. Thus, a product branded with the owner's trademark and sold lawfully in Country A can be legally imported into India and sold by a third party, despite the trademark owner manufacturing and selling the same product in India. This is the phenomemon of parallel imports. The only exception to the parallel import right is where "the conditions of the goods have been changed or impaired after being put on the market". Similarly, the first sale doctrine under copyright law also limits the right owner's ability to interfere with the further dealings of its work once it has put the work into circulation.

While the Copyright Act thus mandates the principle of exhaustion, the courts have also held that this principle applies to literary, musical, artistic and dramatic works, but not to films, software or sound recordings. The proposed amendment extends the principle of international exhaustion to books, films, software and music. So, for example, the amendments will remove the incentive for international publishing houses to make low-priced editions available in India as this would potentially allow Indian dealers to sell such editions at the same low prices internationally. Even the film industry is likely to be negatively affected by this change in law.

The proposed amendment departs from the established international practice of market segmentation, as well as the basic tenets of copyright law which are followed internationally, including in the United States and the European Union, which mandate national exhaustion. It may potentially result in upsetting established practices and irreversibly damaging the creative industries. The proposed amendment must be reconsidered if the Indian media sector is to find its place internationally.