Shabina, a beauty queen turned entrepreneur, has after years of research developed a fairness cream in the year 2004 which she, through her company Shabina Inc., sells under the trademark “Goray Goray” (GG). Shabina Inc. applied for a patent in the year 2004 itself which was allowed by the Wheatasia Patent Office after thorough examination in the year 2013 and was granted Patent No. VN390265 (hereinafter referred to as “IN ‘265”). Mim Inc. had filed a pre – grant opposition against Shabina Inc.’s application. The pre-grant opposition was dismissed by the Wheatasia Patent Office since it failed to pay the fees as prescribed under the Patent Rules, 2003. Shabina Inc. also simultaneously filed for a patent in four other countries. The patent was granted in the United States of America and Australia but was rejected by the UK Patent Office and the South African Patent Office on grounds of lack of inventive step. An appeal against these orders is currently pending. Shabina Inc. has also earlier licensed its patent in the United States for US$ 20 per pack.
GG has enjoyed tremendous commercial success since its launch and has proven to be exceptionally successful in North Wheatasia where fairness creams have traditionally been very popular. Apart from fairness creams, there are other fairness remedies such as fairness pills, gels, soaps and surgical options. However, owing to its ease of application, significant promotional campaigns undertaken by Shabina Inc. and claimed superior efficacy, GG currently enjoys a 40% market share all over Wheatasia of fairness creams and a 30% market share amongst all fairness remedies. However, in North Wheatasia (which comprises 18 states) Shabina Inc. enjoys a 60% market share of fairness creams and a 51% market share amongst all fairness remedies. In South Wheatasia, GG faces stiff competition from Mim Inc’s product “Pyaare Pyaare” (PP) which was introduced in the year 2010 shortly after the publication of Shabina’s patent application. Owing to its wide network in the area, PP currently enjoys a 60% market share in South Wheatasia (which comprises 9 states) amongst fairness creams (and 51% market share amongst all fairness remedies). Mim Inc. is also fast encroaching on Shabina Inc.’s market share in North Wheatasia. Mim Inc. has also developed a process for manufacturing PP which is more cost – effective than the process employed by Shabina Inc.. Mim Inc. has chosen not to apply for a patent over this process and tries to protect it as a trade secret. Mim Inc. has earlier licensed this process to a third party in the United States for a royalty rate of US$ 5 per pack.
A 100ml pack of GG costs Shabina Inc. US$ 15 (variable cost) to make and is currently being sold for US$ 100. Similarly, a 100ml pack of PP costs Mim Inc. US$ 10 (variable cost) and is currently being sold for US$ 75. These costs do not account for the research and development costs incurred by both parties which are undisclosed but are rumoured to be in the range of hundreds of millions of dollars. Without accounting for the R&D costs, the profits made by Shabina for GG are US$ 40 million per annum while those made by Mim Inc. for PP are approximately US$ 25 million per annum.
In view of the threat posed by PP, Shabina Inc. filed a lawsuit for infringement of WN ‘265 against Mim Inc. before the High Court of Hedli in January 2014. Mim Inc. admitted that PP infringes WN ‘265 but disputed the validity of the patent by filing a counter claim under Section 64 of the Wheatasia Patents Act, 1970 claiming that the patent is invalid on grounds of lack of novelty and inventive step. For this purpose, Mim Inc. placed heavy reliance on the decisions of the UK and South African Patent Offices.
Litigation was proving to be expensive for both parties – both parties claimed that they spent approximately US$ 2 million each till the stage of trial and the expected total costs for litigation including appeals is US$ 15 million each. Shabina was informed by her attorneys that the chances of the patent being invalidated were “reasonably good”. Since Shabina was averse to the risk of the patent being invalidated and was conscious of the increasing litigation costs, she called the CEO of Mim Inc., Mr. Mimic.
Mim Inc. and Shabina Inc., on the eve of trial filed a joint compromise application under Order XXIII Rule 3 of the Wheatasia Code of Civil Procedure, 1908 before the Hedli High Court. The terms of the settlement were kept confidential and the agreement was filed before the Court in sealed covers. The Judge recorded that “the compromise is lawful” though, as is the usual practice, no arguments were addressed on the legality of the agreement.
Within a period of one year of the settlement agreement, Mim Inc. stopped selling PP throughout Wheatasia.
Meanwhile, Mr. Seeti Baaz, a former director of Shabina Inc. established Khoobsurat Inc.. In view of the existing market structures and high barriers to entry, Khoobsurat Inc. has found it difficult to enter the market. Khoobsurat Inc. approached Shabina Inc. for a license for WN ‘265 and also separately sought a license for Mim Inc.’s process for making PP. Seeti Baaz offered to match the royalty fees that these parties had agreed to pay each other. However, both Shabina and Mimic flatly refused to license their technologies.
Suspecting that the agreement between Mim Inc. and Shabina Inc. had something to do with their refusal to license their technology, Seeti Baaz used his contacts at Shabina to get a copy of the terms of the agreement between Mim Inc. and Shabina Inc.. The relevant terms of agreement are annexed as Annexure A.
Khoobsurat Inc. gave information to the Competition Commission of Wheatasia (“CCW”) alleging that the above agreement is anticompetitive which he alleged had been subject to scrutiny in several jurisdictions. Seeti Baaz also produced a transcript of the conversation between Shabina and Mimic before the CCW and this is annexed as Annexure B. Though this conversation was meant to be confidential, Seeti Baaz was in the same room as Shabina when the conversation was taking place.
CCW, finding a prima facie case asked the Directorate General to conduct an investigation into the conduct complained of. The Directorate General submitted a report to the CCW finding that the agreement did not contravene Section 3 or Section 4 of the Competition Act, 2002. The Commission has invited both parties to state their objections, if any to the report of the Directorate General. Both parties have filed their written submissions and the CCW has now listed the matter for hearing and disposal on August 30 – 31, 2014.
The laws of Wheatasia are in pari materia to the laws of India, while the Hedli High Court Rules are in pari materia with the Delhi High Court, 1967.
Participants appearing as Appellants will represent Khoobsurat Inc..
Participants appearing as Respondents will represent Shabina Inc. and Mim Inc Corp..
1. Mim Inc. acknowledges the validity of IN ‘265 and undertakes to withdraw its counter claim challenging the validity of the patent.
2. Shabina Inc. shall pay Mim Inc. US$ 265 million over a period of 10 years with equal payments being made every year.
3. Shabina Inc. undertakes not to license IN ‘265 to others in the Wheatasia market.
4. Mim Inc. will exclusively share its process for manufacturing PP with Shabina Inc..
5. Shabina Inc. agrees to withdraw its lawsuit against Mim Inc.
Managing Director and CEO CEO,
Shabina Inc. Mim Inc.
The following is a transcript of their conversation:
Shabina: Mimic, is this a good time for you?
Mimic: Oh hi Shabina! I have been meaning to talk to you myself.
Shabina: What about?
Mimic: About this expensive litigation that our companies have been at. Let’s put an end to this. What do you think?
Shabina: I completely agree. Let’s discuss this further over lunch tomorrow?