Intellectual Property RightsKey Legal Disputes Arising in the FMCG Sector

INTRODUCTION

The Indian economy’s fourth-largest sector is Fast-Moving Consumer Goods (FMCG) sector. The FMCG sector is defined by high-turnover consumer packaged products, which are goods that are manufactured, delivered, advertised, and consumed in a short period of time. Detergents, toiletries, cosmetics, etc. are a few of the FMCG products that are currently dominating the market.

The FMCG sector is divided into three primary segments:

• food and beverages, which accounts for 19% of the total;
• healthcare, which accounts for 31% of the total; and
• household and personal care, which accounts for the remaining 50%.

The consumer market’s primary growth drivers include increased awareness, simpler access, and changing lifestyles. Initiatives aimed at increasing the disposable income of the average person, particularly in rural regions, shall benefit the industry.

Like all the other sectors, even the FMCG sector has several challenges and bottlenecks with respect to the Intellectual Property (“IP”) of the several products in the sector. As mentioned earlier, the goods in the FMCG sector are usually readily available and are manufactured and sold in bulk to different retail stores and markets. Hence, it is important to be aware about the potential IP threats and disputes concerning the goods in the FMCG sector

Moving forward in this article, we shall discuss the key legal disputes in the FMCG sector with respect to IP, and the other legal challenges faced by the sector.

MAJOR LEGAL DISPUTES

1. IP Sector

Trademark

The first step in safeguarding the brand of any FMCG product is to file a trademark. In India, trademarks are valid for a period of 10 years and thereafter can be renewed. Several factors hinder the registration process for availing trademark of any brand, such as ingenuity, novelty and popularity of the brand; continuous use of the mark, etc.

As a brand is marketed and the products are distributed over the world, it faces a number of issues in terms of trademark protection. To ensure ease in availing the trademark certificate, FMCG companies must examine a slew of concerns.

While each global jurisdiction faces its own distinct issues, they all come together to form a unique global strategy, with timing being key.

The commercial image of the companies and their brands have a long-lasting effect on the consumers and are often the key differentiators among competing companies.

The companies need to focus on safeguarding their brands, as such products in a fast-moving sector like FMCG, are prone to counterfeiting and trademark infringement. Additionally, even the consumers need to be vigilant about the products that they are purchasing and the authenticity of the same.

Patent

Depending on the type of product, Patent protection may be an important strategy in protecting FMCG. Although each jurisdiction’s Patent protection varies, ‘design protection’ for FMCG products are a popular option. The two most important aspects in Patents are novelty and priority date.

Patent law provides the exclusive right to the inventor of a particular invention. In the FMCG sector, Patent protection is usually obtained at a development stage.

One of the very common Patents, i.e., the utility Patents, are acquired to protect the creation of an improved or new product, process, or invention.

Effective Patent protection can represent the key assets of consumer goods, especially for the products which require a considerable amount of time and investment for development. However, it is pertinent to note that Patent protection might be less useful for products with short lifecycles and quick turnovers.

Counterfeiting of Products

Counterfeiting is a process in which goods, typically of poorer quality, are manufactured and sold as a copy of a well-known brand’s product, without their consent, resulting in people purchasing a counterfeit product believing it to be genuine. The fact that counterfeit items are of poor quality might put the end user’s safety and health at risk.

Businesses in the FMCG industry also incur losses by counterfeit goods as such duplicate goods affect their established brands’ reputations and consumer confidence are harmed, as a result of these inferior or non-authentic products. Therefore, counterfeit products affect the goodwill of the brands to a large extent.

The products of FMCG brands are widely and instantly available across the market, and hence, are easily accessible to all. Such instant access and bulk manufacturing make it fairly easy for counterfeiters to duplicate the products and sell it in the market.

The counterfeit sector operates in every country, and no brand appears to be immune to its negative consequences. The more well-known a brand grows, the more likely it is to be targeted by counterfeiters. This is especially true for FMCG brands. Thousands of companies, including Coca-Cola, Nestle, Amul, etc., deal with counterfeit items on a regular basis.

Parallel Imports

Parallel imports occur when a legal commodity purchased elsewhere is brought into the importing country without the right holder’s authorization. It is pertinent to note that the products herein are genuine and not counterfeits. The Foreign Trade (Development and Regulation) Act, 1992 was enacted to regulate imports and exports in India, which acts as a legal impediment to such imports.

The said parallel imports goods also called ‘grey market’ goods, however unlike pirated goods, are very much real, which means that the goods are initially procured from the rightful owner, but thereafter, imported somewhere else without the owner’s consent and knowledge.

When products materialised in marketplaces that the brand owners are not aware of, gruesome confusion and worry arises. Markets may become saturated with a surplus of genuine products if distribution systems are disrupted. The commodities are authenticated and their origin is determined with more time and expense. Furthermore, even if the product is genuine, it is still a concern for FMCG items sold in a different jurisdiction that comes to company’s notice unexpectedly and surprisingly.

Some products may not be intended for sale in specific markets, thereby causing issues and affecting the goodwill of the brand. An additional challenge for the FMCG sector is that such parallel imports or grey market imports cannot be regulated or controlled by any regulation or law and also, it is usually difficult to trace the grey market goods as they are imported all across the globe.

Enforcement of IP Rights

One of the most significant difficulties facing FMCG brands is enforcement of their IP rights. As FMCG brands have such a high level of recognition, counterfeiting and infringement are almost inevitable.

Difficulty arises when an FMCG company tries to enforce their IP rights in numerous jurisdictions in a short period of time. The counterfeiting industry appears to be integrated, with open lines of communication between various counterfeit or infringing goods producers and sellers. When an FMCG brand decides to enforce their IP rights in a particular jurisdiction, notice may be distributed to other makers and retailers, making it more difficult to gather the notarized evidence needed to proceed with enforcement. When one counterfeit goods manufacturer gets sued, other counterfeit product manufacturers may become wary of any unsolicited purchase or request for a visit. Hence, the vast nature of the FMCG market makes it difficult to enforce the IP rights of the FMCG companies.

When FMCG brands and their products are subjected to counterfeiting, the production and distribution of the counterfeited products are typically extended throughout an entire country. Therefore, taking a targeted action against a single small producer or seller may curb illicit activities in that one location, but it accomplishes little to address the problem as a whole.

2. General Legal Compliance

Keeping up with the evolving regulatory requirements under numerous jurisdictions and regulations, and without having a centralised framework for tracking and monitoring, compliances has been challenging for a widespread and fast-moving sector like that of FMCG.

Few of the key legislations applicable to the FMCG sector are:

1. Legal Metrology Act, 2009, Legal Metrology (Packaged Commodities) Rules, 2011,
2. Competition Act, 2002,
3. Environment Protection Act, 1986,
4. Cable Television Regulatory Rules,1994,
5. Advertising Standards Council of India’s Code of Self-Regulation in Advertising, 1985,
6. The Consumer Protection Act, 1986,
7. Right to Information Act, 2005,
8. Goods and Service Tax Act, 2017.

Some of the key compliances for the FMCG sector are as follows:

• Compliance with regards to Foreign Direct Investment Policies
• Compliance with major laws regulating food compliance with other/minor sectoral food Laws
• Section 272 of the Indian Penal Code, 1860 for adulteration of food or drink intended for sale.
• Compliance provided by the Advertising Standards Council of India.
• Compliance with regards to the Drugs and Cosmetics Act, 1940.

3. Other Legal Challenges

Disputes relating to retail agreements; advertising including comparative advertising claims and issues; labeling disputes for the product; product liability; and consumer claim issues are extremely prevalent in the FMCG sector.

In order to ensure reduction in such snags, FMCG industry experts must be made well-versed with the formulation of e-labeling regulations and learn the impact of GST on retail price labeling which gives birth to major challenges in current times.

PROSPECTIVE LEGAL DISPUTES ARISING IN POST-PANDEMIC WORLD FOR FMCG INDUSTRY

The Covid-19 outbreak has thrown the FMCG business today into disarray like never before. Despite producing and selling staple and fundamental products, FMCG companies have had to respond quickly to unprecedented hurdles with inventive tactics to sustain supply chains and ensure that the consumers can access their products even amidst the nationwide lockdowns.

Businesses and enterprises experienced major revenue losses and are, therefore, striving to mitigate the commercial damage by collaborating and cooperating with their competitors. The crucial questions arise that whether:

1. Are horizontal agreements and cartels between manufacturers and businesses in the FMCG sector prohibited under Section 3(3) of the Competition Act, 2002 (“the Act”)?

 2. Does a collaboration arrangement have the potential to result in an Appreciable Adverse Effect on Competition (“AAEC“) regime?

3. Due to unforeseen circumstances, can Section 54(a) of the Competition Act be invoked?

When an agreement generates a direct AAEC, as defined by Section 19 of the Act, a general prohibition is imposed under Section 3(1) of the Act. As a result, the Competition Commission of India (“CCI“) can consider any or all of the considerations listed in Clause 19(3)(a)-(f) of the Act, while determining the considerable adverse effects on competition. An agreement to improve the production, distribution, or provision of goods or services falls under this category.

The Act also defines a number of critical requirements which must be met, including the development of hurdles for new entrants, the eviction of current and operational competitors in the same industry, and so on.

The concept of AAEC is not an objective stand-alone criterion for efficiently removing market competitors for anti-competitive behaviour. It necessitates a case-by-case examination within a specific economic and social setting.

The CCI has clearly held in the matter of Builders Association of India v. Cement Manufacturers’ Association, Case No. 29 of 2010, that the presumption of anti-competitive agreements can be derived from the intention or conduct of parties, regardless of circumstantial evidence.

Such presumption would include proof of price-fixing and information sharing with other similar businesses without an explicit agreement, resulting in the development of an anti-competitive cartel.

The main concern is whether, in light of the dire circumstances, FMCG companies can enter into genuine Horizontal Agreements for the purpose of sharing markets and sources of production, as well as efficient resource utilisation, in order to effectively percolate into the market and provide essential goods or not.

Section 4 of the Act bans businesses from abusing their market dominance to the detriment of their competitors and end customers. In essence, businesses with sufficient resources can exert a dominant position over smaller and less well-equipped competitors, thereby forcing them out of the market without the use of competitive force—this is referred to as the misuse of a dominant position.

However, under Section 54(a) of the Act, such a dominant position cannot be judged anti-competitive, if it is used by companies for the public good in the form of Horizontal Agreements and cartels.

A tie-up and Distribution Agreement among a group of competent enterprises for the purpose of ensuring the timely delivery of vital commodities at a reasonable cost to the general public cannot be viewed as an unethical price-fixing correspondence or transaction.

Furthermore, due to a lack of demand and supply for products and services, the size of competition and the number of competitors has shrunk. As a result, the ‘pushing out of rivals‘ is a product of natural economic forces in the face of the epidemic, rather than dominating actors actively participating in the removal of rivals.

The pandemic’s emergence has sparked fears of dire consequences. The legality of cartels and Horizontal Agreements between dominant businesses in a critical industry might have unintended consequences for smaller players and competitors.

LANDMARK JUDGMENTS

In the case of S.M. Dyechem Ltd. vs. Cadbury (India) Ltd., JT 2000 (7) SC 151, the Supreme Court held that, while both marks have phonetic resemblance and contain the phrase ‘Picnic,’ the effect of the differences must also be examined, with the tests being –

1. Is there any special aspect of the common feature that has been copied?
2. Is it true that the dissimilarity of one or more pieces is sufficient to classify the entire item as dissimilar?
3. Shouldn’t one give more attention to the portions that aren’t common, while not ignoring the common parts, and what is the first impression, when there are common elements?

In the case of Hindustan Unilever Ltd. v. Gujarat Co-operative Milk Marketing Federation Ltd., (2017) 71 PTC 396, the Hon’ble Bombay High Court granted relief to the Plaintiff and thereby restrained the Defendant from –

1. In any language, disseminating to the public the two contested TVCs or any part of them, or any other commercial of a similar type.
2. In any way disparaging or demeaning the Product of Kwality Wall’s (owned by the Plaintiff therein) products or company.

The learned Courts of India, have time and again, ensured to protect the rights of both sellers and customers and assured the sanctity of Caveat Emptor and Caveat Venditor is rightly preserved, in its true sense. Such and many more other landmark judgments have paved a way for an easier marketplace to exist between the cohort free of challenges for FMCG companies.

AMLEGALS REMARKS

When it comes to market introduction, FMCG and its respective brands and goods confront a slew of obstacles and issues. It is a well-established fact that most FMCG brands operate in multiple countries at the same time, and it is evident that a number of issues must be handled.

When a company in the FMCG industry develops a diversified IP portfolio, it is critical to protect those rights and take action when third parties infringe on them. On the other hand, even the consumers need to be aware of the products that they are purchasing and check the product specifications, packaging, bar codes, and other unique specifications pertaining to the product.

The FMCG companies must enforce stringent IP policies and identify the potential risks prevalent in the sector in order to avoid IP disputes. Many difficulties can be resolved before they become a costly, unpleasant, and time-consuming legal matter if the companies are vigilant about their IP assets and take reasonable measures to safeguard the same.

-Team AMLEGALS assisted by Ms. Labdhi Mehta (Intern)

For any query or feedback, please feel free to get in touch with arushi.vyas@amlegals.com or mridusha.guha@amlegals.com.