Rodrigo Bonan and Fabio Albergaria from Luiz Leonardos & Advogados explore the recent adaptations to Brazilian IP Law in respect to design patents for automobile parts in the foremarket and the aftermarket.
Brazilian Industrial Property Law (Law 9279/96), in force since May 1997, regulates the rights and obligations regarding industrial property including the protection of industrial designs by means of the grant of registration to these rights. The Brazilian IP Law provides protection for two-dimensional and three-dimensional designs. Still, according to Brazilian Design Rules, parts of an object may be protected as industrial designs, while partial designs are not protectable. Further, the common or ordinary shape of an object or the shape which is essentially determined by technical or functional considerations are not registrable either.
Brazilian IP Law, however, makes no distinction between designs related to a primary market (the commercialization of new products) or the aftermarket (sale of spare parts), as also stated by a recent opinion issued by the Attorney-General of the Brazilian Patent and Trademark Office on a response to a consultation made by the Brazilian Antitrust Office (CADE Administrative Council for Economic Defense), dated November 6, 2017.
As far as the automotive industry is concerned, if a third party is producing, using, selling, or importing the object of a design registration, the design owner may enforce its design rights against the potential infringer. The IP Law allows the possibility of filing a civil or a criminal court action in this case.
Just to illustrate the figures of one sector of the automotive industry, according to a Performance Report published in 2017 by the Brazilian Association of Auto Parts Industry, total sales of auto parts in 2016 were of approximately 20 billion dollars, 57% of the total being directed to the foremarket (primary market), whereas around 24% are directed to the aftermarket (the automobile spare parts market), which represents approximately 5 billion dollars of sales in 2016.
Considering the above figures, on April 4, 2007, the National Association of Auto Parts Manufacturers (ANFAPE) filed a representation at the Brazilian Antitrust Office against the Brazilian subsidiaries of Volkswagen, Fiat, and Ford. The National Association of Auto Parts alleged that the car manufacturers were abusively enforcing their intellectual property rights, sending warning letters to the manufacturers of spare parts as well as suing them for manufacturing and selling spare parts protected by design rights.
On a first decision, the Secretary of Economic Rights of the Brazilian Antitrust Office decided to file away the representation, stating there was no evidence of abuse of economic rights or sham litigation, but a pure exercise of the intellectual property right according to the social function of the property. Nevertheless, the Federal Public Prosecutor has not agreed with the decision of the Brazilian Antitrust Office and argued in favor of the representation and on December 5, 2010, the Board of the Brazilian Antitrust Office decided to accept the representation. At that time, one of the arguments was related to the existing lock-in of the automotive market, i.e., the obligation of the consumer to acquire must-match parts of a predetermined manufacturer, which would be a reason why the exclusivity would cause negative effects to the economic structure.
Finally, on April 27, 2011, an administrative procedure was initiated at the Brazilian Antitrust Office to determine whether the acts of the car manufacturers would configure violation of the economic order. On July 15, 2016, the General Superintendence of the Brazilian Antitrust Office issued a Technical Note arguing there was a violation to the economic order and recommended the condemnation of the car manufacturers to the payment of a fine. They further recommended that the industrial designs of the car manufacturers should not be enforced against the manufacturers of spare parts, based on the division of the market into the foremarket and the aftermarket as well as a supposed lack of spare parts in the market due to the lock-in effect.
The Technical Note further highlighted the practice of evergreening related to multiple industrial design registrations encompassing the same automotive part. In this case, the Brazilian PTO was accused of enabling an automotive part already registered in the automobile registration to be separately protected as a new registration, causing the validity of the registration to be extended beyond the legal term.
Finally, on March 14, 2018, the Board of the Brazilian Antitrust Office decided to file away the procedure against the car manufacturers. The Board decision, contrary to the former Technical Note, has not considered that the industrial design registration of spare parts is an abuse of rights originated from the lock-in effect provided by part of these registrations. Further, the protection of an automobile and their parts does not configure the concept of evergreening.
In fact, in these administrative proceedings, it was demonstrated that the car manufacturers do not hold registrations for industrial designs with the intention of barring the access of any economic agent, including consumers. The enforcement of the industrial designs rights does not cause anti-competitive impacts in the market.
In that procedure, it was argued that “the exercise of the rights conferred by industrial design registrations, both in primary and secondary markets, is essential for competition through innovation in the automotive sector. Eliminating a substantial segment of the potential for recovering these investments would clearly act as a disincentive to innovation and could result in a step backward in the industry’s competitive standards” (Final claims of Volkswagen filed on May 25, 2016).
It was also stated that “(…) the European Commission had already conducted investigations concerning IP rights in the secondary auto parts market and concluded that the simple exercise of IP rights cannot constitute an abuse of a dominant position.”
The final decision, issued by majority votes, also recognizes that the intellectual protection of industrial designs has an additional beneficial effect for the consumer. The restriction on the existence of auto parts that are not certified by car manufacturers — on the contrary, manufactured without their formal authorization for several years and in clear criminal and civil violation — increases the informational asymmetry of consumers, who could inadvisably buy parts of inferior quality, thus compromising the safety and performance of their vehicles.
It is important to highlight that this administrative decision recognizes that there is no conflict between the official entities (BPTO and CADE). In this regard, it was established that the specific rules applied in each sphere of competence coexist peacefully because it is not CADE’s role to assess the quality of intellectual property legislation, but whether there is any excess in its application.
In fact, according to Brazilian Constitution, the laws applicable in this case (Law 8,884/94 applied at the time of the facts under analysis and Law 12,529/11 — which structures the Brazilian System for Protection of Competition; sets forth preventive measures and sanctions for violations against the economic order, as well as Law 9,279/96 — which establishes rules concerning the rights and obligations regarding industrial property) have the same level of hierarchy. In this regard, it was ruled that the exercise of exclusive industrial design rights has effects erga omnes, without any limitation in the law that justifies its restrictive incidence restricted only to the primary market of automobiles.
This decision is certainly the first round of this long-standing battle. Article 5th, item XXXV of the Brazilian Constitution establishes that the law shall not exclude any injury or threat to a right from the consideration of the Judiciary Branch. In the current scenario, at the end of the administrative proceedings at CADE, the National Association of Auto Parts Manufacturers (ANFAPE) will be in a position to file a court action before the Federal Court Circuit aiming at annulling the CADE’s decision.
Parallel to this, the Design Division of the PTO has been recently issuing opinions rejecting design applications on the basis that these designs would be essentially defined by technical or functional characteristics, which would not be allowed to be registered as per Brazilian IP Law. Taking a closer look into this issue, Design Examiners consider that if a certain object incorporates the must-fit or must-match concepts, then it would be defined by technical/functional characteristics and, consequently, not registrable. Such opinions are contradictory to the protection of spare parts themselves and will probably be submitted to the Court in order to fix the legal and technical parameters.
In conclusion, we understand that CADE’s decision is an important leading case which recognizes the rights given to owners of an industrial design legally granted by the BPTO without any evidence of abuse of economic rights or sham litigation, but a pure exercise of the intellectual property right according to the social function of the property as foreseen in the Federal Constitution and in the Brazilian IP Law.
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