Proposed repeal of IP exemption has companies racing to review contracts

WHO SHOULD READ THIS

• IP owners who have licensed or assigned their IP in the past, or may wish to do so in the future.

THINGS YOU NEED TO KNOW

• a Bill currently before Parliament may affect the lawfulness of your existing IP contracts by extending competition law prohibitions to those contracts; and
• if the laws are passed and your IP contracts breach those competition provisions, you may be exposed to substantial fines.

WHAT YOU NEED TO DO

• review your existing IP licenses and assignments and ensure they (and any future IP contracts) comply with the competition law.

There is currently a Bill before Federal Parliament by which the Government proposes to repeal section 51(3) of the Competition and Consumer Act 2010 (CCA). This is the provision that exempts IP owners from some aspects of competition law when they impose restrictive conditions on licences or assignments of their IP rights (such as patents, registered designs, registered trade marks, copyright or eligible circuit layouts). Once this Bill becomes law, IP owners will need to make sure their licences and assignments do not breach competition law, including some that were made before the law took effect.

Fast facts: Get up to speed

The right balance between competition law and IP rights has been debated for a long time. There are already no exemptions from some aspects of competition law. For example, IP owners already cannot license their IP rights in a way that amounts to a misuse of market power or so as to prevent resellers from discounting their product. However, for some time, anti-competitive territorial and customer restrictions in IP licences have been exempt from Australian competition law.

The Government asked to the Productivity Commission to review whether it is appropriate for IP owners to continue to be exempt. The Productivity Commission recommended that these exemptions be repealed.

Making IP owners fully subject to competition law is an acknowledgment that IP rights do not, of themselves, create economic monopolies, and the impact on competition depends on the nature and extent of the IP rights granted, and the availability of close substitutes in the relevant market. The proposed Bill follows the Government’s support of the Productivity Commission’s recommendation to repeal section 51(3) and is designed to:

• promote innovation, especially as licensing and cross-licensing increases in the pharmaceutical and communications markets;
• enhance consumer welfare, and strike a balance between rights holders and users, by broadening the scope of the CCA to cover IP transactions in the same way as other property and asset transactions; and
• bring Australia into line with other jurisdictions including the United States, Canada and Europe, where competition law treats IP the same as other proprietary rights.

If passed, the Bill will make contracts and arrangements relating to IP rights subject to the same competition law prohibitions as apply to other agreements concerning the right to use or supply goods or services, including contracts and arrangements that were entered into before this change to the law if they are still in effect afterwards.

The main aspects of competition law that IP owners will need to start considering are:

• cartel conduct (arrangements with a competitor that fix prices, allocate customers or territories, restrict production or output, or rig bids) – the concept of who is your competitor is very broad, essentially anyone who might sell similar goods or services now or in the future;
• exclusive dealing (arrangements between a supplier and acquirer that impose restrictions as to who else the supplier can supply to, the acquirer can acquire from, or the acquirer can resupply to) – this captures exclusivity clauses, but can also capture bundling the licensed product with other products (whether yours or a third party’s); and
• anti-competitive arrangements (any arrangement that has the purpose, effect or likely effect of substantially lessening competition).

Exclusive dealing and anti-competitive arrangements are only illegal if they have the purpose, effect or likely effect of substantially lessening competition. So not every exclusivity clause will be problematic.  However, you must consider the overall impact of similar restrictions placed across all your licences. Also, substantially “lessening” competition can occur by substantially preventing or hindering competition from developing, which will sometimes be a real issue for innovative products protected by IP.

Size up the consequences

The repeal of section 51(3) may impact the lawfulness of your existing IP licensing and assignment arrangements.

For each breach of the competition provisions in the CCA, the maximum penalties are:

• for individuals – $500,000; or
• for corporations – the greatest of:
  • $10 million;
  • if the Court can determine the “reasonably attributable” benefit obtained from the conduct – three times that value; or
  • if the Court cannot determine the size of the benefit – 10% of annual turnover in the preceding 12 months.

Get a head start

To prepare for the proposed changes, you should review your existing IP licences and assignments now, and ensure any future IP arrangements comply with the restrictive trade practice prohibitions in the CCA.

Pay particular attention to, and consider obtaining legal advice about, provisions which may amount to cartel conduct, exclusive dealing or anti-competitive arrangements.

In addition, when entering into settlement agreements to resolve disputes, it is important to analyse the legality of:

• cross-licensing arrangements, which may impose anti-competitive restrictions on each licensee (and risk being exclusive dealing or cartel conduct); and
• restrictive licence conditions, or ‘pay for delay’ arrangements, which are often used in the pharmaceutical and technology sectors.

On your marks…

The Bill has not yet been passed, however, once it has, it will have a broad reach and businesses will have a six month grace period to review their existing IP arrangements to ensure they comply with the competition provisions of the CCA.

The Australian Competition and Consumer Commission (ACCC) may also issue guidance on the application of the CCA competition provisions to IP rights.

We will provide updates in due course.

For any questions or queries regarding this alert, please contact the below team. 

This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.