IP Owners. Get ready for the competition law – Update

Repeal of IP exemption has companies racing to review contracts

On 18 February 2019, the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 was passed which, amongst other things, repeals 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 intellectual property (IP) rights (such as patents, registered designs, registered trade marks, copyright or eligible circuit layouts).  The Bill does not become law until it has received assent, however, once it come into play, 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.

This is particularly relevant for those industries which rely heavily on IP rights, such as health, biotechnology and pharmaceuticals, information technology, Fintech and telecommunications.

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Commission, in its 2016 intellectual property arrangements inquiry report, recommended that these exemptions be repealed.  The Harper Review in March 2015 also recommended repealing subsection 51(3).  A key reason for this recommendation was that the rationale for the exemption has largely fallen away, as intellectual property rights and competition are no longer thought to be in fundamental conflict.

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 amendment 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.

As a result of the Bill being passed, contracts and arrangements relating to IP rights will be 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 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 a 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 the IP Owner’s 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, each business must consider the overall impact of similar restrictions placed across all its 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 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 address the changes head on, businesses should review their existing IP licences and assignments now and assess whether any changes are required to ensure they comply with the amended law.  It will also be vital to ensure that 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…

Having been passed on 18 February 2019, the Bill is currently awaiting royal assent.  Once the repeal of section 51(3) becomes law, 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.  It will be possible to apply to the Australian Competition and Consumer Commission (ACCC) for authorisation of existing arrangements, which:

• would remove the risk of legal action under the competition provisions; and
• may be granted by the ACCC where conduct is likely to provide a net public benefit.

It is understood that the ACCC will also issue guidance on the application of the CCA competition provisions to IP rights, as recommended by the Productivity Commission.

For further information on 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.