Our previous update in February “Where to now? Longstanding IP exemption repealed in Australian competition laws” (available here) highlighted the significance of Parliament passing legislation that would repeal the limited exemption in section 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA) (IP Exemption). Although Parliament passed the Treasury Laws Amendment (2018 Measures No. 5) Act 2019 in February, the repeal will not take effect until 13 September 2019.
In anticipation of this repeal date, on the 21 June 2019 the Australian Competition and Consumer Commission (ACCC) released for public consultation draft guidelines on how it plans to interpret and enforce the CCA once these amendments take effect (Draft Guidelines). The ACCC is seeking submissions by 19 July 2019.
The Draft Guidelines provide useful insight into how the ACCC plans to approach intellectual property (IP) rights. However, we do not know how the court will apply the competition tests in this area and whether it will ultimately adopt the ACCC’s position.
In this Insight we look at key aspects of the ACCC’s Draft Guidelines.
- The ACCC considers that provisions containing territorial restraints, price restrictions and output restrictions in IP agreements with competitors are at risk of breaching cartel provisions.
- The ACCC does not consider that repeal will expose agreements authorising the use of a Certification Trade Marks to additional risk.
- Businesses have until 13 September 2019 to review and amend their current licensing and assignment agreements for compliance with the CCA.
Implication of the repeal of the IP exemption
Section 51(3) of the CCA provides an exemption from certain prohibitions in the CCA for conditional licensing or assignment of specified IP rights such as patents, registered designs, copyright or eligible circuit layout rights. The IP Exemption applies to cartel conduct (price fixing, output restrictions, market sharing and bid rigging), exclusive dealing conduct and other provisions prohibiting arrangements or concerted practices that have the purpose or effect of substantially lessening competition in a relevant market. However, the IP Exemption does not extend to resale price maintenance or conduct that would amount to a misuse of market power.
As a result the IP Exemption, IP licensing and assignment agreements will be subject to the same competition laws as other commercial arrangements from 13 September 2019.
ACCC’s Draft Guidelines
ACCC’s approach to compliance and enforcement
The ACCC has set out in the Draft Guidelines three general principles that will guide its approach to compliance and enforcement after the IP Exemption has been repealed:
- IP rights do not necessarily create substantial market power and even where ownership of an IP right is a key determinant of a firm’s market power, this will not of itself contravene the CCA;
- The licensing or assignment of IP rights usually encourage competition by enabling IP to be exploited to a greater extent than would occur if those rights were not licensed or assigned; and
- despite the first two principles, licensing or assignment agreements will in some cases have the purpose, effect or likely effect of substantially lessening competition.
Provisions the ACCC has identified as ‘at risk’
The ACCC considers the following provisions (where contained in contracts, arrangements or understandings between competitors) are likely to be considered cartel conduct although it notes that this does not necessarily represent a change from the pre-repeal status given the narrow nature of the IP exemption.
- Territorial restraints – conditions that restrict the territory in which a firm can supply goods under a cross-licensing agreement.
- Price restrictions – conditions that restrict or influence the price that a licensee or assignee can charge.
- Output restrictions – conditions that restrict the output of a licensee, assignee, licensor or assignor.
The ACCC also points to the possibility that certain types of arrangements would fall for consideration as agreements or concerted practices that may have the purpose, effect or likely effect of substantially lessening competition.
Our previous update identified a number of competition law risk areas that businesses should be aware of such as patent pooling, grant-back obligations and hold-up agreements.
Certification Trade Marks
A certification trade mark (CTM) indicates to consumers that a product bearing the mark meets a particular standard or characteristic. Businesses that wish to register a CTM must apply to the Registrar of Trade Marks and propose rules that will govern the use of the CTM. They must also obtain approval from the ACCC.
The Draft Guidelines state that the ACCC “does not consider that the repeal will expose agreements authorising the use of a CTMs to additional risk”. This is because the ACCC “assesses the competition impacts of the proposed CTM rules and does not approve the rules unless satisfied that they would not be to the detriment of the public”. This includes that the rules not require or encourage anti-competitive conduct. The Draft Guidelines clearly state that the ACCC “does not foresee” a situation where it approves CTM rules and later takes action against parties acting in accordance with these approved rules.
Consequences for a contravention of the CCA
The maximum civil penalties for contraventions of the CCA (per contravention) are as follows:
a) for corporations, the greater of:
- $10 million;
- three times the value of the benefit from the act or omission; or
- where the benefit cannot be calculated, 10% of the corporation’s annual turnover in the last 12 months.
b) for individuals $500,000.
The removal of this IP Exemption will affect all new licensing arrangements and existing arrangements that are in place at 13 September 2019. For businesses that rely on the IP Exemption, this may call for a review of all existing IP arrangements to check for compliance with the CCA and changes to the approach used for licensing and assignment of IP.
Businesses in the health industry (such as pharmaceuticals) or businesses with more complex licensing agreements will need to pay particular attention to the effect of the repeal on how they commercialise their IP.