The Productivity Commission's Draft Report into the regime for the compulsory licensing of patents in Australia foreshadows significant changes to the criteria for obtaining a compulsory licence, and may also have broader ramifications for the licensing of intellectual property in Australia.

Last August the Productivity Commission released an Issues Paper asking if the current regime for the compulsory licensing of patents in Australia is working "efficiently and effectively". The Commission has now released its Draft Report, foreshadowing significant changes to the criteria for obtaining a compulsory licence, which may also have broader ramifications for the licensing of intellectual property in Australia.

We look at the key recommendations below.

Process for obtaining a compulsory licence

At present, after three years have passed since the grant of a patent, a party wishing to obtain a compulsory licence in respect of the patent must apply to the Federal Court for an order.

In its Draft Report, the Commission has dismissed the possibility of providing alternative dispute resolution mechanisms to replace or complement the current Federal Court process. While recognising that the current process for obtaining a compulsory licence in Australia is "costly and time consuming", the Draft Report concludes that there is no obvious alternative that would be less costly and more efficient than the Federal Court while also maintaining the same level of quality outcomes.

Criteria for obtaining a compulsory licence

Under the current regime, in order to successfully obtain a compulsory patent licence, an applicant must persuade the Federal Court that it satisfies one of two tests: a public interest test; or a competition-based test. In either case, a successful applicant must pay reasonable compensation to the relevant patentee.

The public interest test

Under the public interest test, a successful applicant must demonstrate that:

  • it has tried for a reasonable period, but without success, to obtain a licence to work the patented invention on reasonable terms and conditions;
  • the "reasonable requirements of the public" with respect to the patented invention have not been satisfied; and
  • the patentee has given no satisfactory reason for failing to exploit the patent.

Factors which suggest that the "reasonable requirements of the public" are not being met include that:

  • demand in Australia for a patented product is not being met, because of the patentee's failure to manufacture sufficient quantities of the patented product or supply it or grant licences in respect of it on reasonable terms;
  • a trade or industry in Australia is unfairly prejudiced by the conditions attached by the patentee to the purchase, hire or use of the patented product; or
  • the patented invention is not being worked in Australia on a commercial scale, but is capable of being worked in Australia.

The competition test

Under the competition test, a successful applicant must demonstrate that the patentee has contravened or is contravening Part IV of the Competition and Consumer Act 2010 (Cth) (CCA) in connection with the patent. Part IV of the CCA prohibits anti-competitive practices such as exclusive dealing, misuse of market power and resale price maintenance.

Recommended reforms

The Draft Report recommends that the criteria for obtaining a compulsory licence should be strengthened and streamlined.

The public interest test

As we noted in our earlier article, some commentators have suggested that the current public interest test is too ambiguous, with others claiming generally that a public interest test (as opposed to a competition test) is likely to be inherently protectionist and inappropriate. In this regard, the Draft Report recognises that the way in which the current public interest test is defined "conflates the reasonable requirements of the public with the interests of Australian industry" which in turn "could potentially lead to a compulsory licence being issued when it is not in the interests of the community as a whole".

Accordingly, the Draft Report recommends that the current public interest test (and particularly the "reasonable requirements of the public" elements of that test) should be replaced. Under the proposed new test, the Federal Court would have the power to grant a compulsory licence if it found that:

Australian demand for a product or service is not being met on reasonable terms, and access to the patented invention is essential for meeting this demand;

the applicant has tried for a reasonable period, but without success, to obtain access from the patentee on reasonable terms and conditions;

there is a public interest in providing access to the applicant, having regard to:

  • costs to the patentee from granting access to the patented invention;
  • benefits to consumers and the licensee from the licensee’s access to the invention; and
  • longer-term impacts on community wellbeing;

the terms of any compulsory licence order are consistent with public interest, having regard to:

  • the right of the patentee to obtain a return on investment commensurate with the regulatory and commercial risks involved; and
  • the right of the public to the efficient exploitation of the invention. 

What may be seen as the "protectionist" elements of the current test (most notably, the second and third elements) do not appear in the recommended replacement.

The competition test

The Draft Report recommends that the second ground on which a compulsory licence may be obtained (the competition test) be removed from the Patents Act and that, instead, the CCA provide that a compulsory licence is a remedy that an applicant can seek in a restrictive trade practices action under the CCA. This would essentially be a cosmetic change.

It is the Commission’s observations in relation to section 51(3) of the CCA that are particularly noteworthy. Section 51(3) exempts certain conduct relating to intellectual property from aspects of Part IV of the CCA. The Draft Report asserts that:

  • these exemptions "have no exact analogues in the EU or US legislation";
  • as far as Australia is concerned, "the Commission has not received any evidence that this provision played a material role in decisions that could potentially lead to a compulsory licence application" – indeed, "s 51(3) has rarely been used in any context";
  • these exemptions are "unlikely to promote efficient outcomes with respect to access to patented inventions" and
  • insofar as they apply to patents, the Commission "sees no reason why [these exemptions] should not be repealed" – a view also held by the Australian Competition and Consumer Commission.

The Commission’s reasoning in relation to section 51(3) is unconvincing. There are numerous features of Australian competition law and practice which are quite different to those which exist in other countries, including the US and European Union members. Difference is not a reason for change, and it is dangerous to take one aspect of Australian law which has no analogue overseas and say that it should be repealed, without carefully considering the broader impact of such a change.

More fundamentally, the reference to a lack of evidence about the practical effect of section 51(3) is flawed. It is unclear what evidence the Commission was looking for, or where it looked. Licensors of intellectual property have frequently taken comfort from the present exemption when considering their licensing arrangements. While the Commission foreshadows the introduction of guidelines for the licensing of intellectual property, this would have the obvious weakness that, whereas section 51(3) provides legal immunity, a guideline would not have the force of law.

The Commission’s conclusion in relation to section 51(3) only relates to patents, but there is no obvious reason why any repeal would be so limited. As a result, all intellectual property owners should carefully monitor what eventuates from this aspect of the Draft Report.

Next steps

The Commission is seeking submissions on the Draft Report, which are due by 8 February 2013. There will also be an opportunity for interested parties to appear at public hearings in Canberra and Melbourne on 19 and 20 February 2013 respectively. The Commission will then forward its Final Report to the Australian Government in March 2013.

Intellectual property owners (particularly any business which owns patents, especially those covering the "Key Areas of Technology"[1] which are the focus of the Commission's inquiry) should give serious consideration to making a submission or appearing at a public hearing. Details regarding how to make a submission and the prerequisites for appearing at a public hearing are set out in the Draft Report.