What just happened?
As foreshadowed in our previous articles on the topic (which can be found here and here), the Government removed the IP Safe Harbour from the Competition and Consumer Act 2010 (Cth) (the Act) as of 13 September 2019.
Before then, the Safe Harbour exempted many IP-related conditions in assignments and licences from the restrictive trade practices provisions of the Act other than in relation to abuse of market power and resale price maintenance.
What does this mean?
After 12 September 2019, those previously exempt conditions in IP assignments and licences will, at the very least, be subject to the Competition Test. This means that they will be unlawful if their purpose, effect or likely effect is to substantially lessen competition in a relevant market unless they are otherwise the subject of an exemption (e.g. between related companies), an authorisation on public benefit grounds, or, in the case of exclusive dealing and resale price maintenance, a notification. Where a previously exempted provision is contained in an agreement entered into before 13 September 2019, it will be unlawful to give effect to the provision after 12 September.
However, some previously exempt conditions might be cartel provisions which are strictly forbidden under the Act.
What is a cartel provision?
A cartel provision is comprised of two conditions:
- a competition condition; and
- a purpose/effect or purpose condition.
The competition condition is satisfied if at least two parties to the arrangement (or their related companies) are, or are likely to be, or, but for the arrangement would be, or would be likely to be, in competition with each other in relation to the goods or services which are the subject of the purpose/effect or purpose condition, as the case may be.
The purpose/effect condition applies to pricing arrangements and is satisfied if the purpose, effect or likely effect of the provision is to fix, control or maintain the price, discount, allowance, rebate or a credit in relation to goods or services supplied or acquired by any party to the arrangement, or, resupplied, or likely to be resupplied by a customer or class of customer of a party.
The purpose condition applies to non-price matters and is satisfied where the purpose is to:
- prevent, restrict or limit production, capacity to supply services or the supply to or acquisition from persons or classes of persons, by a party;
- allocate customers, suppliers or territories between parties to the arrangement; or
- rig bids for the supply or acquisition of goods or services by the parties to the arrangement.
How do you determine the purpose of a provision?
The courts have held that the relevant purpose is the subjective purpose for including the provision. Whilst this is a subjective test, the subjective purpose can be inferred from objective evidence – including the likely effect.
An important illustration of an analysis of purpose is given by the High Court in News Limited v South Sydney District Rugby League Football Club Limited ( FCA 45). That case arose out of the merging of the Winfield Cup Competition run by the ARL and the Super League competition run by News Limited and the decision by News Limited and the ARL to reduce the competition to 14 teams. As a consequence, South Sydney was excluded on the agreed selection criteria because it became the 15th team. South Sydney argued that the agreement between News Limited and the ARL to reduce the competition was an unlawful exclusionary provision under the old provisions of the Act. The definition of an exclusionary provision is similar to conduct now described in the purpose condition for a cartel provision in Section 45AD(3) of the Act.
The High Court held by a 4–1 majority that the purpose behind the decision to create a 14-team competition was not designed to exclude South Sydney (or any other team) but rather to have a manageable competition. Therefore, the High Court therefore held that the relevant purpose was not established.
The subjective purpose of including a provision in an IP licensing arrangement is clearly of fundamental importance in assessing whether or not a cartel provision has been created.
What does the ACCC say?
In establishing general principles which the ACCC will apply to intellectual property arrangements, the ACCC states in its Guidelines that:
‘The licensing or assignment of intellectual property rights is usually helpful to the competitive process. It enables intellectual property to be exploited to a greater extent than would occur if those rights were not licensed or assigned, therefore encouraging competition. Licensing or assigning intellectual property rights often increases production, geographic distribution and the rate at which new products are introduced to the market.
The licensing or assignment of intellectual property rights can also be helpful to the competitive process if it enables the licensee to engage in commercial activity that would otherwise be closed to it, or which the licensee could only engage in by duplicating or “inventing around” existing intellectual property rights.’ (ACCC Guidelines on the Repeal of Sub-Section 51(3) of the Competition and Consumer Act 2010 (Cth) paragraphs 2.6 and 2.7).
Adopting this principle and, as a general rule, applying it to the question of whether or not an intellectual property licensing arrangement contains a provision which limits the production of the licensed goods by the licensee of licensed goods, one could argue that the licensee is able to engage in greater production after the grant of the licence than before the grant, and, therefore, the purpose could not be said to limit production as opposed to allowing greater production in circumstances where that could not otherwise occur.
What examples does the ACCC give?
A bona fide quality control requirement in a trade mark licence between competitors is unlikely to have the purpose of restricting supply. It is therefore unlikely to constitute a cartel provision.
The arrangement would then be subject to assessment under the Competition Test. The Commission considers that if the control requirements are not bona fide to protect the goodwill associated with the business or intellectual property right, then the purpose might be to substantially lessen competition thereby rendering the arrangement unlawful under the Competition Test. However, if the imposition of the requirement is bona fide to protect the goodwill of the business or the intellectual property right, then the requisite purpose might not be present (i.e., the purpose of lessening competition).
A territorial restriction in a copyright licence between competitors in which the licensor also competes with its licensees, is unlikely, without further evidence, to be for the purpose of allocating markets (and thereby constitute a cartel provision) where the licensees have a particular strength or presence in the licensed territory allocated to each.
3. Price Fixing
An agreement between the owners of Plant Breeders Rights for banana varieties, following a bad season for farmers, to reduce the royalty payable by banana farmers to enable the farmers to take licences from the rights owners and then to return to independent royalty setting the following year, is likely to be a cartel provision and therefore illegal cartel conduct.
4. Output Restrictions
An agreement between steel manufacturers who compete with each other and under which one licenses a patented production method for a particular type of steel to the other, is unlikely to be a cartel provision because the licensee can produce more steel after the agreement than before and, therefore, the purpose could not be said to be to limit output. However, the arrangement would still be subject to the Competition Test.
5. Collaborative Research
Two pharmaceutical research companies agree to collaborate in the development of a particular compound which has application to the treatment of two different diseases. The parties cross-license their background intellectual property and agree that the results of the collaboration will be jointly owned. However, each company is given exclusive commercialisation rights in respect of the treatment of a particular disease.
In determining whether or not the parties had entered into a cartel provision, the ACCC would look at the commercial rationale for the split of commercialisation rights between the diseases. For instance, if each party had a special focus or expertise in relation to the disease allocated to it under the Agreement, the relevant purpose for a cartel provision might not be satisfied. The Commission also indicates that such an arrangement may be open to the joint venture exception but, if not, might be protected by an authorisation application.
6. Duration of Obligations, Grant Backs and No Challenge Provisions
The Commission considers that arrangements between non-competitors which might have restrictions which extend beyond the life of the relevant intellectual property right, constitute grant-back provisions or no-challenge provisions are unlikely to have the effect or likely effect of substantially lessening competition in a relevant market. This is because the Commission takes the view that in determining whether or not there is likely to be a substantial lessening of competition, the Commission compares the market situation with the licence containing the restriction or obligation against the market without the licence at all. As a licence enables a party to do something which it would otherwise not be entitled to do, even a licence subject to a restriction is pro-competitive rather than anti-competitive.
7. Territorial Restraints
A geographic restriction on franchisees limiting the use of trade marks to a specific geographic area and containing an obligation not to actively promote their businesses outside that geographic area is unlikely to be a cartel provision because the franchisor and its franchisees are not competitors in relation to the supply of the relevant trade marks. This is presumably on the basis that the competition condition requires that the parties be competitive in relation to the supply of the goods or services which are the subject of the restriction or in respect of which the geographic areas are allocated.
What are the exemptions?
The most relevant exemptions from unlawful cartel conduct are arrangements between related bodies corporate, arrangements for the purposes of and which are reasonably necessary for the undertaking of a joint venture, resale price maintenance conduct and exclusive dealing conduct.
Exclusive dealing is specifically defined in the Act and generally requires the supply of a good or service and then the resupply of that good or service by the recipient. As an intellectual property licence agreement generally involves the grant of a licence (the supply of a service) and then the supply of a good or other service (that is, a service other than a licence), an intellectual property licence is unlikely to amount to exclusive dealing. However, where it does, the provision will be exempted from the cartel provision prohibitions and stand to be judged under the Competition Test.
Dealing with the practicalities
In an intellectual property context, arrangements between competitors or likely competitors (remembering that each related body corporate is also deemed to be a party to the arrangement) are arrangements of particular concern. In relation to those arrangements, a fundamental question will be whether a particular provision under consideration was included in the arrangement by a party or parties so as to achieve the control of price (or any element of price), a restriction in the production, the capacity to produce or the supply or acquisition of goods or services or the allocation of customers or territories between the parties. The principles adopted by the ACCC in its Guidelines suggest that where there is a sound commercial rationale for the provision, or the provision is part of an arrangement which allows activity of a kind which would not otherwise be permitted by virtue of the existence of the intellectual property right, the purpose condition is unlikely to be satisfied. If the Courts adopt the same reasoning, then licence agreements containing restrictions where the restrictions merely define the scope of the rights granted, should avoid the cartel provision prohibitions and not have the purpose, effect or likely effect of substantially lessening competition in a relevant market. This is consistent with paragraph 2.21 of the ACCC Guidelines where the ACCC concludes:
‘Accordingly, the ACCC considers that most licences or assignments of intellectual property rights that are subject to conditions will still allow greater exploitation of the intellectual property rights than the scenario without the licence or assignment, and so will not risk contravening those provisions of the CCA that contain a “substantial lessening of competition test”’.
Of course, not all intellectual property arrangements involve the assignment or licensing of intellectual property rights. Importantly, the settlement of an intellectual property dispute is often between competitors and likely to involve restrictions. Those arrangements differ from an intellectual property licence in that, generally speaking, the arrangement is unlikely to allow greater exploitation of the intellectual property right than would otherwise be the case. The question then will be whether the subjective purpose in including a particular restriction – such that a party will cease production or supply of goods which is allegedly infringing conduct – is for the purpose of restricting production or supply or for the protection of the intellectual property right or the goodwill of the business associated with the intellectual property right. There is a sound argument, which is not inconsistent with the approach taken by the ACCC in its Guidelines, that such restrictions would be for the enforcement of the relevant intellectual property right and not for the restriction of production or supply per se.