- Businesses should be aware that all of their intellectual property contracting arrangements may soon need to comply with Australian competition law - and may need to factor this into their 2019 FY budgets.
- Among the measures in a bill currently before the Senate is the repeal of the longstanding intellectual property exception to the application of competition law.
- Businesses with such arrangements should take proactive steps to ensure that their IP licensing arrangements and any new or pending IP assignments are compliant with Part IV (Restrictive Trade Practices) of the Competition and Consumer Act 2010 (Cth).
The Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (the Bill) has passed the Australian House of Representatives and is currently before the Senate. Among the measures in the Bill is a repeal of the intellectual property (IP) exception to competition law found in subsection 51(3) of the Competition and Consumer Act 2010 (Cth) (the CCA).
The current exemption
Part IV of the CCA prohibits companies and other persons from engaging in certain types of restrictive trade practices, such as cartel behaviour and exclusive dealing. Subsection 51(3) provides an exemption from certain prohibitions in Part IV for conditional licensing or assignment of IP rights such as patents, registered designs, copyright or eligible circuit layout rights. Introduced to Australia with the Trade Practices Act 1965 (Cth), the exemption was imported from the UK and has remained in Australian competition law ever since. At the time of its introduction, the predominant view was that IP rights and competition law were in fundamental conflict.
Why the change?
In recent years, the Federal Government commissioned both the Competition Policy Review and the Intellectual Property Arrangements Inquiry Report (the Reviews). Both Reviews recommended the repeal of subsection 51(3), reasoning that the excludability allowed by registration and protection of IP rights can, in some cases, have adverse implications for competition. It was also noted that the repeal of the subsection would bring Australian law into line with other comparable jurisdictions.
This provision has been the subject of seven reviews that have recommended its removal or significant narrowing in the past 15 years - so this day has been approaching for some time. As a result of the recommendations in these Reviews, a measure in the Bill repeals subsection 51(3) of the CCA.
Implications for your business
If the Bill is passed into law, the IP activities of a business, including licences granted, assignments made, or contracts, arrangements or understandings entered into, will need to comply with Part IV of the CCA. Competition concerns, such as excessive prices, price discrimination and raising barriers to market entry, can arise in many different contexts with respect to the variety of IP assets.
If passed, the amendments are not likely to touch each and every licensing arrangement, but should be reviewed to ensure your business is compliant (particularly in arrangements where competitors in the markets face few or no product substitutes).
Consider these fictitious examples where the current CCA exemption may not allow intervention:
- parties entering into a licensing agreement that includes quantity or price restrictions in the licence agreement, that enable the restriction of output of particular products and the fixing of product prices
For example, let’s say a company has been granted a pharmaceutical patent from which it manufactures and sells “The Best Pain Killer”. That company then enters into an exclusive licence agreement with Medicines 101 Pty Ltd to also manufacture and sell their patented product. Medicines 101 Pty Ltd is the patent owner’s direct competitor, and the licence Medicines 101 Pty Ltd has been granted only allows them to manufacture 100 units per year (the demand is actually greater at an estimated 300 units per year) and requires them to sell the goods at $2,000 per unit (the fair market value for those goods is realistically lower at $1,000 per unit). This might be a scenario where restrictive trade practices are occurring, but the current exemptions may not allow legal intervention under the CCA because a patent is intellectual property.
- territorial restrictions in exclusive cross-licenses (i.e. each party is licensing their IP to the other party at the same time)
For example, let’s say Company one breeds a variety of oranges under the registered trade mark TIGER (for fruit in Class 31) and Company two breeds a variety of lemons under the registered trade mark SWEET’N’SOUR (for fruit in Class 31). The companies may enter into a licence agreement where they each allow the other to sell oranges and lemons, but only in selected jurisdictions. The arrangement effectively enables the parties to allocate territories (or “share markets”) to one another and reduce competition within those territories. Company one will have total market control for this variety of lemons and oranges in Queensland, Victoria and South Australia and Company two in Western Australia, New South Wales and Tasmania.
The removal of section 51(3) is likely to shake up how such types of arrangements are dealt with under the CCA.
Alarm bells should be sounding for businesses with any IP arrangements that cover matters such as:
- conditions that limit the use of the IP with respect to only some customers or some territories;
- quantity or price restrictions being imposed on the use of IP;
- licences that have licence-back obligations requiring the licensee to licence back any improvements made to licensing technologies;
- the grant of a license to an IP asset that arises as a result of resolution of a dispute about the validity of an IP asset, instead of the IP asset being invalidated.
There is no ‘grandfathering’ of pre-existing arrangements in the Bill. Therefore, the Bill applies to pre-existing and future arrangements. However, persons may apply to the ACCC for authorisation of existing arrangements. This removes the risk of legal action under the competition provisions. The authorisation process, however, can be time-consuming, cumbersome and expensive.
For a breach of Part IV, the penalties are serious. For corporations, the maximum penalty is the greater of the following:
- if there were no gains made – $10 million;
- if the Court can determine the "reasonably attributable" benefit obtained from the conduct – three times that value; or
- if gains were made but the Court cannot determine the size of the benefit – 10% of annual turnover in the preceding 12 months.
For individuals, the maximum penalty is $500,000.
The Bill has not yet passed the Senate or received Royal Assent. Prior to the Christmas / New Years’ break, amendments to the Bill were moved on behalf of the opposition in the Senate. The next Senate sitting is in February, and for the measures as described to take effect, the Bill will likely need to be passed before the next Federal election.
Once passed, the measure will take effect after a six month transitional period that begins on the day the Bill receives Royal Assent. This transitional period will give individuals and businesses time to review their existing arrangements.