Competition law issues
Restrictions on trade
Are practices that potentially restrict trade prohibited or otherwise regulated in your jurisdiction?
The Competition and Consumer Act 2010 (the CCA) proscribes a range of business practices that are regarded as being inimical to a competitive market. These proscribed practices include:
- price fixing between competitors;
- market sharing between competitors;
- restricting output or the capacity to provide services;
- resale price maintenance;
- bid rigging; and
- contracts, arrangements, understandings and concerted practices and the misuse of substantial market power which have the purpose, effect or likely effect of substantially lessening competition in a relevant market (the competition test).
Conduct falling within the first three categories listed above constitutes cartel conduct, which is absolutely prohibited unless specifically authorised on public benefit grounds by the Australian Competition and Consumer Commission (the Commission) or is the subject of an exception or exemption. Cartel conduct also carries civil and criminal penalties.
As licences are contracts or arrangements, the provisions of the CCA clearly apply to their provisions. At the present time and until 12 September 2019, the CCA contains a safe harbour (section 51(3)) that protects provisions in assignments and licences of intellectual property, in general terms, to the extent that the provisions ‘relate to’ the subject of the relevant intellectual property right (the safe harbour). While this provision has been widely criticised as being uncertain in its application, it has meant that some provisions in licence agreements, particularly licence agreements between competitors, have escaped the impact of the CCA altogether; for instance, the grant of exclusive rights, territorial and field of use restrictions and sub-licensing restraints were all generally regarded as falling within the safe harbour. However, the safe harbour will be repealed on 12 September 2019.
In drafting an intellectual property licence which is to be enforceable in Australia, care should be taken to ascertain whether clauses which might generally be regarded as permissible in intellectual property licence agreements might now not be so and, in particular, might now be regarded as cartel conduct. As the prohibition on cartel conduct and the application of the competition test will apply after 12 September 2019 to agreements entered into before that date, existing agreements with continuing effect also must be reviewed.
In general terms, after 12 September 2019, a provision in a contract, arrangement or understanding (an arrangement) which does the following is seen by the Commission as being absolutely prohibited unless specifically authorised by it on public benefit grounds or the subject of an exception or exemption:
- fixes the price (or an element of price) of goods or services;
- restricts the production of goods, the capacity to supply services or the acquisition or supply of goods or services;
- allocates customers, suppliers or territories or imposes field of use restrictions;
- amounts to bid rigging; or
- is conducted by parties that are, or would otherwise be, in competition with each other.
There are technical arguments relating to the construction of the CCA and the characterisation of licensing which throw doubt on the Commission’s view. Further, submissions have been made to the Commission promoting this alternative view by a number of highly respected bodies. The result of those submissions will not be known until the final guidelines on the removal of the safe harbour are published by the Commission (see below).
In the context of intellectual property licensing, the exceptions that are most likely to be applicable are a joint venture exception (which might assist in the context of joint research and development arrangements) and an exclusive dealing exception. However, the exclusive dealing exemption has little scope for application to licensing arrangements. This is because ‘exclusive dealing’ is defined in the act in terms of a ‘resupply’ and, generally, in a typical licence there is no resupply of goods or services.
Other conduct (including conduct falling within an exception) other than resale price maintenance is only unlawful if it has the purpose, effect or likely effect of substantially lessening competition in a relevant market. The resale price maintenance prohibition would catch the granting of a sub-licence and therefore arguably prohibits a head licensor regulating the price at which a licensee can grant a sub-licence. However, resale price maintenance can be made the subject of a notification to the Commission, which will protect the conduct unless it is satisfied that any public benefits of the conduct will not outweigh the detriments.
The Commission is also empowered to grant authorisation on public benefit grounds in respect of any category of proscribed conduct and can also make class exemptions.
The Commission issued draft guidelines on the removal of the safe harbour for public comment in June 2019. Final guidelines are expected to be issued by the end of August 2019.
As noted above, in the draft guidelines, the Commission concluded that territorial restraints, price restrictions and output restrictions contained in contracts, arrangements or understandings between competitors are likely to be absolutely prohibited as cartel conduct. On the analysis employed by the Commission, it would also seem that field of use restrictions could be added to this list. However, that conclusion has been the subject of criticism and it may be the case that the Commission will take a different view once it has considered the submissions it has received in relation to the draft guidelines.
The final guidelines to be issued by the Commission might assist in dealing with the uncertainty which now revolves around the drafting of licence agreements; particularly licence agreements between competitors. However, it is clear that all intellectual property licence agreements which are entered into after 12 September 2019, or which are given effect to after 12 September 2019 (irrespective of when they were entered into) will be subject to an assessment as to whether they have the purpose, effect or likely effect of substantially lessening competition in a relevant market; even if they do not contain prohibited cartel provisions.
Settlement agreements involving intellectual property rights are also likely to receive more attention in the future, particularly those concerning companies in the pharmaceutical industry. The Australian government has accepted a recommendation that a system be established for the reporting and monitoring of settlements between originator and generic pharmaceutical companies to identify ‘pay for delay’ agreements. While pay for delay agreements have not been considered by Australian courts to date, it is likely that they will come under scrutiny from the ACCC in the future. Pay for delay agreements should be carefully scrutinised to ensure that they do not amount to a cartel provision that is absolutely prohibited under the CCA; this concern becomes even greater now that the safe harbour has been all but removed.
In any event, given that settlement agreements in the intellectual property arena are often concluded between competitors, considerable care will now need to be exercised as to the types of restraint which are included in those agreements.
Are there any legal restrictions in respect of the following provisions in licence agreements: duration, exclusivity, internet sales prohibitions, non-competition restrictions and grant-back provisions?
The Patents Act gives a right of termination on three months’ notice to any party to a patent licence after the patent, or all of the patents protecting the invention at the time the contract was made, have ceased to be in force. This is a non-excludable right. However, the relevant section does not give a right of termination in respect of a patent that was only in the application stage at the time the patent licence was made.
None of the other intellectual property statutes restricts the duration of licence agreements although the common law doctrine of restraint of trade and possibly the rules regarding a total or partial failure of consideration could conceivably apply in the event that the underlying right ceased to exist.
As noted above, the Competition and Consumer Act applies to exclusive arrangements, whether in the form of exclusive grants, territorial restrictions or field of use restrictions (subject to the application of the safe harbour). If the safe harbour does not apply, then exclusive arrangements between competitors will need to be scrutinised carefully.
Internet sales prohibitions
There are no restrictions on provisions prohibiting internet sales.
Restraint of trade provisions are subject to the common law rules that, in general terms, invalidate restraints of trade unless they are reasonable in the public interest and as between the parties.
There are no specific restrictions in relation to grant back provisions although there has been speculation as to whether particular forms of grant back provisions could be argued as having the purpose, effect or likely effect of substantially lessening competition in a relevant market. This has not been explored by the courts in Australia as yet.
IP-related court rulings
Have courts in your jurisdiction held that certain uses (or abuses) of intellectual property rights have been anticompetitive?
There have been no court decisions in the superior courts in Australia which have held that the use or abuse of an intellectual property right has substantially lessened competition in a relevant market. However, that position could well change in the not too distant future.
The ACCC is presently running an action against Pfizer in which it is alleging that Pfizer took advantage of its substantial degree of market power in the lead-up to the expiry of its patent for Atorvastatin for the anticompetitive purpose of deterring generic manufacturers from engaging in competitive conduct. The ACCC also argued that Pfizer had engaged in unlawful exclusive dealing by bundling its generic form of Atorvastatin with its proprietary version known around the world as ‘Lipitor’. Pfizer also introduced an accrual funds scheme involving rebates and discounts dependent upon the level of purchases of generic Atorvastatin and Lipitor. The ACCC has alleged that the conduct which was characterised as exclusive dealing was unlawful because the purpose was to substantially lessen competition in the relevant market.
The matter has now been heard by a court of first instance and an appeal court and both have held that Pfizer did not have the requisite anticompetitive purpose to render the conduct unlawful. However, the ACCC has now applied for leave to have the matter appealed to the High Court to get clarification as to how it should assess anti-competitive purpose under the CCA.
In earlier times, in discussions surrounding the ‘safe harbour’ which would protect the use of intellectual property rights from some of the prohibitions in the CCA (see question 30), there was discussion as to the type of conduct involving intellectual property rights that might, under certain circumstances, be anticompetitive. In discussing the limits of the safe harbour, the High Court commented that conditions in a licence agreement that sought to gain advantages collateral to a patent would not be covered (Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83).
The ACCC has recently released interim guidelines discussing the type of conduct which may involve a contravention of the abuse of market power proscription in the CCA. In this regard, the ACCC has specifically referred to refusals to deal, restrictions on access to an essential input, predatory pricing, loyalty rebates, margin or price squeezing and tying and bundling. As recent amendments to the proscription have introduced an ‘effects test’ (that is, the effect or likely effect of substantially lessening competition in a market), the types of conduct referred to above are likely to come under more scrutiny. However, the Commission has commented that innovation, efficient conduct, responding to price competition and responding efficiently to other forms of competition are not likely to raise concerns.