Client Update: Review your IP arrangements: IP exemption from competition laws soon to be repealed
12 March 2019
In brief: Section 51(3) of the Competition and Consumer Act 2010 (CCA), which currently exempts conditional licensing or assignment of IP rights from most of the prohibitions on anti-competitive conduct in the CCA, will be repealed. The repeal of the exemption means commercial transactions involving IP rights will be subject to the CCA in the same manner as transactions involving other property and assets. Businesses will have six months to review their current arrangements to ensure they comply with the competition laws before the exemption is removed. Partners Tim Golder (view CV) and Robert Walker (view CV), and Senior Associate Lauren John, report.
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- The repeal of s51(3) will mean conditions of licences, assignments, contracts, arrangements or understandings that relate to IP rights will also be subject to the prohibitions in the CCA against cartel conduct. These provisions are highly prescriptive and give rise to the potential for overreach.
- Given the delayed commencement of the repeal of s51(3), businesses are strongly urged to review their IP arrangements, to ensure they comply with the competition laws.
Currently, s51(3) of the CCA exempts conditional licensing or assignment of IP rights such as patents, registered trade marks, registered designs or copyright from most of the prohibitions on anti-competitive conduct in the CCA, other than the prohibitions on misuse of market power and resale price maintenance. The exemption applies to conditions of licences and assignments insofar as they 'relate to' IP rights.
The Treasury Laws Amendment (2018 Measures No. 5) Bill 2018, which includes measures to repeal s51(3) of the CCA, passed both Houses on 18 February 2019. The repeal of the exemption has been the subject of much discussion and debate for almost two decades. The most recent call to repeal the exemption came from the Productivity Commission (PC) in its 2016 Intellectual Property Arrangements Inquiry Report. The 2015 Harper Competition Policy Review (Harper Review) also recommended repealing the exemption.
The repeal of s51(3) will mean conditions of licences, assignments, contracts, arrangements or understandings that relate to IP rights will also be subject to the prohibitions in the CCA against:
- cartel conduct;
- making or giving effect to a contract, arrangement or understanding which includes a provision which has the purpose, effect or likely effect of substantially lessening competition; and
- exclusive dealing arrangements which have the purpose, effect or likely effect of substantially lessening competition.
The exemption will not be removed immediately. Once the Bill receives Royal Assent, which will likely occur soon, businesses will have six months before the repeal takes effect to review their existing licences, assignments, contracts, arrangements or understandings relating to IP, to ensure they comply with the CCA.
Crucially, the repeal will not only apply to licences granted, assignments made or contracts, arrangements or understandings entered into, on or after the commencement of the repeal. The repeal will also apply to such arrangements entered into before the commencement of the repeal, in relation to conditions imposed, or provisions included, before or after that commencement.
The recommendation made by the PC was that the Government should repeal s51(3) at the same time as giving effect to recommendations of the Harper Review on the per se cartel provisions of the CCA. The Harper Review stated that IP licences should remain exempt from the per se prohibitions insofar as they impose restrictions on goods or services produced through application of the licensed IP.
The draft exposure legislation, designed to give effect to the Harper Review recommendations, included an exemption for restrictions on supply or acquisition by competitors. However, the provision did not make its way into the Competition and Consumer Amendment (Competition Policy Review) Bill 2017 that came into effect in late 2017.
At present, there is no indication the Government intends to introduce an exemption for restrictions on supply or acquisition by competitors from the per se cartel provisions, and it is rather concerning that an important legislative change, which provided the basis for the recommendations made by the Harper Review and the PC to repeal s51(3), has not been enacted and appears to have fallen by the wayside.
The repeal of s51(3) means businesses should closely review both their existing and past IP arrangements.
Although the ACCC has previously stated that the vast majority of arrangements where IP rights are licensed or assigned to other entities are likely to be pro-competitive, and most IP licensing arrangements do not require the benefit of s51(3) as the vast majority do not damage competition, the cartel provisions in the CCA are highly prescriptive and there is the potential for overreach.
In an IP context, there is a risk that conditions commonly imposed in IP licences (and generally considered to be uncontroversial and rarely anti-competitive), may constitute supply restrictions that are caught by the cartel provisions. This is particularly concerning given individuals and corporations potentially face criminal penalties if found guilty of cartel conduct. The potential for overreach also means parties to IP arrangements will be forced to attempt to shoehorn their arrangements into the exclusive dealing provisions of the CCA, where the arrangement will be subject to a substantial lessening of competition test.
The types of conditions worthy of careful consideration include:
- conditions relating to the quality, quantity and/or price of goods or services produced under licence;
- conditions that restrict a licensee from supplying goods to certain customers or in certain territories;
- field of use restrictions in patent licences which limit use of the patented invention in a defined field;
- patent pooling arrangements;
- 'pay for delay' arrangements, whereby a patent holder pays a competitor, as part of a settlement of a patent dispute, to delay the entry of their products into the market;
- exclusive cross-licencing arrangements entered into by competitors; and
- 'grant-back' obligations, which are clauses requiring licensees to license the IP in any improvements made to the licensed IP back to the licensor.
Although the Explanatory Memorandum to the Bill suggests that, if necessary, businesses will be able to apply to the ACCC for authorisation of existing arrangements, this may not be a viable option. Authorisation is sought for proposed conduct, yet the repeal will apply to conduct engaged in before the commencement of the repeal. Further, the ACCC has six months to make a determination in relation to an application for authorisation, meaning businesses would need to apply for authorisation almost immediately once the Bill receives Royal Assent, to ensure any application can be considered before the repeal commences.
Since 6 November 2017, the ACCC has also been empowered to issue class exemptions for specific types of business conduct. A class exemption may be issued by the ACCC when it is satisfied that all the circumstances are unlikely to substantially lessen competition, or are likely to result in a net public benefit. A class exemption effectively provides a 'safe harbour', allowing businesses to engage in conduct of the specified kind without risk of breaching the relevant provisions of the CCA. The ACCC has not issued any class exemptions to date.
The repeal of s51(3), unaccompanied by the introduction of an exemption for vertical licensing or assignment arrangements from the per se cartel provisions or the implementation of any class exemptions, means Australia will be out of step with other major jurisdictions, such as Europe, which have the benefit of extensive block exemptions and regulatory guidance for IP arrangements. The Government has indicated that the ACCC will issue guidance on the application of the competition law to IP rights, as recommended by the PC, but it remains to be seen what those guidelines will entail and what comfort businesses can draw from them.
- Jacqueline DownesPartner, Practice Group Leader, Competition, Consumer & Regulatory,
Ph: +61 2 9230 4850
- Carolyn OddiePartner,
Ph: +61 2 9230 4203
- Ted HillPartner,
Ph: +61 3 9613 8588
- John HedgePartner,
Ph: +61 7 3334 3171
- Rosannah HealyPartner,
Ph: +61 3 9613 8421
- Robert WalkerPartner,
Ph: +61 3 9613 8879
- Miriam StielPartner, Practice Group Leader, Intellectual Property, Patent & Trade Mark Attorneys,
Ph: +61 2 9230 4614
- Tim GolderPartner,
Ph: +61 3 9613 8925
- Richard HamerPartner,
Ph: +61 3 9613 8705
- Sarah MathesonPartner,
Ph: +61 3 9613 8579
- Andrew WisemanPartner,
Ph: +61 2 9230 4701
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