Repeal of s51(3) of the Australian Competition and Consumer Act 2010

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Historic intellectual property (IP) exemptions provided in section 51(3) of the Competition and Consumer Act 2010 (CCA) were removed on 13 September 2019. Businesses that licence or assign IP rights need to review existing and future arrangements to ensure that they comply with the newly amended CCA.

The repeal means that licensing or assigning IP rights, just like any other commercial transaction, will be subject to the rules prohibiting anti-competitive conduct under the CCA.

Summary

The repeal of section 51(3) of the CCA came into effect on 13 September 2019.

  • Section 51(3) used to exempt licensing or assignment of certain IP rights from most of the anti-competition law prohibitions in the CCA.
  • Following the repeal, IP rights will be subject to the anti-competitive conduct prohibitions of the CCA, like any other business deal.
  • The following prohibitions (previously the subject of exemptions) apply to IP deals:
    • cartel conduct (Division 1 of Part IV of the CCA);
    • making or giving effect to a contract, arrangement, or understanding, or engaging in a concerted practice for the purpose, or with the effect or likely effect of substantially lessening competition (section 45 will of the CCA); and
    • engaging in exclusive dealing with a purpose, the effect or likely effect of substantially lessening competition (section 47 of the CCA).
  • The Australian Competition & Consumer Commission (ACCC) has released guidelines to assist with the transitional process. These guidelines set out the ACCC’s current understanding and interpretation of the law following the repeal.
  • The repeal applies to existing and future licences, assignments, contracts and arrangements.
  • Businesses are strongly urged to review their IP arrangements to ensure they comply with the CCA.
Background

Under section 51(3) of the CCA, licensing or assigning certain IP rights (including, patents, registered designs, copyright and eligible circuit layout rights) were not subject to certain anti-competitive provisions.

The exemptions covered cartel conduct, exclusive dealing and other arrangements which substantially lessen competition, but did not extend to misuse of market power or resale price maintenance.

After recommendations from the Harper Competition Policy Review and the Productivity Commission’s Intellectual property arrangements inquiry section 51(3) was repealed.

The ACCC considered that the repeal would not impact the majority of IP rights arrangements. It also acknowledged that the exclusive nature of IP rights is an important incentive for parties to invest in innovation and commercialisation.

The effect of the repeal

Upon the repeal of section 51(3) the following prohibitions, previously the subject of exemptions, will apply to IP deals:

  • cartel conduct (Division 1 of Part IV of the CCA);
  • making or giving effect to a contract, arrangement, or understanding, or engaging in a concerted practice for the purpose, or with the effect or likely effect, of substantially lessening competition (section 45 will of the CCA); and
  • engaging in exclusive dealing with a purpose, the effect or likely effect of substantially lessening competition (section 47 of the CCA).

Cartel Conduct (Division 1 of Part IV of the CCA)

The CCA Guidelines set out four categories of cartel conduct that are prohibited:

  • Price-fixing: when competitors agree on price restrictions with the purpose or likely effect of fixing or maintaining prices;
  • Output restrictions: when competitors agree to prevent, restrict or limit the volume or type of particular goods or services available;
  • Market sharing: when competitors agree to divide up or allocate customers, suppliers or territories among themselves rather than allowing a competitive market;
  • Bid rigging: when two or more competitors agree that they will not compete genuinely with each other.

Contracts, arrangements, understandings and concerted practices substantially lessening competition (section 45 of the CCA)

Section 45 of the CCA prohibits a corporation from making or giving effect to a contract, arrangement, or understanding, or engaging in a concerted practice, for the purpose, or with the effect or likely effect, of substantially lessening competition.

Conditions such as time restrictions, grant back provisions, and no challenge provisions which are commonly included in IP licenses may be vulnerable following the repeal.

However, the conduct is still required to meet the ‘substantial lessening of competition’ threshold before it will contravene section 45.  When reaching a view of whether conduct substantially lessens competition, the ACCC will consider a variety of factors such as the commercial rationale behind the conduct, the market and the ‘future with and without’ test (which involves a comparison of a situation where an arrangement is in place, to where there is no arrangement at all) and the impact on the relevant market.

The ACCC Guidelines give a number of examples to show how the ACCC will approach the ‘substantial lessening of competition’ threshold.  These examples show that time restrictions, grant backs (which require the licensee to license the IP in any improvements made to the licensed IP back to the licensor), and no challenge provisions will only occasionally reach the ‘substantial lessening of competition’ threshold.

The ACCC considers for example that a licence restriction that extends beyond the statutory lifetime of the underlying IP rights is unlikely to suddenly substantially lessen competition simply because the statutory lifetime ends, unless there is also a major change in the competitive dynamics in the relevant market place.

Exclusive dealing (section 47 of the CCA)

Section 47 of the CCA prohibits a corporation from engaging in exclusive dealing which has the purpose, effect or likely effect of substantially lessening competition.

According to the CCA Guidelines, exclusive dealing broadly includes:

  • Only supplying goods or services, or give a particular price or discount on the condition that the purchaser buys goods or services from a particular third party; or
  • Refusing to supply goods or services unless the intending purchaser agrees not to:
    • buy goods or services of a particular kind or description from a competitor;
    • re-supply goods or services of a particular kind or description acquired from a competitor; or
    • re-supply goods or services of a particular kind acquired from the supplier to a particular third party.

IP licenses which contain exclusivity conditions akin to the above) will be prohibited where they have the purpose or likely effect of substantially lessening competition.

Certification trade marks

Certification trade marks (CTM) denote independent certification by the owner that the goods or services in respect of which they are used possess certain defined characteristics. Businesses that wish to register a CTM must apply to the Registrar of Trade Marks and propose rules that will govern the use of the CTM. ACCC approval is now required.

In making its assessment on whether to approve a CTM, the ACCC will analyse whether the proposed CTM rules would require or encourage CTM users to engage in anti-competitive conduct. Sensibly, the ACCC states in its Guidelines it does not foresee a scenario where it would approve CTM rules and later take action against parties conducting themselves in accordance with those approved rules.

Next steps for businesses

Review current arrangements

Businesses should review their current IP deals. The Harper review has singled out the bio-technology, pharmaceutical and telecommunications industries as those most likely to be affected.

Potential risks

Potential penalties for businesses contravening the anti-competitive provisions of the CCA can be up to the greater of:

  • $10 million dollars;
  • Three times the value of the benefit from the contravening conduct; or
  • Where the benefit cannot be calculated, 10% of the corporation’s annual turnover in the last 12 months.

The maximum penalty for individuals (including directors and employees) is $500,000 per breach.

Conditions to consider

The types of conditions worth careful attention include:

  • Patent pooling arrangements;
  • ‘grant back‘ obligations (which require the licensee to license the IP in any improvements made to the licensed IP back to the licensor);
  • Exclusive cross-licencing arrangements;
  • ‘pay for delay’ arrangements (where a patent holder pays a competitor to delay entry into the market);
  • Market sharing arrangements;
  • Conditions relating to the quantity, quality and price of goods or services;
  • Conditions which restrict a licensee from supplying goods to certain parties or into certain territories; and
  • Field of use restrictions.

Authorisation and notification

Where there are conditions which may be of concern, businesses should consider seeking authorisation from or lodging a notification with the ACCC.

Where a business is concerned that a contemplated conduct might contravene the CCA, it can seek authorisation from ACCC by filing an application and submissions. The ACCC may grant authorisation to a business where the proposed conduct is likely to result in a net public benefit.

An alternative process to authorisation is notification. This is available where parties propose to engage small business collective bargaining, exclusive dealing or resale price maintenance.

Both authorisations and notifications are public processes. Any application made to the ACCC will be available for interested parties to comment on before a decision is made.

Once authorisation or notification is obtained, a business will receive statutory protection from the ACCC for that conduct; neither the ACC nor any third party may take legal action against that business

James & Wells can assist with review of current IP arrangements if you are concerned by these changes.