Intellectual property exception to competition law prohibitions to be removed. Time to review IP dealings for anti-competitive provisions.

Effective from 12 September 2019, the exception to the prohibitions on restrictive trade practices, contained in Part IV the Competition and Consumer Act 2010, for the conditional licensing and assignment of intellectual property will be removed.

The impact from this will be that, effective from that date, all transactions involving IP will become subject to competition law prohibitions in the ordinary course. IP licences and potential assignments of, and other arrangements involving, IP should therefore be reviewed to ensure that those dealings will not be anti-competitive in contravention of the Act.

What is the exception?

Subsection 51(3) of the Competition and Consumer Act 2010 provides a limited exception to the prohibitions in Part IV on restrictive trade practices for:

• the imposing of, and giving effect to, conditions in licences and assignments of patents, designs, copyright or protected circuit layouts;
• certification trade marks; and
• provisions in contracts, arrangements and understandings between a trade mark owner and either a registered user of the trade mark or person who may use the trade mark subject to becoming a registered user.

The balance between encouraging competition and rewarding innovation can be a challenge for policy makers. Until now, the Competition and Consumer Act 2010 has provided these exceptions, which applied to most prohibited restrictive trade practices – except misuse of market power or resale price maintenance – on the basis that these prohibitions would otherwise dissuade innovators from engaging in the investment and effort to innovate and develop intellectual property.

Why is it being removed?

The prevailing view over a number of years, including in the Harper panel’s Competition Policy Review in 2015, is that the balance has been skewed too far in favour in of IP rights holders, and that there is no sufficiently persuasive argument that subjecting IP rights holders fully to competition law would put a brake on innovation. In the USA, the European Union and Canada, for example, IP rights holders have not enjoyed such exceptions, and thus Australia is adopting a policy position consistent with comparable jurisdictions.

What is the impact of its removal?

In its review of intellectual property arrangements in 2016, the Productivity Commission cited examples of arrangements that could be impacted by the removal of subsection 51(3):

• Arrangements where competitors faced few or no substitutes of the products and:
• exclusively cross-license their IP rights;
• include quantity and/or price restrictions in their licence agreements, enabling them to restrict output of particular products and fix prices; or
• include territorial restrictions in exclusive cross-licences, which enables them to allocate territories to each other and reduce competition within those territories.
• Licence agreements that required licensees to grant back to the licensor any improvements that a licensee may make in the licensed technology (though its questionable whether subsection 51(3) actually applies to such arrangements).
• Licence agreements where patent holders impose higher licence fees on users after they have made up front investments that depend on the patented invention (e.g. that forms a technology standard) and thus are effectively compelled to use the patented technology.
• Territorial restraints, such as those used in respect of copyright where distribution is constrained to certain geographies at different prices.
• Pay-for-delay arrangements.

Subsection 51(3) has received very limited judicial consideration and therefore the extent of its application has remained unclear. For example, in the case of trade marks, subsection 51(3) refers to trade marks legislation that was repealed over 20 years ago. In any event, for those where the licence or assignment provision has the purpose, effect or likely effect of substantially lessening competition, they should review current arrangements, because the enforcement of any such anti-competitive provision will become unlawful.

Indeed, given the restructure of the misuse of market power prohibition in 2017, this has likely diminished the value of subsection 51(3) anyway. Where IP rights give a rights holder a substantial degree of power in a market, that person has always been exposed to the misuse of market power prohibition. While historically it had been difficult to prove a contravention of that prohibition, the introduction both of the “effects test” and the revised purpose element to that prohibition opens up greater potential for a successful claim against an IP rights holder whose IP rights afford them market power.

The other notable area of risk is arrangements between actual or potential competitors. Subsection 51(3) has provided protection for a claim of cartel conduct where the arrangement fell within the scope of the exception, however that will now fall away in September. Businesses with such arrangements with actual or potential competitors should revisit the terms of those arrangements.

Final comments

Relying on subsection 51(3) to avoid an allegation of contravening competition law has been fraught with risk due to the significant uncertainty as to scope of the application of the exceptions, and the revision of the misuse of market power prohibition in 2017 has diminished that protection further.

Holders of intellectual property rights should always be mindful of whether current or future arrangements may contravene prohibitions against restrictive trade practices, and the forthcoming repeal of subsection 51(3) provides a timely opportunity to do so.