IP exemption from competition laws about to go, so review your licensing arrangements now

By Natalie Shoolman, Simon Ellis
27 Sep 2018
Businesses which license IP rights should review their existing IP arrangements now to ensure that they will be compliant with the Competition and Consumer Act 2010.

Businesses that rely on conditional licence or assignment arrangements for intellectual property rights are recommended to review their arrangements to ensure future compliance with the Competition and Consumer Act 2010, when a long-standing exemption is repealed.

A Bill now before Federal Parliament, the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018, will repeal the section 51(3) IP exemption from the Competition and Consumer Act 2010 (CCA) and the equivalent provisions in the State Competition Codes.  

Following numerous reviews and reports concerning the interaction between IP rights and competition laws, the new Bill will mean that transactions involving IP rights will be treated in the same manner as any other arrangements governing the right to use or supply goods or services.

How the IP exemption operated

The IP exemption operated to protect IP rights owners from risks and penalties for anti-competitive conduct where the owner imposed restrictions on the manner in which the commercialisation of IP rights occurred, for example, market segmentation, quality specifications, quantity restrictions and territorial restrictions.

Following the repeal, market restrictive conditions in the licensing or assignment of IP rights such as patents, registered designs, copyright or eligible circuit layout rights, will be exposed to and will need to comply with the general obligations in Part IV of the CCA.

These include:

  • not to make or give effect to arrangements that have a purpose or effect which may substantially lessen or hinder competition in Australian markets;
  • not to engage in exclusive dealing or third line forcing or refusals to supply that have a purpose or effect which may substantially lessen or hinder competition in Australian markets;
  • cartel arrangements – such as market allocation or price-fixing with competitors, or bid-rigging.

It should be noted that the exemption never applied to abuse of market power contrary to section 46, which prohibits any conduct by a company, with substantial market power, that has a purpose or effect of substantially lessening or hindering competition in Australian markets; nor section 48's prohibition on resale price maintenance.

The reason for repealing the IP exemption

There has been a groundswell advocating for the change for some time, following a number of reviews and recommendations, including the Intellectual Property and Competition Review Committee (Ergas Committee), a review by the National Competition Council, the Harper Review and a review by the Productivity Commission.

The Government supported the Productivity Commission's recommendation that section 51(3) be repealed on the basis that there is no fundamental conflict between IP rights and competition policy and that both frameworks share the purpose of promoting innovation and enhancing consumer welfare, echoing the sentiments of the Harper Review in 2015.

The change will also bring Australia into line with comparable jurisdictions, such as the US, Canada and Europe, where there is no exemption from competition laws for conditions of IP transactions.

The high cost of breaching the Competition and Consumer Act 2010

The penalties for breach of the CCA are high.  The maximum penalties for breaches of Part IV for each act or omission will be the greater of:

For corporations:

  • if there were no gains made – A$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:

  • $500,000.

Types of arrangements that should be reviewed

The Bill has not yet been passed but, assuming it is enacted before Christmas, businesses will have six months to review their existing IP arrangements to ensure that they are compliant with the provisions of Part IV of the CCA.  This includes licences granted, assignments made, or contracts, arrangements or understandings entered into before or after the commencement of the Bill which continue to operate after the Bill's commencement.  The repeal of the IP exemption will apply to them all, as there is no grandfathering in the Bill of pre-existing arrangements, so they will all need to be scrutinised to ensure compliance.

Businesses which license IP rights should therefore begin to review their existing IP arrangements now, to ensure that they will be compliant with the CCA.

They should pay particular attention to any licensing conditions that relate to the allocation of customers, territory or improvements, as well as other arrangements including:

  • in fields in which there are multiple and competing IP rights, cross-licensing arrangements (often entered into to resolve disputes) which impose anti-competitive restrictions on each licensee;
  • any patent pooling arrangements; and
  • restrictive licence conditions in any patent settlement arrangements, seen most often in the pharmaceutical and technology sectors. Such licensing arrangements are often entered into to settle litigation that calls into question the validity of a patent.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.