On 18 February 2019, the Australian Government passed legislation which repeals the limited exemption in section 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA) for conditions in the licensing or assignment of intellectual property (IP) rights.
- What is happening? IP licensing and assignment arrangements will now be subject to the same competition laws as other commercial arrangements.
- What IP arrangements are affected? All new licensing arrangements as well as older arrangements that are still in place at the date the new law comes into effect.
- What will be the overall commercial impact? Some have argued that the change would increase business uncertainty and compliance costs. However, in practice the impact may be more limited since the scope of application of the exemption is very limited in the first place.
- Who will be most affected? Industries which rely heavily on IP rights such as health, biotech and pharmaceuticals, information technology, Fintech and telecommunications are more likely to be affected by these changes.
- What to do next? Businesses have 6 months from the date of Royal Assent to ensure their commercial arrangements involving IP rights comply with the CCA. This would require a review of existing IP licensing and assignments to test whether the exemption would apply and if so, to decide how they may need to be changed to comply with the new law.
The change will bring Australia’s competition laws in line with other comparable jurisdictions such as the US, Europe and Canada.
What is s51(3)?
Section 51(3) of the CCA provides an exemption from certain prohibitions in the CCA for conditional licensing or assignment of specified IP rights such as patents, registered designs, copyright or eligible circuit layout rights (IP Exemption). The IP Exemption applies to cartel conduct (price fixing, output restrictions, market sharing and bid rigging), exclusive dealing conduct and other provisions prohibiting arrangements or concerted practices that have the purpose or effect of substantially lessening competition in a relevant market. However, the IP Exemption does not extend to resale price maintenance or conduct that would amount to a misuse of market power.
Implications of the change
For businesses that have structured their IP arrangements to rely on the IP Exemption, its repeal will necessitate:
- a review of all existing IP arrangements for compliance with competition laws in the CCA; and
- changes to the approach used for licensing and assignment of IP moving forward.
For example, IP arrangements which involve exclusive licenses, territorial restrictions (market sharing), output restrictions (product supply), conditions limiting the use of IP rights for particular customers, product quality or price requirements will need to be reviewed and assessed for compliance.
A key risk area will be where an IP assignment or licensing arrangement exists between two or more companies that are competitors or potential competitors. Particular care should be taken to ensure those arrangements do not raise cartel conduct concerns (which conduct is prohibited out right). In this regard, businesses may wish to consider whether the arrangements could be structured to benefit from the exclusive dealing exemption and if so, undertaking an assessment to ensure the arrangements do not have the purpose or effect of substantially lessening competition.
Other competition law risk areas for businesses to consider in licensing or arrangement of IP include the following.
- Patent pooling, which involves aggregating patent rights held by an individual or company to license patents – Businesses should ensure arrangements do not substantially undermine competition or reduce incentives to innovate.
- Cross-licenses – Businesses should consider whether there are potential anti-competitive bundling provisions such as in respect of complementary technology, or whether they amount to arrangements which effectively involve price-setting or dividing markets, quota restrictions or other non-compete clauses.
- Grant-back obligations where licensees license improvements to licensed technology back to the licensor – Businesses should take care where obligations may enable licensors to control innovative achievements to the extent it reduces their incentive to innovate or entrenches the licensor’s dominant position.
- Hold-up arrangements where patent holders impose higher license fees on users after they have invested up front. Businesses should consider whether a follow-on innovator will face economic hold-up if it relies on patented technology and therefore is discouraged from innovation and investment.
- Settlement of IP disputes – Businesses will need to ensure any restrictions agreed to for the purpose of settling IP disputes are considered carefully for compliance with competition laws and do not involve anti-competitive conduct, such as pay-for-delay type arrangements.
Given the uncertain scope of the IP Exemption, many of the above examples are ones which may give rise to competition concerns in any case, although the repeal of the exemption will bring these areas into sharper focus.
Consequences of breaches of the CCA
The maximum civil penalties for contraventions of the competition law provisions in the CCA, per contravention, are as follows :
(a) for corporations, the greater of:
three times the value of the benefit from the act or omission; or
where the benefit cannot be calculated, 10% of the corporation’s annual turnover in the preceding 12 months.
(b) for individuals, $500,000.
While the delayed commencement of the repeal gives businesses time to review their existing IP arrangements, for arrangements that may give rise to a risk of contravention but produce off-setting public benefits, businesses have the option of seeking immunity from the ACCC through the notification or authorisation processes. However, authorisation cannot be sought retrospectively for conduct already engaged in.
History of the changes
The IP Exemption has until now survived longstanding calls for repeal, including seven reviews over the past 20 years recommending its removal or a significant reduction in scope.
However, the confines of the exemption have never been entirely clear. The IP Exemption is limited to conditions of licences and assignments to the extent that the condition ‘relates to’ specified IP rights.
As the Australian Competition and Consumer Commission noted in its submission to the Productivity Commission’s Inquiry into Intellectual Property Arrangements:
“the extent of the exception contained in section 51(3) is highly uncertain, given limited jurisprudence, but [is] potentially very narrow.”
Therefore, it remains to be seen whether concerns expressed by some sectors that a repeal of section 51(3) would increase business uncertainty and compliance costs are borne out.
Momentum to repeal the IP exemption reignited following the Productivity Commission’s Final Report into Intellectual Property Arrangements (publicly released December 2016) (PC Final Report) and the “Harper Review” (March 2015), both of which recommended the repeal of section 51(3), although the Harper Review considered IP licences should be exempt from the per se cartel provisions to the extent they impose restrictions on goods or services produced through application of the IP licences.
On 25 August 2017, the Government released its response to the PC Final Report and supported copyright reforms, including the Productivity Commission’s recommendation to repeal section 51(3) . The Government considered it was important to conduct further consultation with stakeholders over 12 months to determine how best to implement the proposed reforms. Following the Government’s response, the Department of Industry, Innovation and Science invited additional submissions. In September 2018, the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 was introduced in the House of Representatives and following some unrelated last minute amendments in the Senate, the Bill was passed on 18 February 2019.