Time to review your IP arrangements as exemption from competition law is repealed

Section 51(3) previously exempted certain arrangements regarding IP rights (being trade marks, patents, designs and copyright) from the prohibitions against anti-competitive behaviour contained in Part IV of the Act relating to:

• cartel conduct, such as price-fixing with competitors, market-sharing or bid-rigging;
• 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; or
• exclusive dealing arrangements which have the purpose, effect or likely effect of substantially lessening competition.

The exemption under section 51(3) did not extend the protection offered to IP holders to the prohibitions against a misuse of market power or resale price maintenance under sections 46 and 48 of the Act.  These actions were, and remain, prohibited in relation to IP rights.

While the commercial impact of the repeal of section 51(3) is likely to be limited as most contracts regarding IP rights do not damage competition, problematic arrangements may include:

• conditions that restrict a licensee from supplying goods for particular customers or in particular territories;
• conditions restricting the quantity of goods or services produced or the price of the goods and services under an agreement;
• grant-back obligations where licensees license improvements to licensed technology back to the licensor;
• exclusive cross-licensing arrangements entered into by competitors;
• ‘pay for delay’ arrangements, whereby an IP right holder pays a competitor, as part of a settlement of a dispute, to delay entry of their product into the market; or
• patent pooling arrangements (where two or more patent owners license one or more of their patents to one another or to third parties).

To avoid breaching the Act, we recommend that businesses review their IP arrangements as soon as possible.

There are significant penalties for unlawful anti-competitive behaviour in contravention of Part IV of the Act. The maximum penalties for a civil contravention of the Act are:

• for corporations, the greater of:
  • $10 million;
  • 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 (including related bodies corporate) in the preceding 12 months; and
• for individuals, $500,000.

The Act also makes it a criminal offence for corporations and individuals to participate in a cartel. Individuals found guilty of cartel conduct could face 10 years imprisonment and/or fines of up to $420,000 for each criminal cartel offence.

According to the Australian Competition and Consumer Commission (the ACCC), the purpose of the repeal is to promote innovation, particularly within the pharmaceutical and communications markets in which cross-licensing arrangements are increasing. The repeal will also bring Australia into line with other jurisdictions such as the United States, Canada and Europe.

Further, there are serious competition concerns in relation to intellectual property where there are few substitutes or where the aggregation of IP rights may create market power. Accordingly, the repeal will improve protections offered to consumers by broadening the scope of the Act to treat intellectual property arrangements in the same way as other property or asset arrangements.

Businesses with pre-existing arrangements may consider applying to the ACCC for authorisation of their existing arrangements under section 88 of the Act or for a class exemption under section 95AA of the Act.

Authorisations

A business may seek authorisation from the ACCC it is concerned that its proposed conduct may give rise to a breach of the Act. The legal test that the ACCC will apply when considering an application for authorisation depends on the particular conduct. For example, in relation to an authorisation for potential cartel conduct, the ACCC may grant authorisation only if it is satisfied that the likely public benefit from the conduct outweighs the likely public detriment. This is a high threshold and may be difficult for an applicant to satisfy.

Class Exemptions

The ACCC also has the power to make class exemptions for certain types of business conduct under section 95AA of the Act. In order to grant a class exemption, the ACCC must be satisfied in all the circumstances that the conduct is of a kind unlikely to substantially lessen competition or is likely to result in a net public benefit. If a class exemption is issued by the ACCC, it will specify that one or more provisions of Part IV of the Act do not apply.

Once a class exemption is in place, businesses are able to self-assess whether their proposed conduct falls within the terms of the class exemption. Class exemptions are rare and there are currently no class exemptions in place.

We recommend businesses with new or pre-existing arrangements regarding IP rights review their arrangements carefully to ensure they comply with the anti-competitive conduct prohibitions in the Act.

Our Corporate and Commercial team regularly advise on commercial contracts containing IP rights and can assist you in ensuring your arrangements are not in breach of Australian competition law. If you require any advice, please do not hesitate to contact us.

This article was co-written by Commercial Lawyer, Laura Bain.

This article is not legal advice.  It is intended to provide commentary and general information only.  Access to this article does not entitle you to rely on it as legal advice.  You should obtain formal legal advice specific to your own situation.  Please contact us if you require advice on matters covered by this article.