09 October 2018

Australia to repeal the IP exemption in competition legislation

The article was written by Kim O'Connell and Peta Stevenson.

Businesses who license their intellectual property rights should start reviewing their licensing arrangements to ensure compliance with the Competition and Consumer Act 2010 (Cth). 

The longstanding intellectual property exemption found in section 51(3) of the Competition and Consumer Act 2010 (CCA) may soon be repealed – and commercial arrangements concerning IP rights will be treated in the same way as any other commercial arrangement concerning the right to use or supply goods or services.

This change may have a significant impact on the lawfulness of your businesses’ existing IP licensing and assignment arrangements.

How does the current IP exemption work?

The CCA prohibits companies and other persons from engaging in certain types of conduct that reduces competition, such as cartel behaviour and exclusive dealing.

The current IP exemption in section 51(3) of the CCA carves out certain prohibitions on anti-competitive conduct for IP owners who engage in conditional licensing or assignment of specified IP rights, including patents, registered designs, copyright or eligible circuit layout rights.

In other words, the exemption allows IP owners to dictate the manner in which their IP is commercialised, for example, through territorial restrictions or quality specifications.

The exemption is limited to conditions of licences and assignments insofar as they “relate to” IP rights. The exemption does not apply to:

  • conduct that constitutes a misuse of market power pursuant to section 46 of the CCA; or
  • the prohibition on resale price maintenance in section 48 of the CCA.

What is changing?

The Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (the Bill) is currently before Federal Parliament. The Bill will repeal section 51(3) of the CCA and the corresponding provisions in the State and Territory Competition Codes.

Following the repeal, any market restrictive conditions in existing IP licensing/assignment arrangements will need to comply with the general requirements of Part IV of the CCA.

Part IV of the CCA prohibits a broad range of anti-competitive conduct, including:

  • conduct that constitutes “cartel conduct” – for example by price fixing, bid-rigging or by controlling the output or limiting the amount of goods and services available to consumers;
  • conduct that constitutes “exclusive dealing” where that conduct substantially lessens competition – for example by third line forcing; and
  • arrangements that have the purpose, or have or are likely to have the effect, of substantially lessening competition.

The maximum penalty for a breach of Part IV by a corporation is proposed to be the greater of:

  • $10 million;
  • if the Court can determine "reasonably attributable" benefit obtained from the act or omission, 3 times that value; or
  • if the Court cannot determine benefit, 10% of annual turnover in the preceding 12 months.

Why is the law changing?

A range of recent reviews, including the Productivity Commission’s Intellectual Property Arrangements Inquiry Report (December 2016) and the Competition Policy Review released by Professor Harper in March 2015 recommended that subsection 51(3) of the CCA be repealed.

The Productivity Commission considered that IP rights and competition policy are no longer thought to be in “fundamental conflict” as IP rights do not, of themselves, pose a significant risk to competition. Rather, competition implications arise in cases where there are few substitutes or where the aggregation of IP rights may create market power.

The Explanatory Memorandum to the Bill also suggests that the repeal will bring Australia into line with other comparable jurisdictions which do not include IP exemptions in their competition laws, including the US, Canada and Europe.

When is the law changing?

The Bill has not yet passed. However, once it does, businesses will only have a six month grace period to review their existing IP licensing and assignment arrangements to ensure compliance with the CCA.

What type of arrangements are at risk?

The amendment will apply to all arrangements made before or after the commencement of the Bill that continue to operate after the Bill’s commencement.

All businesses which license their IP rights should start reviewing their existing IP arrangements to ensure they will be compliant with the CCA when the grace period ends.

In particular, the following types of arrangements or conditions are at risk of infringing Part IV of the CCA:

  • licenses that include quantity and/or price restrictions;
  • conditions that limit the use of the IP rights with respect to certain customers;
  • conditions that limit the use of the IP rights with respect to certain territories
  • patent pooling arrangements;
  • “pay for delay” arrangements, where for example, a pharmaceutical company may pay another to delay market entry;
  • restrictive cross-licences entered into by parties following the resolution of a dispute; and
  • licenses that include “grant-back” obligations – meaning that licensees must license back any improvements made to the licensed technology to the licensor.

Our Intellectual Property and Competition teams have industry expertise across the life sciences, technology and creative sectors most likely to be affected by such changes – if your business would like to discuss its own arrangements in light of proposed legislative changes, please contact our team.

We will keep you posted as the Bill progresses through Parliament.

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