Tony Conaghan and Claire Slunecko

Review your IP contracts – competition law changes from 13 September

Tony Conaghan and Claire Slunecko

13 September 2019

Competition and Consumer Law

What is changing?

Section 51(3) of the Competition and Consumer Act 2010 (Cth) (the CCA) contains a nearly 45 year old exception that exempted certain intellectual property (IP) rights from anti-competitive and cartel conduct provisions.

On 13 September 2019, the repeal of section 51(3) will take effect. It will apply to all contracts and arrangements – whether agreed or entered into prior to or after 13 September 2019.

Any existing or future contracts or arrangements involving IP rights (e.g. licensing, assignments) should be reviewed to ensure they do not breach competition law.

The exception has been in existence since the commencement of the original Trade Practices Act 1974 (Cth) on 1 October 1974, which was replaced by the current CCA. The Explanatory Memorandum to the bill outlines the context and rationale for the repeal.[1]

Effect of repeal

The following prohibitions (previously exempt) will apply to conduct involving IP rights from 13 September 2019:

Cartel conduct

Generally, cartels exist where businesses agree to act together, instead of competing against one another. For example, price fixing, agreements to divide a market, rigging bids (by suppliers) and controlling output or limiting goods/services available to buyers.

Anti-competitive conduct

Any contract or arrangement that would have the effect or likely effect of substantially lessening competition or exclusive dealing for the purpose, or with the effect or likely effect, of substantially lessening competition. For example, restricting the territory within which an IP licence can be used may now breach the CCA.

Principles the ACCC will apply

In August 2019, the enforcement body of the CCA, the Australian Competition and Consumer Commission (ACCC), released guidelines on the repeal, which contains general principles it will apply in relation to assessing contraventions, including as outlined below.

Anti-competitive conduct

  • There must be the ‘effect’ or ‘likely effect’[2] of ‘substantial lessening of competition’ within the ‘relevant market‘ (i.e. an objective examination of the actual or likely impact of the conduct or relevant provision on the competitive process in the relevant market).
  • The ‘relevant market’ is assessed by firstly identifying the:
    • goods or services supplied or acquired by the relevant business and close substitutes to the goods/services (product market); and
    • geographic region in which the business supplies or acquires the goods/services and close geographic substitutes (geographic market).
  • A business may not necessarily have substantial market power (and be able to substantially lessen competition within a market in breach of the CCA), due to its intellectual property rights. For example, goods or services from other businesses that can act as reasonable substitutes may mean the other business does not have substantial market power.
  • Licensing or assigning IP rights can in fact help to increase competition within a market (e.g. through increases in production, distribution and introduction of new products to the market).

Cartel conduct

In relation to cartel conduct, this is prohibited regardless of whether the conduct affects competition (i.e. it is not necessary that there be a ‘substantial lessening of competition for breach of the cartel prohibitions).

What do we need to do?

Businesses should review their IP contract and arrangements to ensure compliance with the CCA (whether they are the licensee or licensor).

The types of contracts and arrangement that businesses should review in light of the repeal, include:

  • manufacturing and distribution agreements;
  • licensing agreements (e.g. patents, copyright (including software) and trade marks);
  • development or research agreements (see exclusive rights to commercialise below); and
  • settlement agreements (which will often place restrictions on parties).

Particularly, contractual provisions or arrangements that have the following effect (or possible effect) should be reviewed:

  • generally, any division or allocation of markets, customers, territory and/or commercialisation rights;
  • restrictions on use of IP (i.e. circumstances in which IP can be used or applied to goods. We note that safety requirements and protection of goodwill may be an appropriate purpose for restrictions on use);
  • restrictions on territory or sale channels (we note that substitutable goods or services may overcome any possible issues with such restrictions);
  • prescription of the sale price of goods (which may be at risk of constituting cartel conduct through fixing or controlling prices);
  • prescription of a maximum amount of goods/services that a licensee may produce or sell;
  • exclusive rights to commercialise certain IP (relevant factors in assessing such provisions may include prior competition between the two relevant entities of the subject matter of the IP, likelihood of competing in the absence of the agreement and the commercial rationale[3] for the exclusivity provision); and
  • an exclusive licence back to the licensor of any improvements in the IP.

Exemptions to cartel prohibitions

Relevantly, there are a number of exemptions to the cartel prohibitions under the CCA, including:

  • conduct under a collective bargaining notice;
  • authorised conduct (see below);
  • contracts, arrangements or understandings between related bodies corporate;
  • joint venture conduct.

The application of such exemptions can be complex and legal advice should be sought in relation to such exemptions.

Authorised conduct

In relation to any conduct that may breach the CCA, businesses are able to seek authorisation (prior to engaging in such conduct) from the ACCC. Generally, the ACCC will assess whether the conduct would result in a ‘net public benefit‘ (i.e. if the likely public benefit of the conduct outweighs the likely public detriment).

For example, authorisation may be sought for:

  1. price fixing at lower prices than usual in times of natural disaster, which ultimately assists an industry to survive; and
  2. where a certain product is unlikely to be developed in the absence of an agreement (e.g. under a research and development agreement).

Should you have any questions, please contact us for a confidential discussion.

Tony Conaghan | Partner | +61 7 3338 7502 | tconaghan@tglaw.com.au

Claire Slunecko  | Lawyer | +61 7 3338 7563 | cslunecko@tgaw.com.au

 

[1] See Chapter 4, page 31.

[2] ‘Likely’ means a real chance or possibility, that is not remote. See Tillmans Butcheries v Australasian Meat Industries Employees’ Union [1979] FCA 85, (1979) 42 FLR 331.

[3] For example, the specialised expertise of one business in commercialising the relevant product and similar products may be relevant (and may mean that the prohibitions in the CCA are not triggered).