Anti-competitive IP transactions under the spotlight

Section 51(3) of the Competition and Consumer Act 2019 (Cth) (‘CCA’) was repealed on 13 September 2019. Before its repeal, s 51(3) provided an exemption to certain provisions in Part IV of the CCA for conduct involving the conditional licensing or assignment of certain intellectual property (‘IP’) rights. The exemption covered the conditional licensing or assignment of patents, trade marks, copyright, registered designs and eligible circuit layout rights (but not confidential information or trade secrets). It exempted businesses engaging in such conduct from the prohibitions against: cartel conduct (Part IV, Div 1), arrangements with the purpose or effect of substantially lessening competition in a relevant market (s 45), and exclusive dealing (s 47) (but not misuse of market power or resale price maintenance).

The repeal of s 51(3) operates retrospectively, in the sense that the exemption will not apply to a business seeking to give effect to a relevant condition contained in a pre-13 September agreement.

It is critical that businesses bear in mind the consequences of the repeal when settling IP disputes, setting up exclusive licensing arrangements and when considering patent pooling, cross-licences, grant-back obligations and hold-up arrangements. There are extensive civil (and in the case of cartel conduct, criminal) penalties for corporations and individuals who contravene Part IV of the CCA.

IP and competition law: a common purpose

IP and competition law share a common, underlying purpose – the enhancement of business and consumer welfare by promoting innovation and efficiency. They seek, however, to achieve this purpose by differing means. To encourage innovation, IP law confers exclusive rights to exploit IP. To encourage market efficiency, competition law prohibits anti-competitive conduct. This gives rise to a potential tension, given the impact that transactions involving exclusive IP rights can have upon competition.

Before its repeal, s 51(3) was directed to resolving this potential tension.

In deciding to repeal s 51(3) the Federal Government supported the recommendations of the Productivity Commission, which were in part based on a view that IP rights and competition law are not in fundamental conflict and that IP rights do not, in and of themselves, have significant competition implications. In these circumstances the Productivity Commission (among other bodies) considered that repealing s 51(3) would allow the Australian Competition and Consumer Commission to address anti-competitive conduct, while minimising uncertainty for rights holders and licensees. Ultimately, the repeal of s 51(3) means that IP rights will be treated in the same manner as transactions involving other property and assets.

IP rights do not necessarily confer ‘substantial’ market power on a firm, as goods protected by IP rights will often be subject to competitive constraint from substitutable goods. Of course, there are certain IP rights that tend to confer some power on a firm; the 20-year exclusive right to exploit an invention, conferred upon patentees by the Patents Act 1990 (Cth), being one example.

Related to this, the licensing or assignment of IP rights may enhance competition, by allowing other market participants to provide goods or services they otherwise would be precluded from providing. However, licensing or assignment of IP rights can have anti-competitive consequences where the agreement has the purpose or effect of substantially lessening competition in a market. This can only be assessed by considering the particular conduct in issue, the market in which goods or services are provided, and the competitive constraints operating more broadly in that market. By way of example, a condition imposed in a licence or assignment that is not in fact related to the IP rights the subject of the agreement, but towards some collateral advantage, may raise red flags.

ACCC Guidelines

While businesses have been on notice for some time of the repeal of s 51(3), the ACCC has only recently published guidelines addressing how it intends to approach enforcement: Guidelines on the repeal of subsection 51(3) of the Competition and Consumer Act 2010 (Cth), 30 August 2019 (‘Guidelines’).

As the ACCC acknowledges: it is IP statutes that confer exclusive rights on IP owners; the ‘bare exercise’ of these statute-conferred exclusive rights cannot fall foul of the anti-competitive conduct provisions. The ACCC says the majority of IP rights arrangements will not be impacted by the repeal of s 51(3).

A risk arises, however, where an arrangement (such as a licence or assignment with conditions) constitutes more than the ‘bare exercise’ of a statute-conferred exclusive right. The Guidelines provide examples of conduct that the ACCC considers is likely to contravene the CCA.

Cartel conduct: The prohibitions against cartel conduct (price fixing, output restrictions, market sharing and bid rigging) now apply to all conditions of a licence or assignment, including any that relate to an IP right. Cartel conduct is prohibited where the ‘competition condition’ is satisfied and either the ‘purpose/effect’ or ‘purpose condition’ is also satisfied (see s 45AD). In the Guidelines, the ACCC provides an example relating to output restrictions. A small manufacturer (Firm A) owns a patent over a method of producing steel. Firm A licenses this method to a major manufacturer (Firm B), on condition that Firm B only produce a specified maximum amount of the steel. The two firms agree to the maximum amount, include the restriction in the licence and behave in accordance with the agreement. The ACCC notes that, prior to the repeal of s 51(3), giving effect to the agreement may have been exempt, because Firm B’s specified maximum output may have been considered a condition of Firm A’s licence of the patented invention. Now, however, the cartel provisions could apply in circumstances where Firms A and B are competitors in the supply of steel generally. Overall the Guidelines suggest that the ‘purpose condition’ (see s 45AD(3)) is unlikely to be satisfied as Firm B is able to supply more steel than before the license was entered into.

Agreements with the purpose or effect of substantially lessening competition:
The Guidelines provide an example where Firm A owns a patent for transmission systems in mining vehicles, and licenses that patent to Firms B and C for manufacture and on-sale. Firm B agrees to pay Firm A licensing fees that are 20 per cent more than the licensing fees Firm A receives from Firm C. In return, Firm A agrees to make it a condition of its licence with Firm C that Firm C abide by more stringent quality requirements than Firm B. This reduces the number of systems Firm C can produce. The ACCC considers that Firms A and B are at risk of contravening s 45. It is in return for the higher licensing fees from Firm B that Firm A is imposing the additional quality requirements upon Firm C, with the result that the quality requirements are unlikely to be bona fide, suggesting an anti-competitive purpose. Prior to its repeal, s 51(3) could have protected Firm A, on the basis that the additional quality requirements could have been construed as a condition relating to the patented invention.

Exclusive dealing with the purpose or effect of substantially lessening competition: Exclusive dealing occurs where a corporation trades with another and imposes a condition on the other’s freedom to choose with whom, in what, or where they deal. The Guidelines provide an example where Firm B, which owns the copyright to an independent film, licenses the film to Firm A. Firm A insists that the licence agreement contain a provision that prevents Firm B from licensing the film to any other distributors in Australia. Whether the conduct contravenes s 47 will depend on the commercial rationale for the arrangement, and the operation of the film distribution market. Again, prior to its repeal, s 51(3) could have exempted Firm A from liability because the agreement may have been construed as a condition relating to the copyright work.

Authorisation and notification

There are steps businesses may take under Part VII of the CCA, if they are concerned that their proposed conduct would, or might, contravene the anti-competitive conduct provisions of the CCA.

First, authorisation for the conduct may be sought from the ACCC. Authorisation may be granted where the proposed conduct is likely to result in a net public benefit. If authorisation is obtained the business receives statutory protection from legal action under the CCA for the conduct for the duration of the authorisation. Authorisation does not protect conduct engaged in before the authorisation was granted.

Second, the business may notify the ACCC of the proposed conduct. Notification is an alternative process to authorisation that is available where parties propose to engage in small business collective bargaining, exclusive dealing or resale price maintenance. The ACCC may only object to a notification if the public benefit, likely to result from the notified arrangements, would not outweigh the likely public detriment. Notification and authorisation provide similar protections from legal action: see above.

Where to from here?

Businesses that wish to enter into transactions in relation to IP rights must be alive to the challenges of doing so in a way that does not contravene the CCA. It is not sufficient to assume that because a business holds statute-conferred IP rights that all transactions in respect of those rights are protected from the operation of competition law. Always consider:
(i) why is this arrangement being entered into?;
(ii) what are the competitive dynamics of the relevant market in which the business operates?; and (iii) what effect will the arrangement have on those dynamics?

Cynthia Cochrane and Catherine Bembrick are barristers at 5 Wentworth Chambers.