Restraints on competition through the licensing of IP - the effect of the repeal of the IP exception

Introduction

Conditions attached to the licensing or assignment of intellectual property (IP) have benefited from an exception to certain provisions of the Competition and Consumer Act 2010 (Cth) (CCA) under section 51(3) (IP Exception).  The IP Exception previously excused conduct even if it was anti-competitive conduct, in purpose or effect, or cartel conduct, provided it was not a misuse of market power or resale price maintenance by reason of IP licensing. 

From 12 September 2019, any arrangements that have relied on the long-standing exception will now be subject to all prohibitions, including cartel conduct, and under scrutiny as to the purpose or the effect of the restrictions attached to the granting of IP rights.  Any licencing agreement that potentially affects competition, even if the agreement has been in place for some time, should now be reviewed to ensure competition compliance going forward.

• Current and future agreements will now be subject to all prohibitions under the CCA
• IP owners have until 12 September 2019 to ensure that their “house” is in order

What is the IP exception?

Section 51(3) of the CCA currently provides that certain conditions imposed in licences or assignments of IP rights, including patents, registered designs and copyright, are excluded from certain anti-competitive conduct, such as cartel conduct and exclusive dealing.¹  Consequently, IP owners have been in a position to impose restrictions on the use of their IP that may be anti-competitive.

What are the implications of this change?

Removal of the IP Exception will expose businesses that have relied on it to the full force of the CCA.  Stipulation of the conditions under which a licensee can use licensed IP has been a powerful and often used approach by which an IP owner controls the use of their IP assets in whatever manner they see fit.  Going forward, the purpose and the effect of those conditions will need to be examined through a competition lens.  This will be particularly important where the relevant agreements are between competitors.²

Importantly, there will be no “grandfathering” of the current exception – the removal of the IP Exception will apply to new and pre-existing arrangements in place from the date the change comes into effect.  This means that current agreements, irrespective of when they were entered into will be subject to the Act.

The sectors that will be most affected by the repeal include those where IP rights are regularly licensed or assigned conditionally, including life sciences, pharmaceutical, information technology, and telecommunications.  For these industries, there are a number of readily identifiable key risk areas:

• Patent pools: These are agreements between patent owners to license one or more of their patents to one another or to third parties. This poses a risk of undermining competition, or potentially reducing innovation incentives.
• Cross-licensing: Cross-licensing involves an agreement between two parties to grant rights to their IP rights to the other.  This runs the risk of breaching the cartel conduct provisions under the CCA or risk falling foul of the provisions which prohibit agreements which may substantially lessen competition.
• Conditional Licensing: for example:
  - Licences which impose restrictions on licensees as to the customers to whom the goods or services can be supplied or the technical fields or territories in which they can supply the licensed goods or services.
  - Licences which impose conditions as to the price, or place restrictions on the geographical territory, of the services or goods produced pursuant to the licence.
• Licence term: licences, where the term extends beyond the life of the licensed IP.
• Potential licensee challenges: the repeal of the exemption may lead to licensees challenging the terms of existing licensing arrangements where they may be contrary to the new law.  In particular, the inclusions of conditions which restrict the ability of the licensee to compete with the IP owner or restrict the licensee in terms of pricing, territory or customers where this may be anti-competitive.
• IP enforcement and settlement agreements: IP enforcement and settlement strategies typically involves consideration of who to enforce against or settle with and on what terms. Such strategies will now need to be analysed through a widened competition lens, with the rationale for the action particularly in focus.  
• “Pay-for-delay” agreements:  These agreements are used to settle patent infringement litigation, where the owner of the patent pays the alleged infringer to settle the dispute.  The restrictions on use of patents inherent in these agreements pose a risk of misuse of market power by the IP right holder (unchanged by the IP Exemption) and call into question the anti-competitive purpose of any arrangement. 

The “purpose” of the conduct or course of action is critical. An overarching commercial purpose must be paramount. In considering the “effect” of any arrangement, it is important to note that the existence of a patent may give rise to a single product market. This effectively limits competition and heightens the risk that conduct may raise competition concerns. 

The ACCC has also indicated that it expects to publish draft guidelines on the application of competition law to IP rights following the removal of the exception. This guidance is anticipated to include how the ACCC proposes to investigate and enforce competition law issues relating to IP rights and examples of conduct which is likely or unlikely raise concerns under the Act, which will be important guidance in assessing the extent of any compliance risk.

Immunity from the application of competition laws to IP arrangements can be sought where the arrangement is likely to result in a net benefit to the public, by notifying or applying for authorisation from the ACCC.

What will you need to do?

All businesses with existing IP licensing or assignment arrangements should review their agreements to ensure they comply with the prohibitions against anti-competitive conduct under Part IV of the CCA. 

Generally, any arrangements that provide for territorial licence restrictions, conditions attaching to the use of IP rights for particular customers or groups of people, quality restrictions, or price will need to be considered for compliance with the Act.

Agreements between competitors must ensure that the IP licensing / assignment agreements do not run the risk of:

• preventing, restricting or limiting the production, capacity, supply or acquisition of IP (output restrictions);
• limiting or allocating IP use to certain customers or territories;  (market sharing) and
• fixing, controlling or maintaining the price of IP (price fixing).

Preparing a list of all agreements and considering the type of licence and the implications of the arrangements is the key starting point.  Where required, agreements may need to be re-negotiated to ensure compliance going forward.

Consequences of failure of comply

A failure to comply with the Act carries significant consequences.  The penalty for breaches of Part IV of the CCA are summarised below.

1. Corporations: the greater of:
   (a) $10 million; 
   (b) if the Court can determine a benefit obtained from the conduct – three times that value; or
   (c) if the Court cannot determine the size of the benefit – 10% of annual turnover in the preceding twelve months.
2. Individuals: maximum of $500,000.

Drivers for the repeal

The Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 was given Royal Assent on 12 March 2019 (now the Act), after passing both Houses of the Australian Government in mid-February.  It will enact recommendations from both the Harper Review and Productivity Commission’s IP Arrangements Inquiry by repealing s 51(3) of the CCA.  

The Harper Review came to the conclusion that, whilst in the majority of cases granting an IP right is unlikely to raise significant competition concerns, IP rights, like all property rights, can be used in a manner that harms competition.  For example, the Harper Review observed that in industries with multiple and competing IP rights, such as the pharmaceutical and communications industries, cross-licensing arrangements may be entered into to resolve disputes which may impose anti-competitive restrictions on each licensee.  The Harper Review recommended that such arrangements should be examinable under competition law.  Adding to this, the Productivity Commission argued that commercial transactions involving IP rights should be subject to the CCA in the same manner as transactions involving other property rights and assets.

Removing the IP Exemption will also bring Australia in line with other comparable international jurisdictions, such as the US, Canada and Europe who do not have an IP exception in competition laws.  Recent areas of focus for regulators in the US, Canada and Europe have been on the anti-competitive effects of ‘pay for delay’ arrangements in patent settlements, in particular arrangements which may deter entry by generic pharmaceutical manufacturers or other cases involving an IP owner abusing a dominant position (e.g. recent actions by the European Commission involving Google and Qualcomm).  

Where to now?

Businesses have until 12 September to review any licensing agreements or agreements that provide for the licensing of IP to ensure compliance with the Act.  Agreements between competitors (that are not subject to any other exception) are particularly high risk, and the purpose of the restraint, in addition to the effect of the arrangement, must be considered to ensure to ensure that the arrangements are not anti-competitive.