Government proposes radical surgery for competition laws
The Government has issued an exposure draft and explanatory note for radical changes to the restrictive business practices section of the Competition and Consumer Act 2010 (Cth) (the Act). The amendments implement the recommendations of the Competition Policy Review which was conducted by Professor Ian Harper (the Harper Report). The Government has called for comments on the exposure draft and persons interested in making submissions have until 30 September, 2016 to do so.
The proposed changes will be of interest to intellectual property rights holders as they will impact on the manner in which those rights holders can deal with the rights they hold.
The main changes proposed by the Government are to remove as “per se” offences (i.e., strict liability offences that do not require the conduct to have the purpose, effect or likely effect, of substantially lessening competition – the competition test) the current prohibitions on exclusionary provisions and third line forcing and to enlarge the misuse of market power provisions.
Under the proposed changes, exclusionary provisions (basically, arrangements between competitors to restrict output or allocate territories or customers) will be illegal only if they constitute cartel conduct. Third line forcing (basically forcing the acquisition of goods or services from a third party as a condition of supply or the giving of a discount or other financial accommodation or refusing to supply in the absence of such a condition) is to be treated as any other form of exclusive dealing and therefore be subject to the competition test.
The changes relating to the exclusionary provisions and third line forcing will benefit IP rights holders, particularly trade mark owners who, since 1995, have arguably not had the benefit of the safe harbor for transactions involving intellectual property licences and assignments provided by section 51(3) of the Act. The reason for this is that in 1995 the Government introduced a new Trade Marks Act but did not amend section 51(3) to reflect the introduction of the new Act nor to reflect that the regime regarding licensed use of a trade mark had changed from one of registered use to one of authorised use.
This failure to amend section 51(3) resulted in many franchisors seeking the protection afforded by the notification provisions in the Act for third line forcing provisions in their franchise agreements. Holders of the IP rights could rely on section 51(3) to protect their third line forcing provisions provided that those provisions could be said to relate to the particular subject matter of an intellectual property right.
The proposed changes will become even more important if section 51(3) is removed from the Act. This is now a likely outcome given that two Government enquiries have recommended its removal and the draft report issued by the Australian Government’s Productivity Commission has also recommended removal. In its draft report into “Intellectual Property Arrangements” (April 2016), the Productivity Commission specifically highlighted the absolute prohibitions on exclusionary provisions and third line forcing as being arguments used to support the retention of Section 51(3). Now that those per se offences are proposed to be removed, it is even less likely that the Productivity Commission in its final report would change its view that section 51(3) should also be removed. The loss of the safe harbor for intellectual property arrangements will expose all such arrangements to full scrutiny under the Act.
The other major change proposed in the exposure draft is the amendment to the misuse of market power provision (section 46) in the Act. Currently the prohibition is on a company with substantial market power using that power against its competitors or would be competitors to damage them or prevent competitive behavior arising. The proposal is that the section become a prohibition on a company with substantial market power engaging in conduct (undefined) which has the purpose, effect or likely effect of substantially lessening competition in a relevant market. This is a substantial change to Australian law and one which could affect how IP rights holders can deal with their rights.
Whilst the current section has many faults, it does require the “misuse” of market power by the company in possession of that power. The proposed prohibition only requires that a company with a substantial degree of power in a market “engage in conduct” which has the requisite anti-competitive purpose or effect. Thus, if perfectly acceptable conduct engaged in for a benign purpose by a company with the requisite market power has the effect of substantially lessening competition in a relevant market, it will be illegal. For instance, if one assumes a market in which there are only a few competitors and no prospect of a new entrant and a company with a substantial degree of market power wishing to license one of those competitors for good commercial reasons, that “conduct” would be illegal if the effect would be that the other competitors would cease to be competitive, resulting in a substantial lessening of competition.
In its discussion on this aspect of section 46, the Panel proposed in its draft report, but later rejected, a defence for rational business decisions which advance the long term interests of consumers. As the Panel noted, in both the EU and the US, firms with substantial market power are given the opportunity to show pro-competitive efficiency justifications. In its final report, the Panel recommended the inclusion of an instruction in the section that regard should be had to the extent to which the conduct has the purpose, effect or likely effect of increasing competition by enhancing efficiency, innovation, product quality or price competitiveness. This recommendation has also been accepted in the exposure draft of the proposed amendments.
Whilst the proposal ultimately adopted may provide the courts with enough room to develop an appropriate pathway through the section, intellectual property rights holders with a substantial degree of market power will have to carefully consider the effect that their licensing and other commercialisation decisions are likely to have on competition.
Davies Collison Cave Law would be pleased to assist clients who have questions in relation to the proposed changes or who might wish to make submissions to Government on those changes.