Dealing with Australia’s challenge to Intellectual Property arrangements
The Australian Government has passed legislation which will remove the intellectual property safe harbour from the Competition and Consumer Act 2010 (Act) on 12 September 2019, thus exposing licences and assignments of patents, registered designs, copyrights, eligible layouts and trade marks to the brunt of Australia’s competition law. The removal of the safe harbour will potentially render some previously lawful arrangements unlawful and, at the extreme, a criminal offence. For that reason, the Government has delayed the actual removal of the safe harbour until 12 September 2019 to give businesses the opportunity to review their intellectual property arrangement which will persist beyond 12 September 2019.
As explained below, the way the change has been effected puts Australia out of step with other developed countries in relation to the approach to intellectual property related transactions and is inconsistent with the recommendations of the expert committees on which the Government’s decision to remove the safe harbour was based.
A bit of history
The Intellectual Property Safe Harbour contained in s 51(3) of the Act has been the subject of several reviews over the past 40 years and has been controversial. Broadly, it exempted conditions in licences and assignments of some intellectual property rights from the restrictive trade practices provisions of the Act to the extent that they related to the subject matter of the right.
Since 2000, two expert committees established by the Government and the Government’s Productivity Commission have conducted extensive reviews which looked at the appropriateness of the safe harbour. In each case, the relevant Committee and the Commission recognised that intellectual property rights were not inherently incompatible with competition law and qualified the recommendation for removal of the safe harbour with a further recommendation that intellectual property arrangements should not be subject to the per se prohibition in the Act on cartel provisions being arrangements between competitors or deemed competitors. Indeed, the Government’s draft legislation to implement the Committee’s and the Commission’s recommendations included a vertical arrangements exemption from the cartel provisions which would have gone some way to ensuring that some (but by no means all) intellectual property arrangements (including those between competitors) were subject to the substantial lessening of competition test and not absolutely prohibited as cartel provisions. However, the Australian Competition and Consumer Commission (ACCC) opposed the introduction of a new vertical arrangements exemption at this time and ultimately the Government moved forward with the removal of the safe harbour but without any protection afforded to intellectual property arrangements from the per se prohibitions on cartel conduct.
Under the Act, cartel conduct is absolutely prohibited subject to a number of limited exemptions unless authorised by the ACCC on public benefit grounds. In general terms, a cartel provision is a provision in an arrangement between competitors, likely competitors or persons who would be competitors but for any arrangement between them which has the purpose or effect of fixing or controlling price or any element of price or the purpose of restricting production, supply, or the acquisition of goods or services or the allocation of markets between any or all of the parties on the basis of geography, persons or class of persons. Related companies are also deemed to be parties to any arrangement.
In the context of intellectual property licences and assignments, the relevant exemptions from the per se prohibitions on cartel provisions are most likely to be as follows:
- The relevant provision is conditional on and does not come into force unless and until it is authorised on public benefit grounds by the ACCC.
- The arrangement is between related bodies corporate.
- The cartel provision is for the purposes of a joint venture and reasonably necessary for undertaking that joint venture.
- The provision relates to unlawful resale price maintenance or would do so if resale price maintenance was defined by reference to the setting of the maximum price at which goods or services could be resold or resupplied.
- The cartel provision constitutes exclusive dealing as defined in the Act.
The major concern raised by the removal of the safe harbour in so far as intellectual property arrangements are concerned arises where there are vertical arrangements between competitors or deemed competitors otherwise than in a joint venture situation. The not uncommon restrictions which regularly appear in intellectual property licence agreements such as geographic restrictions, field of use restrictions, grant back provisions, product or output restrictions and pricing restrictions are all potential cartel provisions if included in agreements between competitors. As such, the availability of an exemption is critical if such provisions are to be given effect to after 12 September 2019. Whilst the exclusive dealing exemption affords some protection, the definition of exclusive dealing will at first sight not apply to the types of restrictions listed above. This is primarily because the definition of exclusive dealing is couched in terms which assume that goods or services supplied by one party will be “resupplied” by the other. This is because exclusive dealing was framed to cover physical distribution arrangements rather than intellectual property arrangements. In a typical licensing situation, the licensor grants a right to the licensee to produce and supply goods or services which scenario does not fall within the definition of exclusive dealing for the most part.
As noted above, the arrangements which are now at risk are those in which two or more parties (or their related companies) are competitors, likely competitors or would be competitors but for an arrangement between them. The area in which this scenario is most clearly likely to arise is in the franchise industry. In that industry, it is not uncommon for franchisors to both issue franchises to independent third parties and at the same time have their own captive outlets (either owned directly or through subsidiaries) which in effect compete with independent franchisees. In those cases, it is also quite common for the franchise agreements to include geographic restrictions, field of use restrictions, quality control provisions and pricing requirements, all of which are likely to be unlawful cartel provisions after 12 September 2019 in respect of which no exemption applies and therefore must either be abandoned or an application for authorisation made to the ACCC in respect of them.
Intellectual property settlement agreements are another area where the impact of the removal of the safe harbour will be felt. It is not unusual for intellectual property disputes to occur between competitors or would be competitors and equally not unusual for a settlement agreement to require one of the parties to agree not to continue to supply certain goods or services which are asserted to be covered by an intellectual property right.
As is often the case with any legislative change, there are a number of uncertainties which plague advisors in advising clients on the impact of the change. In this case, one issue is the point in time at which a determination is to be made as to whether or not the parties are or would be likely to be in competition with each other. Is it the date on which the arrangement was made or the date on which, after 12 September 2019, one or other of them will be giving effect to the arrangement. It is conceivable that the parties might not have been competitors or deemed competitors at the time the arrangement was entered into but, through circumstances, perhaps by the subsequent acquisition of a business or another company, would be regarded as being competitors or deemed competitors on or after 12 September 2019.
The analysis is also complicated by the fact that the “purpose” to be considered in relation to non-price restraints is the subjective purpose for the inclusion of the provision. The question to be asked is whether the outcome sought to be achieved by the inclusion of the particular provision falls within the outcomes defined as cartel conduct. In the context of intellectual property transactions, the logical response would be to acknowledge that in licencing transactions at least, the intended outcome would be pro-competitive because permission is given to engage in otherwise prohibited conduct. However, in the draft guidelines issued by the ACCC, the ACCC concludes that territorial restrictions, output limitations and pricing restrictions in arrangements involving competitions are likely to be prohibited after 12 September 2019.
Where to now?
It is clear from the Government’s announcements that it considers that the 6 month period between the relevant legislation coming into effect and the date on which the safe harbour will be removed will be adequate time for businesses to review and decide whether or not their intellectual property arrangements are at risk and, if so, what would be the appropriate action to take. This may well lead to a large number of applications for authorisation being made to the ACCC for competitively benign restraints or conditions.
The ACCC has power to issue class exemptions which were envisaged as being in the nature of the block exemptions applicable in the EU. However, the ACCC has not given any indication that it proposes to issue a class exemption in respect of intellectual property arrangements.
The ACCC sought feedback on the draft Guidelines and that has been provided by a number of organisations including ones which members of the firm are involved with. The ACCC has indicated that it will publish final Guidelines in August. Whilst the guidelines will presumably provide information on how the ACCC proposes to exercise its prosecutorial discretion, guidelines do not have any legal effect and certainly will not cure a void provision or protect parties against private action. We encourage anyone who has an interest in the area to look at the draft Guidelines on the ACCC website.
If you require legal advice regarding the impact for your business on the removal of s 51(3), please contact Davies Collison Cave Law (Tim Creek at firstname.lastname@example.org or Rodney De Boos at email@example.com). If you would like a broader business assessment of the potential impacts and proposed frameworks for responding to this change, or require support in drafting an urgent submission (notwithstanding that the date for receiving submissions has now passed), please contact Jane Perrier or Karen Hallenstein of our associated company: ipervescence (www.ipervescence.com).
In the meantime, businesses need to be reviewing their intellectual property arrangements and assessing whether action is required before 12 September 2019.
Rodney De Boos
Davies Collison Cave Law Pty Ltd
1 Nicholson Street
MELBOURNE VIC 3000
Rodney DeBoos is a consultant with Davies Collison Cave Law. He has spent a substantial part of his career involved in the commercialisation of intellectual property and related competition issues and written extensively on those subjects. He has been a member of both the Intellectual Property Committee and the Competition and Consumer Committee of the Law Council of Australia since the mid 1970’s. He is also a former president of both the Licensing Executives Society Australia and New Zealand and the Licensing Executives Society International and a Certified Licensing Professional.