Australia: Proposed Removal Of Intellectual Property Safe Harbour A Potential Nightmare

Last Updated: 22 March 2019
Article by Rodney De Boos

A Bill to remove the intellectual property safe harbour from the Competition and Consumer Act 2010 (the Act) is presently before Parliament having already passed the Lower House and is ready for debate when the Upper House resumes sitting on 12 February, 2019. The longstanding intellectual property safe harbour currently provides an exception to the operation of certain prohibitions on anti-competitive conduct in the Act for licensing and assignment of certain intellectual property rights. Once the Bill is passed, the Act will apply to all intellectual property arrangements, whether made before or after commencement.

One question which arises is whether the amendment will have the effect of creating a breach of the Act by parties who "entered into" an intellectual property arrangement before the amendment was made which was at the time protected by the safe harbour. This is unlikely because the Acts Interpretation Act 1901 precludes the repeal of part of an Act affecting the previous operation of the repealed provisions. The alternative position would be that, insofar as arrangements entered into before commencement are concerned, the amendment only has the effect of creating an offence where the provisions of such an arrangement are "given effect to" after commencement. On that issue, it is noteworthy that the Federal Court has recently decided that giving effect to a cartel arrangement does not require knowledge of the arrangement and that it is sufficient for the challenged conduct to be undertaken pursuant to, or otherwise to implement an arrangement (ACCC v Yazaki [2018] FCAFC 73).

The Act as it currently stands, but without the safe harbour, would prohibit a number of standard provisions of assignments and licences of intellectual property and settlements of intellectual property disputes. When these facts are coupled with the substantial penalties which apply to contraventions and the exposure to private actions, the review of existing intellectual property arrangements becomes necessary and particularly so where the arrangement involves competitors or persons deemed to be in competition with each other.

The Bill providing for the removal of the safe harbour has a delayed commencement of 6 months from the date it receives Royal Assent. In the words of the Government, this:

"...will give individuals and businesses time to review existing arrangements to ensure they comply with the competitive provisions of the CCA. If necessary, they can apply to the Australian Competition and Consumer Commission (ACCC) for authorisation of their existing arrangements..." (Paragraph 4.11 Explanatory Memorandum to Treasury Laws Amendment (2018 Measures No. 5) Bill 2018).

As is explained below, unless the ACCC is able to issue class exemptions for a range of generally acceptable provisions before commencement, parties to intellectual property arrangements who are competitors or who are deemed to be competitors will have 6 months to review their intellectual property arrangements with each other and even if they apply for authorisation from the ACCC, may not be able to show a public benefit to allow the ACCC to grant authorisation even if there is no anti-competitive effect.

The elements which combine to produce this result are the:

  1. distinction between Cartel Conduct and the Competition Test offences;
  2. definition of exclusive dealing;
  3. authorisation test; and
  4. class exemption provisions.

1. The Distinction between Cartel Conduct and the Competition Test offences

Cartel Conduct is essentially an arrangement between competitors which has:

  1. the purpose or effect or likely effect of directly or indirectly fixing, controlling or maintaining the price (or an element of price) in relation to goods or services supplied, likely to be supplied or resupplied by any or all of the parties to the arrangement;
  2. the purpose of preventing, restricting or limiting:

    1. the production of goods by any or all of the parties;
    2. the capacity of all or any of the parties to supply to or acquire from persons or classes of persons;
  3. the purpose of allocating customers, suppliers or territories between any or all of the parties; or
  4. the purpose of bid rigging.

Other commercial arrangements (other than resale price maintenance) are only unlawful if they have the purpose, effect or likely effect of substantially lessening competition in a relevant market (the Competition Test).

The prohibition on engaging in Cartel Conduct does not apply to, for present purposes, arrangements between related companies, cartel provisions which are reasonably necessary for the undertaking of a joint venture and conduct which constitutes exclusive dealing within section 47 of the Act. For the purposes of this note, the most important of these exceptions is that which relates to exclusive dealing.

2. The Definition of Exclusive Dealing

Exclusive dealing is defined very precisely in section 47 of the Act and, in an intellectual property licensing context, would cover:

  • the grant of sole or exclusive rights to a licensee (section 47(4)(b));
  • restrictions on sub-licensing (section 47(2)(b));
  • restrictions on a licensee acquiring goods or services from a competitor of the licensor or the resupply of those goods or services (section 47(2)(d)); or
  • obligations on a licensee to acquire goods or services from a third party (section 47(6)).

As these types of restrictions fall within the definition of exclusive dealing in the Act, they would be unlawful only if the purpose, effect or likely effect was to substantially lessen competition in a market. Furthermore, engaging in that conduct would be protected if made the subject of a notification to the ACCC under section 93 of the Act or an authorisation granted by the ACCC under section 88.

However, provisions which are commonly found in intellectual property arrangements which do not fall within the definition of exclusive dealing and which the Commission had previously considered as being either within the protection afforded by the intellectual property safe harbour or unlikely to be anti-competitive (albeit in its 1991 Guidelines) include:

  1. territorial restrictions;
  2. field of use restrictions;
  3. price or quota restrictions in respect of products produced under a licence;
  4. quality requirements; and
  5. minimum production requirements.

The reason for this is that section 47 deals with the supply and acquisition of goods and services and, relevantly for present purposes, the resupply of the (presumably "those") goods and services. Whilst the grant of a licence to produce goods under an intellectual property right would be the supply of a "service" for the purposes of the Act, restrictions on the supply by a licensee of the goods produced under the licence are not dealt with by section 47 and therefore do not fall within the definition of exclusive dealing and accordingly are not removed by virtue of that definition from the prohibition on engaging in Cartel Conduct. There are a myriad of such restrictions which are common in licences to manufacture or produce goods or provide services which, from a competition point of view, are unobjectionable; arguably even between competitors.

Thus, where provisions of the type discussed above are contained in assignments or licences of intellectual property rights between competitors or persons deemed to be competitors, they will arguably fall within the description of Cartel Conduct.

Whilst any arrangement between competitors containing these types of provisions will be problematic, one area in which there is likely to be great impact is the area of franchising. For instance, it is not uncommon for franchisors to have franchisor owned outlets which compete (or would, but for a territorial restriction, compete) with its franchisees in supplying goods or services. Thus it is likely that a franchisor in that position will be regarded as being in competition with its franchisees. It would follow that, in those franchise systems for instance, a limitation on the resupply by franchisees of goods which do not meet a certain standard or specification would constitute Cartel Conduct.

In licence agreements, it is not unusual for a licensor to limit the supply of goods produced under the licence to those which meet certain specifications, or bear a particular trade mark or to limit sale to a particular territory or to a particular class of customer. Again, where the licence agreement is between competitors or companies deemed to be competitors, it is arguable that such provisions will amount to Cartel Conduct. In other situations, such restrictions are generally regarded as being not anti-competitive or even pro-competitive.

In similar vein, where there is an intellectual property dispute between competitors which is resolved by, for example, an agreement of one:

  1. not to engage in infringing conduct by supplying goods or services; or
  2. to sell off infringing stock under certain conditions,

those provisions would also arguably constitute Cartel Conduct.

Where provisions do not fall within the definition of Cartel Conduct because the arrangement does not involve competitors or persons deemed to be competitors, they will be judged in accordance with the competition test whether they fall within the definition of exclusive dealing in section 47 or not.

This leads into the proposition put by the Government that under the proposed amendment individuals and businesses will have time to review the existing arrangements and, if necessary, apply to the ACCC for authorisation.

3.The Authorisation Test

The Act allows the ACCC to grant authorisation in certain circumstances. However, there are two issues which arise and create concern.

In relation to all arrangements which do not amount to Cartel Conduct, secondary boycotts or resale price maintenance, the test for the grant of an authorisation is whether the ACCC is satisfied that the effect will not be to substantially lessen competition or that there is a public benefit which outweighs any public detriment.

In relation to Cartel Conduct, the Commission may grant authorisation only if it is satisfied that the conduct would result or be likely to result in a benefit to the public which outweighs any detriment to the public resulting or likely to result from the conduct. Thus, for Cartel Conduct, there is no consideration as to whether or not the conduct is likely to have the effect or has the effect of substantially lessening competition. In many intellectual property arrangements, it may be difficult for a party to show a public benefit (as opposed to a private benefit) in engaging in certain conduct even if there is no anti-competitive effect.

The second concern is in relation to the authorisation process. The Commission does not have power to grant an authorisation for conduct engaged in before it decides the application (section 88(6)). Furthermore, pursuant to section 91(1A), an authorisation (except in some limited circumstances) comes into force on the last day on which an application for review of the Commission's determination can be made to the Australian Competition Tribunal. Given that the Commission has to make market enquiries and consider submissions in an application for authorisation, it is highly likely that existing conduct which falls within the definition of Cartel Conduct but not exclusive dealing will constitute a contravention of the Act unless and until authorisation is granted (which may take considerable time), thus exposing the parties to actions for damages by third parties under Section 82 of the Act even if the authorisation is subsequently granted. The extent of any retrospective effect also becomes a critical issue in those circumstances.

Where conduct constitutes exclusive dealing within section 47 of the Act, parties will also have the opportunity of making that conduct the subject of a Notification under the Act. Whilst a Notification remains on a public register of Notifications, the parties are protected from legal action in respect of the notified conduct. The ACCC can remove a Notification if it decides that there is a purpose, effect or likely effect of substantially lessening competition which is not outweighed by any public benefit.

4. The Class Exemption Provisions

A recent amendment to the Act gave the Commission the power to determine class exemptions for conduct which is unlikely to have an anti-competitive effect or which is likely to result in a public benefit which outweighs any anti-competitive effect. The concept behind this power reflects the situation in Europe where Block Exemptions are used to mitigate transaction costs, risk and uncertainty.

Under the Act, class exemptions are to be made by legislative instrument. If the concerns expressed above are to be dealt with, it is to be hoped that the ACCC is preparing a class exemption in relation to intellectual property arrangements given that the Government has indicated that the Commission will issue "guidance" on the application of the law to intellectual property rights as recommended by the Productivity Commission (Senator Cash second reading speech 18 October, 2018). It is to be assumed that the reference to "guidance" is intended to refer to a class exemption as guidance is unlikely to be of particular benefit to parties who may find themselves in contravention of the Act in respect of provisions which were previously lawful or which the Commission has previously regarded as being unlikely to be anti-competitive.

Furthermore, legislative instruments must be made in accordance with the Legislation Act 2003 which requires consultation with persons having expertise in the relevant fields and persons likely to be affected by the instrument. The proposed legislative instrument is then subject to Parliamentary scrutiny. It would therefore seem unlikely that the Commission could issue a class exemption in relation to intellectual property arrangements and have it brought into force in a timely manner in so far as existing arrangements are concerned.

The upshot is that business is likely to find itself in something of a predicament in 2019 in coming to terms with a change in the law which the Government believed would affect only a small number of arrangements (Para 4.3 Explanatory Memorandum).

Assuming that the Government does not change its mind on the repeal of the safe harbour or the manner of its repeal, all businesses should review their existing intellectual property arrangements with a view to assessing what steps might be necessary in each case to deal with lawful conduct which has suddenly become unlawful.

Unless and until the ACCC creates a class exemption in relation to intellectual property arrangements, this is likely to be a time consuming, costly and largely non-productive exercise.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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