If your business operations involve licensing or the transfer of intellectual property ('IP') rights, such as trademarks, patents, registered designs or copyright, you need to be aware of the recent legal changes outlined below in order to:
- avoid significant monetary penalties; and
- review your commercial agreements to ensure compliance with competition laws.
Prior to 13 September 2019, companies and/or individuals entering into commercial transactions to licence the use of or transfer ownership of IP rights were exempt from some provisions of the Competition and Consumer Act 2010, which otherwise prohibits conduct that reduces competition.
From a practical perspective, this exemption meant that conduct which has the effect of substantially decreasing competition within a market was acceptable in relation to IP licensing and assignment agreements. The exemption was based on a presumption that a conflict exists between the use of IP rights, which by their nature grant monopoly rights (because they are specific to an entity/individual), and competition laws (laws that promote market competition). Views on this have shifted, with IP rights and competition no longer considered to be in fundamental conflict.
You may have been obtaining the benefit of the exemption, knowingly or unknowingly, by specifying in your licensing or assignment agreements a limited territory, field of use or market segment in which rights can be exercised or by including provisions in relation to exclusivity or price requirements. Whilst such terms and conditions may still be acceptable, each agreement needs to be carefully drafted to ensure compliance with the Act. It is important to review or restructure your licensing agreements to make sure they do not fall foul of the Competition and Consumer Act.
Due to the rationale for the exemption having fallen away, the exemption contained in section 51(3) of the Act was repealed on 13 September 2019. This means agreements in relation to IP rights are now subject to the same restrictions against anti-competitive conduct as all other commercial transactions.
The following conduct is now prohibited in all IP agreements:
- Cartel conduct – companies/individuals cannot agree to act together instead of competing against one another, with the intention of controlling markets and restricting goods in order to increase profits. For example: price fixing, output restrictions, market sharing and bid rigging;
- Exclusive dealing – a company/individual cannot impose restrictions on another's trading freedoms, where the result would be that competition is substantially lessened; and,
- Anti-competitive conduct – a company/individual cannot enter into a contract, arrangement or understanding with another company/individual to prevent, restrict or distort competition.
The purpose of this change in law is to improve competition and innovation in the intellectual property sector in Australia, and to bring Australia into alignment with comparable jurisdictions, including the US, Europe and Canada.
The cost of breach: Penalties
The maximum penalty for a company involved in anti-competitive conduct, contrary to the Act, is the greater of:
- $10 million;
- three times the value of the benefit obtained from the conduct; or
- if the value of the benefit cannot be determined, then 10% of the company's annual profit for the past twelve months.
The maximum penalty for individuals, which includes directors or employees, involved in anti-competitive conduct is the sum of $500,000 per breach.
Companies and individuals can also be subjected to criminal penalties if they are found guilty of cartel conduct.
What does this mean for you and your business?
The industries most affected by this change in law are those which rely heavily on IP rights, such as telecommunications, pharmaceuticals and information technology. Companies or individuals who operate using a franchise model should also review their IP arrangements.
This change in law will put agreements involving conditional licences or assignment of IP rights under closer scrutiny and make such agreements more susceptible to objection from third parties, if they are considered to be anti-competitive.
The repeal applies to IP agreements currently in place, as well as all future agreements. As such, we encourage all companies and individuals affected by the legislative change to review their IP agreements.
If there is any concern regarding whether conduct may be a breach of the Act, the company or individual concerned should seek legal advice or authorisation from the ACCC. Where an application and submissions are made to the ACCC, they will consider the conduct, and any comments made by interested parties. The effect of authorisation being that statutory protection will be provided in relation to the conduct.
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.