Dealing with Australia’s challenge to intellectual property arrangements

June 2019 | SPOTLIGHT | INTELLECTUAL PROPERTY

Financier Worldwide Magazine

June 2019 Issue

The Australian government has passed legislation which, on 12 September 2019, will remove the intellectual property safe harbour from the Competition and Consumer Act 2010, thus exposing licences and assignments of patents, registered designs, copyrights, eligible layouts and trademarks to the brunt of Australia’s competition law. As the removal of the safe harbour will potentially render some previously lawful arrangements unlawful, and at the extreme a criminal offence, the government has delayed the actual removal of the safe harbour until 12 September 2019 in order to give businesses the opportunity to review their intellectual property arrangement which will persist beyond 12 September 2019 in order to make any changes necessary to ensure that giving effect to those arrangements after 12 September 2019 will not be a breach of the restrictive trade practices prohibitions contained in the Act.

As explained below, the way in which 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 has been the subject of a number of reviews over the past 40 years and has been controversial. Broadly, it exempted conditions in licences and assignments of 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.

In the period since 2000, two expert committees established by the government and the government’s Productivity Commission conducted extensive reviews which included reviews of 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 with a further recommendation that intellectual property arrangements should not be subject to the per se prohibition in the Act on cartel provisions. Indeed, the government’s draft legislation included a vertical arrangements exemption from the cartel provisions which would have ensured that intellectual property arrangements were subject to a 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 exemptions 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.

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. There is also an absolute prohibition on bid rigging which is not relevant to the present discussion.

The exemptions

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: (i) 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; (ii) the arrangement is between related bodies corporate; (iii) the cartel provision is for the purposes of a joint venture and reasonably necessary for undertaking that joint venture; (iv) 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; and (v) 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. As such, the availability of an exemption is critical if such provisions are to be given effect after 12 September 2019. While 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 for the reason that 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 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.

The consequences

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 after 12 September 2019 are likely to be unlawful cartel provisions 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.

Uncertainties

As is often the case with any legislative change, there are a number of uncertainties which plague advisers in advising clients on the impact of the change. In this particular case, one issue is as to 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 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 provision. The question to be asked is whether the outcome sought to be achieved by the inclusion of the particular provision falls within the conduct defined as cartel conduct.

Where to now?

It is clear from the government’s announcements that it considers that the six 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; at least at this time. The ACCC has issued a press release in which it has indicated that it will issue draft guidelines relating to the application of the Act to intellectual property arrangements by mid-2019 and that the guidelines will be finalised by 12 September 2019. While 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.

In the meantime, businesses need to be reviewing their intellectual property arrangements and assessing whether action is required before 12 September 2019.

Rodney DeBoos is a consultant at Davies Collison Cave Law. He can be contacted by email: rdeboos@davies.com.au.

Rodney DeBoos

Davies Collison Cave Law