Part IV of the Competition and Consumer Act 2010 (Cth) (the Act) prohibits certain anti-competitive conduct.
Following the repeal of s51(3) of the Act, which provided an exemption for some IP dealings, various prohibitions in Part IV will now apply to certain IP arrangements from 13 September 2019. Amongst other things, those prohibitions will apply to licences and assignments of patent, design, copyright and eligible circuit layout rights. The prohibitions will also apply to licences between registered trade mark owners and registered users that were previously exempted. Importantly, it will be an offence to continue to give effect to provisions of relevant IP licences, assignments and other arrangements that contravene Part IV even if those licences, assignments or other arrangements were entered into before 13 September 2019.
The ACCC recently released its final Guidelines on the repeal of s51(3), with the intention of providing further clarity on what conduct involving IP rights is likely or unlikely to contravene the prohibitions that now apply to IP arrangements, and on the ACCC’s approach to assessment and enforcement. The following is an overview of some of the key parts of the final ACCC Guidelines.
The final Guidelines can be accessed here.
So what is prohibited?
The following will now be prohibited in connection with arrangements/conduct involving relevant IP rights:
- making or giving effect to a contract, arrangement or understanding, or engaging in a concerted practice, for the purpose, or with the effect or likely effect, of substantially lessening competition;
- engaging in exclusive dealing for the purpose, or with the effect or likely effect, of substantially lessening competition – this would generally involve imposing conditions which restrict the other party’s freedom to choose how it engages with third parties (for example, by requiring the other party to obtain goods/services from or supply goods/services to a specified third party or refusing to supply goods/services to the other party unless they agree to deal with a specified third party); and
- cartel conduct – IP contracts/arrangements will generally constitute cartel conduct if they are between parties that are, or are likely to be, competitors and include a provision that has the: (a) purpose or likely effect of fixing the price of goods/services supplied or acquired by any of the parties (Price Fixing); (b) purpose of preventing, restricting or limiting the production, supply or availability of goods/services (Output Restriction); (c) purpose of allocating or dividing certain customers, suppliers or territories between any of the parties (Market Allocation); or (d) purpose of rigging a bid for tender (Bid Rigging).
Cartel conduct is prohibited even if the conduct does not have any effect on competition. However, the prohibition on making or giving effect to cartel provisions will not apply if the only parties to the arrangement are related companies or if the conduct is for the purposes of a joint venture relating to the production of goods or the supply or acquisition of goods/services, which is not carried on for the purposes of substantially lessening competition.
Following public consultation and submissions made by some industry bodies, including INTA and LESANZ, it appears that the ACCC is seeking to provide some comfort by suggesting that the repeal of s51(3) will not necessarily disrupt existing IP arrangements, hamper investment in innovation and IP commercialisation or necessarily put IP owners or licensees at broad risk of non-compliance. In particular, the ACCC has acknowledged the exclusive nature of IP rights; acknowledged that exclusivity is an important incentive for investment in and promotion of innovation and IP commercialisation; suggested that the exercise of exclusive IP rights will not have significant anti-competitive implications; and noted that the licensing/assignment of IP rights usually encourages competition by allowing IP to be accessed, exploited and commercialised to a greater extent than would otherwise be allowed if the IP is not made available via licence or assignment.
IP arrangements that substantially lessen competition
Engaging in concerted practices, giving effect to contracts/arrangements (including specific contractual terms) and engaging in exclusive dealing involving IP rights will only contravene the prohibitions on anti-competitive conduct if they have the purpose, effect or likely effect of substantially lessening competition.
The ACCC will usually apply a “with or without” test when assessing the effect or likely effect of certain conduct on competition – by comparing the likely state of competition “with” and “without” the relevant conduct. In the case of IP licences/assignments, the ACCC has indicated that the “without” scenario for the purposes of its assessment will be where there is no IP assignment/licence at all, rather than a scenario where there is an IP licence/assignment without the potentially prohibited provisions. If the position is accepted that IP licences/assignments generally encourage competition by making IP accessible in circumstances where it would not be accessible “without” the licence/assignment, then there is a good argument that IP licences/assignments generally should not substantially lessen competition.
The purpose, effect or likely effect of the relevant conduct is assessed at the time the conduct occurs. Given that the prohibitions applying to IP contracts/arrangements relate to both the “making” and “giving effect” to the IP contract/arrangement, the ACCC will assess the purpose, effect or likely effect of the relevant provisions of the contract both at the time the contract is made and at the time the relevant provisions are given effect. Significantly, the effect or likely effect of a contractual provision on competition within a particular market may vary over time if market conditions change. This could pose a challenge to IP owners and licensees, as it may become necessary to continue to monitor market conditions to ensure that existing compliant IP arrangements do not subsequently become prohibited anti-competitive arrangements because of changes in the relevant market.
Examples of some relatively common IP contract terms that may be at risk of contravening the prohibitions on anti-competitive conduct include those which: (a) impose restrictions beyond the statutory term of the relevant IP right; (b) automatically grant the licensor a licence to improvements made to the IP by the licensee; or (c) require a party not to challenge the validity of the other party’s IP rights. Again, these terms would only be prohibited if they have the purpose, effect or likely effect of substantially lessening competition. The ACCC has indicated that these types of terms will “only occasionally” have that purpose, effect or likely effect when applying the “with or without” test.
Cartel conduct can only occur if both of the following are satisfied:
- the parties to the conduct are, or are likely to be, competitors for the relevant goods/services; and
- the conduct, or contractual provision, has the purpose/effect of Price Fixing, Output Restriction, Market Allocation or Bid Rigging (as applicable).
Parties would generally be considered competitors for the purposes of the cartel provisions if one party’s goods/services being the subject of the cartel conduct are substitutable for similar goods/services of the other party. However, for the purposes of IP licences/assignments, the ACCC has pointed out that it is relevant to consider if both parties already had the capacity to supply substitutable goods/services before the IP licence/assignment – implying that the parties may not be considered competitors for the purposes of the prohibition on cartel conduct if they did not both have that capacity before the IP licence/assignment.
Generally, the ACCC will assess what the parties actually intended in determining whether the relevant conduct or contractual provision had the substantial purpose/effect of Price Fixing, Output Restriction, Market Allocation or Bid Rigging, but by reference to available evidence surrounding the nature and circumstances of the arrangements between the parties. It is therefore possible that the parties to an IP licence/assignment will not be liable for engaging in cartel conduct even if certain contractual provisions have the inadvertent effect of Price Fixing, Output Restriction, Market Allocation or Bid Rigging, provided it is clear that the parties did not agree or give effect to the relevant contractual provisions for the substantial purpose of Price Fixing, Output Restriction, Market Allocation or Bid Rigging (as applicable).
Penalties and next steps
A range of penalties may apply if conduct or contractual provisions relating to IP are found to contravene the prohibitions on anti-competitive conduct. Amongst other things, a party may be ordered to pay damages and/or be restrained from engaging in the relevant conduct or giving effect to the offending contractual provisions. Pecuniary penalties may also apply, with the potential for fines of up to $10 million per contravention for corporations and $500,000 per contravention for individuals. Significantly, certain cartel conduct may also constitute a criminal offence for which a sentence of up to 10 years imprisonment and/or a fine of up to $420,000 may be imposed.
Where specific IP licence/assignment terms are at risk of contravening the prohibitions on anti-competitive conduct, the most obvious way to mitigate risk would be to amend the IP licence/assignment to remove the relevant term and vary arrangements to ensure that the relevant term is not given any effect. Of course, this may not be ideal or simple to achieve in the context of certain IP arrangements and such terms should not necessarily be removed or varied without an appropriate assessment of whether they are likely to substantially lessen competition or comprise cartel conduct in the particular circumstances. As an alternative, parties to an IP licence, assignment or other arrangement can also seek the ACCC’s authorisation of the arrangement. The ACCC may authorise the IP licence, assignment or arrangement if it is likely to result in a net public benefit, which may be the case in the context of IP arrangements involving research, development, innovation and IP commercialisation with a public benefit. If the IP arrangements are authorised by the ACCC, neither the ACCC nor any other person may take legal action on the basis that the IP arrangements contravene the prohibitions on anti-competitive conduct.
The ACCC Guidelines do not cater for all scenarios. Whether or not specific conduct or contractual provisions relating to IP will contravene the prohibitions on anti-competitive conduct will depend on the specific context and circumstances of each case. At the very least, IP owners and licensees should familiarise themselves with the ACCC Guidelines and review their IP arrangements to identify and mitigate any apparent risks of non-compliance. While the ACCC Guidelines are not exhaustive or determinative, they at least provide some examples of the types of clauses in IP agreements that may be at risk of contravening the prohibitions on anti-competitive conduct; IP arrangements that are likely or unlikely to contravene the relevant prohibitions; and the ACCC’s approach to assessing each arrangement.