Historical IP protection repealed: Uncertainty for (some) commercial IP arrangements

On 18 February 2019, the Australian Government passed the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (Bill) which effectively removed a longstanding IP exemption in Australia competition law that acted to exempt certain IP provisions from competition laws.

What is the IP exemption?

The IP exemption is housed in section 51(3) of the Competitions and Consumer Act 2010 (Cth) (Act) and provides a safe harbour for proprietors, licensees and IP owners to engage in certain types of conditional licensing and assignment of specified IP rights such as patents, registered designs, copyright and eligible layout rights which may otherwise contravene competition laws set out in Part IV of the Act.

The exemption applies to cartel conduct (ie price fixing, market sharing and bid rigging), exclusive dealing and other arrangements that have the purpose of, or have the effect of substantially lessening market competition. It does not, however, extend to apply to conduct imposing licence or assignment conditions which constitute a misuse of market power or resale price maintenance.

The repeal

The Bill provides for the complete removal of section 51(3) to align commercial transactions involving IP rights with all other transactions involving property and assets and make them subject to the full ambit of competition law.¹ It was reasoned that the commercialisation of IP rights can have significant competition implications where there are few market substitutes, or where IP rights are aggregated as such to create market power.²

The Bill further provides that the repeal will apply to both IP conditions included in licences and assignments entered into, before and after its commencement. This will expose pre-existing IP licences and assignments that previously relied upon the exemption to scrutiny under competition laws.

What type of IP arrangements are at risk?

The IP exemption will only be engaged if the following two elements are satisfied:

• The conduct must give effect to, or arise out of the imposition of a condition of a licence or assignment of the IP right; and
• The condition must relate to the subject matter of the IP right.

The latter element appears to be the determining factor in determining whether a condition is protected under the IP exemption.

High Court authority, Transfield Pty Ltd v Arlo International Ltd further clarifies that where a condition aims to tie in advantages or obligations that are collateral to exercising the IP right, it will not be protected under the exemption and is subject to contravention under Part IV of the Act.³ For example, in Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd,⁴ Pfizer’s condition to restrict the ability of community pharmacies to deal with its competitors in sublicensing its drug patent was held to be unrelated to the subject matter of the patent which was the drug itself.

Based on this discussion, it is possible to identify some IP conditions that, without the current exemption, are at risk of contravening Part IV of the Act:

• Cross licensing conditions where two or more parties license one another rights to use their respective intellectual property;
• Patent-pooling conditions which involve two or more patent holders assigning and aggregating their patent rights to a single individual or holding company for the purposes of cross-licensing;
• Grant-back obligations that require a licensee to license and authorise the licensor to use the licensee’s improvements to the licensed technology; and
• Pay-for-delay conditions in IP dispute settlements whereby the patent holder pays or provides a form of non-monetary benefit to its competitor in order to delay or limit the entry of their products into the market.

IP arrangements incorporating one or more of the abovementioned conditions in markets with limited substitutes will now be more closely scrutinised. In particular, the Australian Competition and Consumer Commission (ACCC) has noted that patent-pooling arrangements can have anti-competitive effects due to its potential for price fixing and market sharing, particularly where the arrangements exclude third party access.⁵

What you should do

For businesses utilising IP arrangements that rely on the section 51(3) exemption, the following provides a number of options which can be undertaken to in preparation for the upcoming repeal:

1. Review of IP Arrangements

As a first step, these businesses should undertake a thorough review of their IP arrangements and agreements to consider whether there are conditions which may be deemed to be restrictive trade practices.

It is worth noting that inclusion of such conditions will not automatically render them illegal. In order to successfully prosecute a majority of restrictive trade practices prohibitions in Part IV of the Act, the ACCC must satisfy the court that the condition in question has the purpose, or would be likely to have the effect, of substantially lessening competition. However, the cartel conduct prohibitions in Part IV remain wide-reaching and do not require proof of a purpose or effect of substantially lessening competition. This is especially problematic for IP arrangements that can be interpreted as cartel conduct behaviour.

2. Notification to the ACCC

Parties may engage in licensing arrangements that will otherwise contravene cartel conduct prohibitions if they provide notification to the ACCC and the ACCC is satisfied that any benefit to the public that is likely to result from use of such arrangements outweighs the detriment to the public that is likely to result from it.

3. Authorisation from the ACCC

Parties may apply to the ACCC for a grant of authorisation to engage in conduct which would otherwise contravene cartel conduct prohibitions. Authorisation will only be granted where the ACCC is satisfied that the conduct would not be likely to have the effect of substantially lessening competition, or that the conduct would likely result in a benefit to the public that outweighs the detriment to the public that is likely to result from it.

4. Class exemptions

The ACCC has the power to issue class exemptions specifying that one or more of the Part IV provisions do not apply to a particular conduct. Where a class exemption is issued, businesses do not need to apply for notification or authorisation with the ACCC to engage in the specified conduct. Instead, the exemption acts as a safe harbor for businesses to engage in the conduct without risk of breaching relevant provisions.

A class exemption may only be issued if the ACCC is satisfied that the specified conduct would not be likely to have the effect of substantially lessening competition, or that the conduct would likely result in a benefit to the public that outweighs the detriment to the public that is likely to result from it.

However, we note that the ACCC has yet to exercise the power and it is not certain whether it will use it to extend protection to the type of IP arrangements initially covered by the IP exemption.

Compliance deadline

The repeal of the IP exemption is set to take effect on 13 September 2019. This provides a window for businesses to review their IP arrangements and make other necessary arrangements in order to ensure full compliance with Australia’s competition laws.

How can we assist?

HWL Ebsworth’s Intellectual Property team and Competition Law team have experience in advising businesses regarding their IP arrangements to ensure that such arrangements are capable of meeting commercial needs as well as compliance with Australia’s competition laws. If you are concerned over the validity of your IP arrangements in light of the upcoming repeal, please contact us for further information on how we can assist you.

This article was written by Luke Dale, Partner and Stephanie Leong, Law Graduate.

¹ Explanatory Memorandum, Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 4.5.
² Ibid 4.4.
³ Transfield Pty Ltd v Arlo International Ltd (1980) 30 ALR 201, 217, 25.
⁴ Australian Competition and Consumer Commission v Pfizer Australia Pty Ltd [2018] FCAFC 78.
⁵ Australian Competition & Consumer Commission, Submission No 35 to the Productivity Commission, Inquiry into Intellectual Property Arrangements in Australia (November 2015) 3.2.2.