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ACCC finalises Guidelines on IP exemption repeal – are you ready?
Date : 10 September 2019
Author/s : Donna Short, Sarah Best
Type : Focus Paper
 

 

With the repeal of the IP exemption in the Competition and Consumer Act (CCA) about to take effect, the ACCC has issued in final form its guidelines to help business work out what the repeal means for them - “Guidelines on the repeal of subsection 51(3) of the Competition and Consumer Act 2010 (Cth)”

 

The draft Guidelines were released back in June and following receipt of submissions, the ACCC has now published the final Guidelines which provide more clarity and useful guidance to business on what the repeal means for IP arrangements. Let’s step you through what the repeal is likely to mean for your business and the key pointers provided by the Guidelines.

 

Background

  • Section 51(3) of the CCA currently contains the IP exemption. This is a limited exemption from certain competition law prohibitions in the CCA for conditional licensing or assignment of intellectual property (IP) rights such as patents, registered designs, copyright or eligible circuit layout rights. The exemption applies to cartel conduct, exclusive dealing conduct and other provisions prohibiting arrangements or concerted practices that have the purpose or effect of substantially lessening competition.

  • Following multiple independent reviews recommending its removal over the last 20 years, the IP exemption was repealed in February 2019. The repeal comes into effect on 13 September 2019.

  • This brings Australia into line with comparable overseas jurisdictions (US, Canada and Europe) and means IP licences, assignments and other contractual arrangements entered into before or after this date will now be subject to the same competition law as other commercial arrangements and will need to be assessed for compliance with the CCA.

  • Why do you need to worry about the repeal? Failing to clear the competition law hurdles in the CCA exposes parties to competition law risk and significant penalties. The maximum civil penalties for contraventions of the CCA (per contravention) are potentially very large - for corporations, the greater of $10 million; 3 x the value of the benefit from the act or omission; or where the benefit cannot be calculated, 10% of the corporation’s annual turnover in the last 12 months; and for individuals $500,000. There is also the potential for criminal penalties for cartel conduct.

 

ACCC’s Guidelines

  • The final Guidelines have been significantly amended since the release of the consultation draft several months ago for stakeholder feedback. This has seen the Guidelines being greatly improved, with further detail now provided about certain aspects of the CCA including the operation of the cartel provisions and the ACCC’s likely approach to exclusive licensing arrangements between non-competitors.

  • The Guidelines make it clear they are not intended to be an exhaustive guide to the interaction between IP and competition law. Rather, they are to provide guidance on the impact of the IP exemption repeal.

  • The Guidelines set out in a more detailed, nuanced way than the draft version the four general principles that will guide the ACCC’s approach to compliance and enforcement once the repeal takes effect. These four general principles are that: 

    • IP rights and competition law are not in conflict; the bare exercise of IP rights will not have significant anti-competitive implications and the exclusive nature of these rights is an important incentive to drive innovation and commercialisation;

    • IP rights do not necessarily, of themselves, create substantial market power and even where ownership of an IP right is a key determinant of the market power of a business, this will not of itself contravene the CCA;

    • the licensing or assignment of IP rights usually encourages competition by enabling IP to be exploited to a greater extent than would occur if those rights were not licensed or assigned;

    • despite this, licensing or assignment agreements will in some cases have anti-competitive consequences (where they have the purpose or effect/likely effect of ‘substantially lessening competition’). 

  • The Guidelines explain the ACCC’s position that it does not consider agreements that authorise the use of certification trade marks will expose businesses to additional risk once the repeal takes effect because the ACCC assesses the competition impacts of the proposed rules and does not approve rules unless satisfied that they would not be to the detriment of the public.

  • The Guidelines also provide more instructive guidance on how the competition law provisions in the CCA will apply to IP arrangements including the cartel provisions, the anti-competitive agreement or concerted practice provisions and the exclusive dealing provisions (including third line forcing).

 

Cartel provisions

The ACCC points to the possibility that certain types of IP arrangements may amount to cartel conduct. The Guidelines provide better guidance than the draft version about the operation of the cartel provisions, making it clear that cartel conduct is prohibited irrespective of the conduct’s effect on competition and stepping through what is required for the provisions to be triggered (including that the parties to the arrangement must be ‘competitors’ in the sense required by the CCA).

 

The Guidelines also provide detailed guidance about the ACCC’s views on red flag provisions in IP arrangements between competitors that it considers risk breaching the cartel provisions. Examples of various contractual provisions that may amount to cartel conduct are provided including:

  • price restrictions - conditions that restrict or influence the price that a licensee or assignee can charge (Example 3 - farmers with competitive plant breeding rights agreeing to set prices to combat a difficult financial position).

  • output restrictions - conditions that restrict the output of a licensee, assignee, licensor or assignor (Example 4 - licence agreement where competitor licensee agrees to accept a patent subject to certain production restrictions).

  • market allocation - conditions that control the way in which a party can commercialise IP rights or supply goods under a cross-licensing agreement such as dividing/allocating customers, suppliers or territories (Example 5 - collaboration agreement where competitor research companies agree to collaborate and then commercialise new IP rights in agreed areas). 

 

Anti-competitive agreement/concerted practice provisions

The ACCC points to the possibility that certain types of arrangements may need to be considered as an agreement or concerted practice that has the purpose, effect/likely effect of substantially lessening competition (known as the ‘competition test’). The Guidelines explain how this competition test is generally approached by the ACCC and that this involves an assessment of both the purpose and effect/likely effect of conduct on competition which will usually include looking at the state of play with and without the relevant conduct.

 

The Guidelines provide examples of IP licence provisions that run the risk of being an anti-competitive agreement or concerted practice, looking at typical time restrictions, grant-back provisions, no-challenge provisions and output restrictions. The ACCC makes it clear though that in general these types of provisions will only occasionally have the purpose or effect of substantially lessening competition and create competition law risk for businesses.

 

The Guidelines also now helpfully explain the ACCC’s likely approach to exclusive IP arrangements and state that “an exclusive licence between non-competitors will generally be unlikely to contravene those prohibitions in the CCA that are subject to a [competition test] ….Instead, it will either encourage competition or be competitively neutral” and will often allow a greater exploitation of the IP rights than would be the case if the licence or assignment was not granted at all.

 

Exclusive dealing provisions

The ACCC provides more detailed guidance on the application of the exclusive dealing (supply/acquisition on condition) provisions to IP arrangements and how conduct that constitutes exclusive dealing is exempt from the cartel prohibitions and the anti-competitive agreement provisions.  Four detailed examples are provided on red flag provisions in IP arrangements that the ACCC considers could amount to exclusive dealing including third line forcing.

 

Key takeaways

  • The ACCC points to the possibility that certain types of IP arrangements may amount to cartel conduct. The Guidelines provide better guidance than the draft version about the operation of the cartel provisions, making it clear that cartel conduct is prohibited irrespective of the conduct’s effect on competition and stepping through what is required for the provisions to be triggered (including that the parties to the arrangement must be ‘competitors’ in the sense required by the CCA).

    The Guidelines also provide detailed guidance about the ACCC’s views on red flag provisions in IP arrangements between competitors that it considers risk breaching the cartel provisions. Examples of various contractual provisions that may amount to cartel conduct are provided including:

  • The repeal of the IP exemption means that from 13 September 2019, IP licences, assignments and other contractual arrangements entered into before or after this date will be subject to the same competition law as all other commercial arrangements.

  • The repeal of the IP exemption will affect the way you commercialise your IP and businesses will need to assess the competition law risk with their IP arrangements. Exclusivity provisions, territorial and customer restrictions, cross-licensing, grant-back obligations, non-compete provisions and restrictions covering price, output and market need particular care.

  • Whilst not every restriction or condition in an IP arrangement will contravene competition law, compliance with competition law should be assessed on a case-by-case basis and arrangements between businesses that are considered ‘competitors’ under the CCA will need particular scrutiny to ensure the cartel provisions are complied with.

  • The final Guidelines issued by the ACCC provide some useful guidance to business on how the repeal of the IP exemption is likely to impact IP arrangements. However, we await the approach taken by the courts with this area to see whether they will adopt the ACCC’s position as explained in the Guidelines.

  • Once the repeal takes effect, the ACCC is likely to target IP arrangements that have the potential to harm the competitive process or cause widespread consumer detriment.

  • If an existing IP arrangement poses competition law risks for the parties, consideration will need to be given to whether the parties need to amend or abandon the enforcement of a provision. Authorisation (for cartel conduct or anti-competitive agreements) or notification (for exclusive dealing etc) may also be available for arrangements but this will require an applicant to demonstrate to the ACCC that a net public benefit results from the conduct which may not always be able to be made out.

     

If you need advice about how this new regulatory environment impacts your business, we’re here to help.

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