Insights + Resources

08 August, 2019

IP Rights Holders beware! Changes to Competition Laws

The repeal of the so-called “IP exemption” from the Competition and Consumer Act could significantly impact commercial dealings in IP rights. Businesses involved in commercialising IP need to review their agreements to ensure compliance before the amendment takes effect on 13 September 2019.

Introduction

From 13 September 2019, the “IP exemption” under sub-s 51(3) of the Competition and Consumer 2010 (‘Act’) Act will have no effect. IP arrangements will be subject to more regulatory scrutiny, exposing modern businesses to a new set of penalty regimes under Australian competition law. Businesses engaged in contractual IP arrangements should be aware of how these changes will affect their rights and obligations.

 What is the “IP exemption”?

Sub-section 51(3) of the Act currently provides that contractual arrangements involving IP rights are exempt from anti-competitive conduct provisions.  IP rights typically include intangible property such as patents, copyright, and registered designs which are the subject of licensing and assignment agreements. As a result, IP arrangements are potentially caught by the anti-competitive conduct provisions (e.g. prohibitions on exclusive dealings) in the same way as dealings with respect to tangible property.

 What does withdrawing the “IP exemption” mean?

According to Draft Guidelines released by the Australian Competition and Consumer Commission (‘ACCC’) in June 2019, types of conduct that will be prohibited as an outcome of IP dealings now include:             

  • “Cartel conduct” – i.e. businesses that make agreements with competitors to fix prices, restrict outputs or rig bids (Division 1 of Part IV of the Act);
  • Exclusive dealings for the purpose or with the likely effect of substantially lessening competition (s 47 of the Act) – e.g. deals that unduly restrict the commercial discretions of a party; and
  • Entering into any arrangement for the purpose or with the likely effect of substantially lessening competition (s 45 of the Act).

The above are all subject to the same tests as apply to other kinds of dealings in the Act.

The Draft Guidelines indicate that agreements where the licensee imposes output restrictions, territorial restraints or exclusive rights to the IP product as a condition of licensing the IP product will be most heavily impacted by the changes. These sorts of clauses can often be commercially normal and important components of an IP deal, as the licensee seeks competitive advantage with respect to the use of the intangible assets. These changes will apply to both new and existing arrangements, so businesses that systematically restrict the use of IP when contracting will need to review their current paperwork. Amendments to current agreements may be required to avoid falling foul of the law.

It has been argued that these changes will enhance innovation and competition within the Australian IP sector, and align our competition laws with those in Europe, the United States and Canada.

Below is an example scenario adapted from the ACCC guidelines which demonstrates the likely effect of the amendment in practice.

Example: Exclusive Dealing

Issue: Firm B agrees to license their film to Firm A for distribution, but Firm A insists on including a contractual provision that prevents
Firm B from licensing that film to any other distributors in Australia.

 

 

Would this amount to exclusive dealing?

Test: Once the repeal takes effect, the ACCC would consider whether Firm A’s conduct would likely have the purpose, effect, or likely
effect of substantially lessening competition. The ACCC considers Firm A at risk of contravening s 47 of the Act, as refusing to acquire
the licence to distribute the film unless Firm B agrees to an exclusive licensing arrangement may amount to exclusive dealing.

Difference: Prior to the repeal of sub-s 51(3), Firm A may have been exempt from liability for giving effect to this agreement, as
preventing Firm B from licensing the film to another distributor as a condition of the licence ‘relates to’ IP rights

Penalties for contravening the Act

Ensuring compliance with the Act is important, especially considering the severity of penalties. Breaching a provision in Part IV of the Act carries the following maximum civil penalties:

(a) For corporations, the greater of:

  • A$10 million;
  • 3 times a “reasonably attributable” benefit that has been obtained; or
  • 10% of the company’s annual turnover in the preceding 12 months.

(b) For individuals, $500,000.

Key Take-aways:

  • On the 13 September 2019, the removal of the “IP exemption” of the Act will take effect;
  • Businesses heavily reliant on IP must review existing agreements to ensure compliance; and
  • Penalties for businesses of at least A$10 million can apply for non-compliance.

Edwards + Co Legal are experts in business contracts that involve the licensing and assignment of IP. We have defined a framework to quickly and cost-effectively review current IP agreements to ensure that businesses do not inadvertently breach these new laws.

This article provides information that is general in nature. If you have any questions or concerns involving the effect of the amendment on your intellectual property rights, please contact us below.