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IP contracts must clear new competition hurdles

27 August 2019

#Competition & Consumer Law, #Intellectual Property

Dan Pearce

Published by Dan Pearce

IP contracts must clear new competition hurdles

From next month, businesses that assign or license intellectual property (IP) rights must comply with further competition laws under the Competition and Consumer Act 2010 (Act).

Previously, sub-section 51(3) of the Act exempted commercial transactions involving certain IP rights from particular restrictive trade practices provisions, including exclusive dealing and cartel conduct. From 13 September 2019 these exemptions will no longer apply.

Businesses must ensure that all pre-existing and new IP arrangements, understandings, licences, and contracts satisfy Part IV of the Act. The changes will particularly affect businesses that rely on IP rights like those in media, entertainment, telecommunications, medical technology, information technology and fintech industries. 

To assist parties to such agreements, the ACCC has released draft guidelines to clarify the new law.

Red flags

Companies should consider whether their IP arrangements involve any red flags.

The ACCC draft guidelines provide several examples of conduct that should raise the alarm, including conduct that is currently problematic in any event. For instance, the ACCC points out that some arrangements seeking to gain advantages related to IP rights under section 51(3) of the Act were never exempt due to over-reach.

One example relevant to the IT industry is where a chip research and development corporation (R&D Corporation) licensed a particular circuit layout to a major chip manufacturer in Australia (Manufacturer) for use in the manufacture of semiconductor chips for on-sale to other businesses. The Manufacturer agreed to meet certain expensive quality requirements during its 15 year licence, which commenced in 2010.

As circuit layout rights are only protected for 10 years from commercial exploitation, the R&D Corporation’s rights over the licensed circuit layout only last until 2020. The R&D Corporation has imposed a condition unrelated to the IP rights at issue - it restricted the Manufacturer until 2025. Accordingly, the ACCC considers that the conduct after 2020 may breach the Act, and, in any event, that last five years of conduct was never exempt.

In most cases, including the example above, it will be necessary to show the conduct has the purpose, effect, or likely effect of substantially lessening competition in the relevant market. In determining whether there is a substantial lessening of competition, the ACCC may compare the likely state of competition with the relevant conduct to the likely state of competition without the conduct.

Remedies

Where anti-competitive conduct provisions of the Act are breached, courts may exercise broad powers. For instance, courts can order payment of penalties (against corporations or individuals), damages, refunds, community service, or restraints.

The pecuniary penalties can be severe. Each contravention can cost a corporation the greater of:

  • $10 million
  • three times the value of the benefit obtained as a (direct or indirect) result of the contravention; or
  • 10 per cent of its annual turnover for the 12 month period that follows the contravention.

Next steps

The draft guidelines indicate that the ACCC will prioritise enforcement of matters that have the potential to harm the competitive process or cause widespread consumer detriment.

In any event, if businesses are concerned about their IP arrangements, they should consider the following options:

  • to avoid breaching the Act, businesses should review their IP arrangements now, and, if possible, amend agreements to comply with the Act
  • where proposed conduct could contravene the new law, businesses can apply to the ACCC for an Authorisation. Authorisation may be granted where the likely public benefit resulting from the conduct outweighs the likely public detriment
  • as an alternative to Authorisation, businesses proposing to engage in small business collective bargaining, exclusive dealing or resale price maintenance can provide a Notification to the ACCC. Unless the ACCC objects, notified conduct will be protected once certain timeframes are met
  • under its power to make class exemptions, the ACCC could grant certain IP exemptions in future. Businesses may consider suggesting exemptions to the ACCC for its consideration.

Authors: Dan Pearce & Louise Almeida

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Dan Pearce

Published by Dan Pearce

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Dan Pearce

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