Time to review your IP arrangements

In February this year, the Federal Parliament passed the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (Act), repealing the intellectual property exemptions under section 51(3) of the Competition & Consumer Act 2010 (Cth) (CCA).

The repeal is set to come into effect on 13 September 2019.

What’s section 51(3)?

Section 51(3) covered contractual terms in licences and assignments of patents, designs, copyright and EL rights, and specified agreements in relation to trade marks.

Do your IP contracts need review?
Do your IP contracts need review?

The section provided a limited exemption for IP rightsholders, to allow them to make arrangements that would otherwise be prohibited under the CCA. So, for example, a generally anti-competitive term, or a cartel provision, which met the requirements of section 51(3), would be permitted.

The background of the section was the perceived conflict between the monopoly rights of IP rightsholders, and the competition provisions under the CCA, meaning that IP rights needed this exemption.

What’s the background to the changes?

Section 51(3) has had a life under the microscope, with consistent review and advocation for its repeal for quite some time. It was reviewed in the Hilmer Report, as well as in a number of subsequent competition reviews.

More recently, the Productivity Commission’s Inquiry into Intellectual Property Arrangements, released in late 2016, considered the balance between access to ideas and products, and the encouragement of innovation and investment.

The report recommended the repeal of section 51(3) on the basis that IP rights did not have significant competition implications, and issues only arose where there were few substitutes or where IP rights aggregation could create market power.

The Commission considered that there would be increasing benefits to repeal, especially in the pharmaceutical and communications markets, as the level of licensing and cross-licensing rises in the future.

 Where does this issue arise?

There have been very few cases where section 51(3) has been considered – in fact the ACCC stated in its 2016 submission to the Productivity Commission that it was not aware of any cases where section 51(3) had been used successfully as a defence.

That said, it’s anecdotally clear that IP rightsholders have relied on knowing that section 51(3) was there, in structuring agreements, and there are several situations where regulators and courts have considered a tension between IP rights and competition regulation. These include:

  • Exclusive dealing – such as where rightsholders impose restrictions on distributors about their permitted suppliers or customers. For example, in Transfield v Arlo [(1979) 144 CLR 83 at 108, the Court considered whether Transfield was obliged to sell exclusively promote and sell Arlo’s steel pole. Wilson J was of the view that if a contract clause requiring a licensee to use its ‘best endeavours’ to sell a patented product meant that the licensee could not sell competing products, it would have been protected by section 51(3).
  • Geo-blocking – where rightsholders impose geographical restrictions on the basis of consumer nationality or location. The EU recently regulated geo-blocking with Regulation 2018/302. The European Commission subsequently found that clothing company, Guess, violated the regulation by restricting authorised retailers from selling cross-border to consumers within the EU single Market, allowing them to maintain artificially high retail prices.
  • Assignments-back – In the US, Pilkington Glass was found to have built up a dominant position in the glass manufacturing market by requiring licensees to assign back improvements to Pilkington’s processes. Consequently, the court prohibited Pilkington from imposing territorial and use limitations on their US licensees, allowing them instead to manufacture and sublicence anywhere in the world, free of charge, using the technology in the licences.

What will happen when the repeal comes into effect?

When the repeal takes effect this September it will operate retrospectively, meaning that existing contract terms will not be grandfathered.

We can anticipate that with this change, the ACCC will have an increased focus on IP-heavy arrangements and compliance activities to ensure businesses understand their new obligations under the CCA.

The ACCC has stated that they are in the process of writing guidelines to assist businesses in complying with the repeal, but while we wait for these, we can expect that agreements including the following aspects will be of interest:

  • Exclusive arrangements, territory restrictions, geo-blocking and assignments-back, as mentioned above;
  • Licences that impose quantity restrictions on the licensees, split licensees’ rights by reference to customers, or involve bid-rigging;
  • Bundling and third-line forcing, where the licensee has to accept other products from the licensor or a third party;
  • Patent pooling arrangements – these are agreements where companies with related patents cross-license them to each other and agree on the terms of licence agreements to parties outside the pool; and
  • Clauses that provide for a first mover advantage or “pay for delay”, where one party pays the other to agree not to commercialise a product or move into a market.

Now is the time to review

With the commencement date fast approaching there is still a window of time to ensure that your existing IP arrangements will comply with the repeal.

If you have any concerns or questions about the potential impact of the repeal on your IP licensing, assignment or distribution arrangements, please contact us.

Author: Blake Motbey, Paralegal.

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