IP contracts now subject to restrictive trade practice provisions

Agreements providing for the conditional licensing or assignment of intellectual property (IP) rights are now subject to the restrictive trade practice provisions of the Competition and Consumer Act 2010 (Cth) (CCA).  On 13 September 2019 section 51(3) of the CCA was been repealed removing the exception which applied to the licensing and assignment of IP.   This means commercial transactions involving the assignment of IP rights will be subject to the anti-competitive prohibitions, as are other transactions involving property.

What was the exception in section 51(3) of the CCA?

Section 51(3) of the CCA provided an exception for licensing or assignment of IP rights from most of the  prohibitions on anti-competitive conduct including:

  • cartel conduct;[1]
  • exclusive dealing;[2] and
  • contracts, arrangements or understandings that substantially lessen competition.[3]

Nothing in this amendment altered the prohibitions against resale price maintenance or misuse of market power which still apply to IP licensing and assignment arrangements.[4]

What is the effect of section 51(3) being repealed?

The repeal of section 51(3) means that conditions of licences, assignments, contracts, arrangements or understandings that relate to IP rights will also be subject to the prohibitions against:

  • making or giving effect to a contract, arrangement or understanding that contains a cartel provision;[5]
  • making or giving effect to a contract, arrangement or understanding, or engaging in a concerted practice that includes a provision which has the purpose, effect or likely effect of substantially lessening competition;[6] and
  • exclusive dealing arrangements which have the purpose, effect or likely effect of substantially lessening competition.[7]

It is immaterial whether the contract, arrangement or understanding was entered into before the repeal came into effect on 13 September 2019.  All licensing or assignments of IP rights are now subject to these prohibitions, regardless of when they were made.

At first glance the application of anti-competitive provisions applying to IP assets, which may exist to provide exclusive rights to the owner, appears counter-intuitive.   However, the Australian Competition and Consumer Commission (ACCC), and parliament (obviously), hold the view that the licensing of IP enables it to be exploited to a greater extent then if it was not licensed.  This premise gives context to the interpretation and application of the various anti-competitive provisions.

Will IP licences or assignments substantially lessen competition?

The prohibitions on misuse of market power, exclusive dealing and restrictive trade practices are all subject to the ‘has the purpose, or has or is likely to have the effect, of substantially lessening competition’ test.   This necessarily requires an assessment of the current state of the market for the product, the geographic region and a further consideration of the different levels of operation, including the retail and wholesale market.

In looking at these different scenarios the ACCC states “it will usually undertake a ‘with or without” comparison, and “the appropriate ‘without’ comparison scenario will be that there is no licence or assignment at all.

This should be music to the ears of many small businesses hoping to licence their products locally, in that even for a unique product, where there is no substitute, the provision of an exclusive licence is unlikely to lessen competition when compared to the personal rights which are currently conferred on the IP owner.

While this means businesses are relatively safe while they continue to expand the distribution of their IP assets, there are substantial risks associated with any rationalisation exercise a business undertakes.  Mistaking the application of these anti-competitive provisions may lead to substantial penalties.

Penalties

Penalties for breaches of the anti-competitive and cartel provisions of the CCA are substantial and can be:

  • $10 000 000;
  • three times the total value of the benefits obtained; or
  • ten (10) per cent of annual turnover,

for corporations, and

  • up to $500,000,

for individuals.

Key takeaways

As a result of section 51(3) of the CCA being repealed, businesses should review existing (and past) IP arrangements to ensure that they are not engaging in conduct that is in breach of the CCA.   In addition, businesses and practitioners need to consider the provisions of the CCA while drafting future IP arrangements to ensure compliance, particularly when engaging in any commercial rationalisation of existing distribution or supply chain processes.

Further references

Legislation

Competition and Consumer Act 2010 (Cth)

Related articles by Dundas Lawyers

Avoiding liability for resale price maintenance
Changes to ACL – suppliers of services to use compulsory wording

Further information

If you need advice on drafting any sort of contract relating to intellectual property, contact us for a confidential and obligation free and discussion:

 

Michael Barber - Dundas Lawyers

Michael Barber
BSc.,Grad.Dip.IT.,Grad.Cert.Bus.Admin.,MAcct.,LLB(Hons).,GDLP.,MQLS.,FGIA.
Senior Associate
Telephone: (07) 3221 0013 | Mobile: 0467 002 839
e: mbarber@dundaslawyers.com.au


 

Disclaimer

This article contains general commentary only.  You should not rely on the commentary as legal advice.  Specific legal advice should be obtained to ascertain how the law applies to your particular circumstances.

 

[1] Competition and Consumer Act 2010 (Cth) ss 45AF, 45AG, 45AJ, 45AK.

[2] Ibid s 47.

[3] Ibid s 45.

[4] Ibid ss 46, 48.

[5] Ibid s 45AF, 45AG, 45AJ, 45AK.

[6] Ibid s 45.

[7] Ibid s 47.

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