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IP Licences and agreements must urgently be reviewed

Anyone who is party to an IP licence should be reviewing it now to consider whether it contains any anti-competitive terms to avoid potential enforcement action from the ACCC.

Previously, IP owners have been able to enter into agreements or arrangements which impose restrictions on the use of their IP that may be anti-competitive due to an exemption in the Competition and Consumer Act 2010 (Cth) (CCA). So it is not uncommon to find terms which might have that effect in agreements.

Section 51(3) of the CCA currently provides that terms imposed in licences or assignments of IP rights, (including patents, registered designs and copyright, as well as contracts or arrangements relating to trademarks), are excluded from certain anti-competitive conduct, such as cartel conduct and exclusive dealing.

The exemptions have now been removed and those dealings will no longer be permitted when the exemptions cease to apply on 13 September 2019. Importantly, the changes apply retrospectively so that all licences (including those in place before 13 September) will be caught.

All agreements, including existing licences or agreements which have relied on the exception, will then be subject to the anti-competitive prohibitions. Conduct which was until now allowed, but will be considered anti-competitive and no longer permitted under the CCA includes:

Cartel Conduct (Division 1 of Part IV of the CCA)

Cartel conduct is prohibited outright, regardless of whether it has any effect on competition. It includes:

  • price fixing between competitors;
  • competitors agreeing on output restrictions (less product = greater price);
  • market sharing where competitors divide customers or territories amongst themselves
  • bid-rigging or collusive tendering.

There are some technical exemptions to this conduct, including where companies are related (e.g. holding company and subsidiary) but advice should be obtained before relying on those.

Lessening of competition (Section 45)

Contracts, arrangements, or understandings, for the purpose, or with the effect or likely effect of substantially lessening competition will be prohibited.

The ACCC considers that the following examples all involve a licensor seeking to gain an advantage that is collateral to the relevant intellectual property rights. The examples will all be caught by section 45 now that the exemption has been removed:

  • Time restrictions, which are conditions that seek to restrain a licensee’s behaviour beyond the time the intellectual property rights have been secured by the licensor (for example, where a licence continues after a patent has expired).
  • Grant-back provisions, which are conditions that require a licensee to assign or grant an exclusive licence back to the original licensor for any improvements generated through the licensee’s exploitation of intellectual property rights.
  • No challenge provisions are conditions that prohibit a licensee from challenging the validity of the intellectual property rights that underpin the licence.
  • Cross-licensing – An agreement between two parties to grant IP rights to the other. This runs the risk of breaching the provisions which prohibit agreements that may substantially lessen competition (therefore amounting to cartel conduct).
  • Conditional licensing - Licences which impose conditions or restrictions on licensees controlling:
    • the customers to whom they can supply;
    • the territory in which they can supply goods or services; or
    • the price of goods or services produced pursuant to the licence.
  • Potential licensee challenges – Many licences contain terms stipulating that a licensee must not challenge the validity of the IP which is licensed. If those clauses restrict the ability of the licensee to compete with the IP owner or restrict the license in terms of pricing, territory or customers, they may be anti-competitive if they meet the ‘substantial lessening of competition’ threshold under section 45 of the CCA.

Exclusive dealing (Section 47)

Section 47 of the CCA prohibits a corporation from engaging in exclusive dealing which has the purpose, effect or likely effect, of substantially lessening competition. In general, exclusive dealing occurs when a corporation imposes restrictions on another’s freedom to choose with whom, in what, or where they engage.

For example, it may include the supply of goods or services on the condition that the buyer also acquire goods or services from an unrelated third party, or a refusal to supply, which is known as third line forcing.

Small/Family business amendments

The amendments also provide new protections and assistance for small business and family enterprises, including allowing a small business (with fewer than 100 employees, or revenue under $5 million) to apply in some circumstances for a "no adverse costs order" in court proceedings, which (if granted) means that the small business will not be liable for the other party’s costs, even if it does not succeed. The rationale is that the amendments will assist smaller businesses to challenge stronger rivals.

Sanctions in the CCA

The CCA carries significant consequences and hefty penalties, which may be pursued by the ACCC. Those include the payment of penalties and damages or disqualification from managing a corporation.

A court may impose a pecuniary penalty on a corporation for each contravention of an anti-competitive conduct prohibition of the CCA to the greater of:

  • $10 million
  • three times the value of the benefit obtained by the corporation as a direct or indirect result of the contravening conduct, or
  • 10 per cent of the annual turnover of the corporation during the 12 month period following the contravening conduct.

Individuals are liable to penalties of up to $500,000 for each contravention and up to 10 years in jail and/or a fine of up to $420,000 for each criminal cartel offence.

What to do

All businesses with existing IP licensing or assignment arrangements should review their agreements to ensure they comply with the prohibitions against anti-competitive conduct under Part IV of the CCA. Any licensing agreement that potentially affects competition, even if the agreement has been in place for some time, should be reviewed now to ensure compliance with the competition requirements.

In addition to the examples set out above, any arrangements that provide for territorial licence restrictions, conditions attaching to the use of IP rights for particular customers or groups of people, quality restrictions, or price will need to be reviewed.

Agreements between competitors must ensure that the IP licensing/assignment agreements do not:

  • prevent, restrict or limit production, capacity, supply or acquisition (output restrictions);
  • limit or allocate IP use to certain customers or territories (market sharing).

Competition provisions can be complex and involve a range of considerations in assessing whether there might be an infringement. Advice should be sought about the terms of your existing (and any proposed) licences, particularly where they have a competition element.

Parties to IP licences should be reviewing them regularly to ensure that they remain current, as the IP generated within a business rarely remains stagnant. However, it is critical that businesses now consider their existing and any proposed licences in light of the above changes.

"The content of this publication is for reference purposes only. It is current at the date of publication. This content does not constitute legal advice and should not be relied upon as such. Legal advice about your specific circumstances should always be obtained before taking any action based on this publication."