The so called ‘IP exemption’ (section 51(3) of the Competition and Consumer Act 2010 (CCA)) has historically provided a carve out for IP rights holders for agreements and arrangements which would otherwise breach certain restrictive trade practices provisions under Part IV of that Act.

The IP exemption applies to conditional licensing or assignment of intellectual property rights such as patents, registered designs, copyright, eligible circuit layout rights or registered trade marks.

The IP exemption has now been repealed by the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (the Bill) which has passed both Houses of Parliament and is currently awaiting Royal Assent. The Bill does not provide for ‘grandfathering’ of existing agreements or arrangements.

Once the Bill becomes law IP rights holders will have a six month window in which to review the terms of their existing licensing and assignment arrangements to ensure ongoing compliance with anti-competitive conduct prohibitions under Part IV of the CCA and avoid potentially significant penalties.

What is the IP exemption?

Until now, section 51(3) of the CCA has provided an exemption for certain licensing and assignment agreements in relation to intellectual property (IP) rights which would otherwise breach restrictive trade practices prohibitions under the CCA. In particular, the IP exemption has prevented the application of cartel conduct prohibitions (price fixing, output restrictions, market sharing and bid rigging) as well as restrictions on arrangements including exclusive dealing, which are illegal where they may substantially lessen competition in a market.

The IP exemption has not, however, been available to avoid the application of prohibitions on misuse of market power, misuse of market power in a Trans-Tasman market or resale price maintenance.

The IP exemption has extended to conditional licensing or assignment of intellectual property rights such as patents, registered designs, copyright, eligible circuit layout rights and registered trade marks. While there has been some debate about the scope of the IP exemption, in practice it has provided a safe harbour for provisions of certain arrangements that may otherwise have attracted scrutiny as anti-competitive practices. These include licence terms such as those imposing territorial restrictions, field of use restrictions, and volume restrictions. They may even include quality requirements and other provisions commonly found in franchising agreements and trade mark licences.

What’s changing and why?

The Parliament has now passed legislation repealing section 51(3), removing the IP exemption from Part IV of the CCA.

This change adopts recent recommendations of the Productivity Commission in its Intellectual Property Arrangements Inquiry Report (December 2016) and the Competition Policy (Harper) Review (March 2015) suggesting that commercial transactions involving IP rights should be subject to the same competition laws as other commercial transactions involving property and assets. Removing the exemption is proposed to bring Australia into line with comparable jurisdictions such as the United States, Canada and Europe, which do not provide IP exemptions in their competition laws, and in the long term it is intended to improve competition and innovation in the Australian intellectual property sector.

No grandfathering …

The change will apply to a licence granted, an assignment made, or a contract, arrangement or understanding entered into on or after the repeal of the IP exemption. However, the change also extends to conditions or provisions within a licence, assignment, or contract, arrangement or understanding which was entered into before the repeal of the IP exemption. This is because it is an offence to ‘give effect to’ a prohibited arrangement.

In other words, there will be no grandfathering of existing contracts, arrangements or understandings which were entered into in reliance on the IP exemption. Existing licensing or assignment arrangements which currently fall within the scope of the IP exemption will therefore need to be promptly re-examined from a competition law perspective, to ensure they comply with all relevant prohibitions under Part IV of the CCA. This is particularly important where arrangements are between competitors or those deemed to be competitors.

What do you need to do?

Industries most likely to be impacted by the change include those in which IP rights are routinely licensed or assigned conditionally. This will include the life sciences, pharmaceutical, biotech, medical device, technology and telecommunications industries in particular.

If you currently have conditional IP licensing or assignment agreements in place which may breach the restrictive trade practices provisions of the CCA (for example, IP licences which impose territorial restrictions, volume or field of use restrictions, patent or other IP settlement agreements involving pooling or cross-licensing arrangements, or arrangements which impose restrictive licence conditions) it will be necessary to re-examine those agreements from a competition law perspective, to ensure ongoing compliance. Agreements between competitors in settlement or resolution of IP disputes will likely require particular attention.

For any new IP licence, assignment, or contract, arrangement or understanding it will now also be necessary to ensure that any potentially anti-competitive impacts have been considered in the same manner as for any other commercial transaction.

How long have you got to act?

The Bill provides for a six month ‘grace period’ which the government considers will give ‘individuals and businesses time to review existing arrangements to ensure compliance’. In practice, however, many businesses may find this provides a limited timeframe in which to review and assess their existing arrangements and, if necessary, vary those arrangements or make an application to the ACCC for the necessary authorisations. While there has been some suggestion by the Government that the ACCC will issue guidance on the application of the law to IP arrangements, it is unlikely that any class exemptions will come into effect before the expiry of the grace period.

Potential penalties for breach of restrictive trade practices prohibitions under the CCA are significant (for corporations, maximum penalties are the greater of: $10 million; three times the value of the benefit; or (if that value is not calculable) 10% of annual turnover in the preceding 12 months).

We therefore recommend that businesses and individuals act as soon as possible to commence reviewing their existing agreements and reach out for assistance where required.