5 June, 2019
The Malaysian Competition Commission (“MyCC”) Guidelines on Intellectual Property Rights and Competition Law (“IPR Guidelines”) came into force on 6 April 2019.
These IPR Guidelines are to be read together with other Guidelines issued by the MyCC, that is, Guidelines on Chapter 1 Prohibitions (“C1 Guidelines”) and Chapter 2 Prohibitions (“C2 Guidelines”). The MyCC recognises the rights of exclusivity granted to owners of intellectual property rights (“IPR”), and is of the view that such rights incentivises enterprises to be more innovative and competitive, which is in line which the aims of competition law which are to prohibit or restrain anti-competitive activities.
IP licensing is generally considered to be pro-competition but care must be taken to ensure that dealings with IPR do not fall within the following restrictions imposed by the Competition Act 2010 (“Act”):
- Chapter 1 Prohibitions — An IP-owning enterprise enters into an anti-competitive agreement (section 4 of the Act);
- Chapter 2 Prohibitions — Any dominance created by the IPR is abused by the IP-owning enterprise (section 10 of the Act).
Chapter 1 prohibitions — anti-competitive agreements
In addition to the conventional restrictions such as price fixing, tying and bundling in the context of IPR dealings, the IPR Guidelines provide some guidance on certain IP-specific vertical arrangements, which are:
1. Territorial and field-of-use restrictions
While restricting a licensee’s use of an IP to a particular territory or field of use is permissible, IP owners should ensure that these restrictions are justifiable and beneficial to all parties. In a patent licensing arrangement, the restrictions which have the result of:
- Foreclosing access to competing technology;
- Preventing licensees from developing their own technology;
- Facilitating market allocation;
- Fixing price for any products or service supplied by the licensee; or
- Restricting resale of the patented product (principle of exhaustion); may be regarded as anti-competitive.
2. Exclusive licensing
In an exclusive licensing arrangement, the licensor gives up his right to use his IPR as well as the right to license others. This arrangement is not anti-competitive unless it is coupled with other anti-competitive conditions.
3. Exclusive dealings
It is permissible to restrict a licensee from obtaining, distributing or selling competing technologies for newly developed technology where the licensee is required to focus his time and energy on the newly developed technology. However, this restriction may be viewed as unreasonable for more mature technology.
4. Grant-backs
A clause which requires any improvements to the licensed IP to be licensed or assigned back to the licensor may be anti-competitive if the grant-back licence is exclusive or if the competition for the assignment is not adequate.
A clause which allows a licensee to own the rights to fully exploit any improvements to the licensed IP, and the licensor is granted a non-exclusive licence to use those improvements, is viewed as having a pro-competitive effect as the licensee is incentivised to come up with improvements and the licensor is not deprived of the benefits of any improvements made to his IPR.
Although the explanations and illustrations may aid in ascertaining the MyCC’s stance on whether an arrangement is pro/anti-competition, it should be kept in mind that the IPR guidelines are not conclusive and other factors would also have to be taken into account to determine whether the effect of such arrangements are anti-competitive.
The IPR Guidelines also provide illustrations of horizontal agreements in the IPR context which may be prohibited under section 4(2) of the Act. IPR owners should ensure that they are not a party to such arrangements as they are deemed to be anti-competitive and the MyCC does not have to determine the anti-competitive effect:
1. Sharing market or sources of supply
- Agreeing with actual or potential owners of competing technologies to divide up the customers to whom each will operate, for example, on the basis of geographical territory.
- Agreeing with competitors to impose an obligation on their licensees to obtain their supplies from a particular source.
2. Limiting or controlling certain activities or markets
- “Pay-for-delay” agreements where a patent owner may enter into agreements with generic companies to delay the production and release of their generic products into the market in order to extend the monopoly granted by the patent even when the patent had expired.
- Output restriction, where owners of competing IP agree on the number of products that can be produced in total by the licensees.
- Patent pooling of substitute technologies, as this will foreclose other substitute technologies to licensees and also reduce incentive to invest in better substitute technologies. According to the IPR Guidelines, two patents are considered substitutes if they cover alternative technologies and are non-blocking, and can be used in parallel without infringing the other patent.
- Exclusive licence agreements with the purpose of protecting absolutely the marketing of products within a particular territory against the importation of identical products (parallel imports). This is not allowed as, in general, parallel importation is allowed under the relevant IP statutes, and competition which would otherwise have been possible is now prevented.
3. Technical or technological development
- Agreeing with owners of competing IP not to license a potential new entrant to use the IP, so as to foreclose competition as well as technical or technological development of the product embedded in the IP.
4. Investment
- Agreeing with owners of competing IP to reduce investment in relation to either production or R&D.
Chapter 2 prohibitions — abuse of dominant position
The IPR Guidelines clarify that ownership of IPR will not necessarily confer market power upon its owner, but does not elaborate on how the MyCC ascertains “dominance”, hence, reference needs to be made to the MyCC’s guidelines on the C2 Guidelines.
The IPR Guidelines provide illustrations of circumstances which may constitute an “abuse of dominant position”. Most of these are IP-variants of unfair conduct, which are excessive pricing (though it may be more lenient as IPR owners may need to recoup R&D costs), tying, post expiration royalty, non-competition clause and price squeeze. There are however some notable explanations:
1. Product hopping
Prior to facing generic competition, a brand drug company may withdraw its original product to force a switch to a reformulated brand drug in order to keep market exclusivity. Although it may be justifiable to discontinue an old formulation, this may nevertheless be abusive if the conduct is done to foreclose the market for generic products. The example provided by the IPR Guidelines shows a distinction between “hard-switch” and “soft-switch”.
When the company withdraws virtually all its original products from the market in order to force patients to switch to the reformulated drug, this “hard-switch” crosses the line from persuasion to coercion and would be regarded as anti-competitive; whereas when the company persuades patients and doctors to switch to the reformulated drug based on factual information while both are on the market, this “soft-switch” will not likely be anti-competitive.
2. Refusal to license IPR
The IPR Guidelines draw a distinction between a primary market (market in which the IPR enterprise is dominant due to its IPR); and a secondary market (market where the dominant IPR enterprise’s technology or product is an indispensable input). A refusal to license the IPR for the secondary market may not be permissible.
3. Standard-Essential Patents (“SEP”), Fair, Reasonable and Non-Discriminatory (“FRAND”) Terms, and royalty stacking
If the IPR is a SEP which manufacturers would have to use to ensure that their products are standard-compliant, refusal to license such SEP could be considered abusive. Patent owners, by virtue of the FRAND Terms, are also not allowed to increase the royalty rate of their patents which are elevated to SEP(s). Even if the FRAND Terms are complied with, the MyCC may still view certain arrangements to be abusive, for example, in standards which are covered by numerous patents, as this may result in royalty stacking.
Conclusion
The IPR Guidelines are definitely welcomed as they provide much needed clarity in reconciling the inherently differing aims of IPR (exclusivity) and competition law (free competition). The Guidelines, however, seem to be more patent-oriented and do not provide further guidance on issues such as dealings with trade marks, research agreements and franchises.
For further information, please contact:
Ameet Kaur Purba, Partner, Shearn Delamore & Co
ameet@shearndelamore.com
