20 March, 2019
Intellectual Property loses competition law exemption and small businesses win right to apply for no adverse cost orders in competition litigation.
What you need to know
- Parliament has removed the exemption in the Competition and Consumer Act 2010 (Cth) (CCA) for certain dealings with IP rights. These dealings will now breach the competition prohibitions if they involve cartel conduct or have the purpose or effect of substantially lessening competition.
- The repeal takes effect six months from the date that the Bill receives Royal Assent, but will operate retrospectively and apply to arrangements entered into before that date.
- Parliament has also created a new mechanism for small businesses to seek orders, in applications for damages for breach of the CCA, that they are not liable for costs of the other party if their application is unsuccessful.
What you need to do
- If you are a party to a dealing that was exempt from competition law (whether as grantor or grantee of the IP right), you should review the arrangement in the next 6 months to ensure that it complies with the prohibitions in Part IV of the CCA.
- Be aware that small business may have a greater appetite for competition litigation now that it can apply for a no adverse costs order if it is unsuccessful.
Parliament passes bill repealing IP exception to competition laws
On 18 February 2019, Parliament passed the Treasury Laws Amendment (2018 Measures No. 5) Bill 2018 (the Bill) which, alongside changes to income tax laws, also repeals section 51(3) of the Competition & Consumer Act 2010(CCA).
This section exempts some licensing and assignments of IP rights from certain prohibitions of anti-competitive conduct in the CCA.
We have briefly summarised the repeal and its effect below.
Section 51(3)
Section 51(3) of the CCA provides an exemption for certain dealings with IP rights. In particular, it applies to:
- conditions in licenses and assignments of patents, registered designs, copyright or protected circuit layouts, to the extent those conditions relate to the subject matter of the patent/registered design etc;
- provisions included in contracts, arrangements or understandings that authorise the use of certification trade marks (in accordance with part XI of the Trade Marks Act 1995); and
- provisions included in contracts, arrangements or understandings between registered proprietors and registered users of other (non-certification) trade marks that relate to the kinds, qualities or standards of goods bearing the trade mark.
The effect of section 51(3) is that these dealings do not contravene division 1 (cartel provisions), and sections 45 (anti-competitive contracts, arrangements, understandings and concerted practices) and 47 (exclusive dealing) of Part IV of the CCA. However, section 51(3) does not provide protection from breaches of sections 46 (misuse of market power) and 48 (resale price maintenance).
Rationale for repeal of the exemption
Section 51(3) was based on an understanding that there is a conflict between the use of IP rights, which by their nature may confer monopoly rights, and competition laws.
However, both the Competition Policy Review (the Harper Review, completed in March 2015) and the Intellectual Property Arrangements Inquiry Report (Productivity Commission, completed in December 2016) considered that this rationale was no longer correct. Further, the Productivity Commission considered that the repeal of section 51(3) of the CCA would only affect a small number of arrangements, and that the benefits of repealing section 51(3) are likely to increase going forward as licensing and cross licensing arrangements increase (particularly in pharmaceutical and communications markets).
The Explanatory Memorandum to the Bill also observed that other major jurisdictions, including the US, Canada and the EU, do not have an equivalent exemption to section 51(3).
Commencement and effect of the repeal
The repeal of section 51(3) means that the dealings with IP rights set out above will breach sections 45 and/or 47 of the CCA if they have the purpose or likely effect of "substantially lessening competition".
The Explanatory Memorandum commented that the risk of substantially lessening competition may arise where there are few substitutes for a particular IP right, or where the concentration of IP rights creates market power.
Importantly, it also exposes these dealings to civil and criminal cartel regulation. In broad terms, this issue will be relevant where the dealings involve an element of coordination about price, production, output or supply, boycotts or bid-rigging between actual or potential competitors.
The repeal of section 51(3) will take effect six months from the day that the Bill receives Royal Assent (Royal Assent is usually 7-10 days after the Bill passes Parliament). We expect the repeal will take effect no later than August 2019.
The repeal applies to licences, assignments and contracts, arrangements or understandings entered into before and after the commencement of the Bill. In other words, once the six month period after Royal Assent passes, even arrangements entered into before that time are potentially subject to the prohibitions on anti-competitive conduct in the CCA.
Ensuring compliance with the new law
As the repeal operates retrospectively, it is essential that participants in the types of IP arrangements listed above review their compliance with the CCA in the six months before the repeal takes effect.
This is especially true of any arrangements that may constitute a cartel provision: an agreement between competitors to price fix, restrict output, allocate customers, suppliers or territories, or bid-rig. Cartel conduct can result in both civil and criminal penalties, raising the stakes for failing to identify a cartel provision in an IP arrangement.
Both licensors and licensees should consider the arrangements that they are a party to. This is because, although the exclusive dealing provision in section 47 generally applies to a person imposing a condition (ie the licensor), the cartel provisions and section 45 applies generally to making or giving effect to contracts, arrangements or understandings. Therefore, even licensees in arrangements that substantially lessen competition in a market may breach section 45 of the CCA.
In reviewing their arrangements, parties should consider whether the conditions they have imposed have the purpose, or effect or likely effect, of substantially lessening competition in an Australian market.
Parties should also be aware that the mere fact that a dealing with a patent or trade mark is authorised by patent or trade mark legislation does not mean that the dealing will not breach the CCA (see section 51(1)(a)).
New protections and assistance for small businesses and family enterprises
In addition to the IP exception repeal, the Bill also adds additional protections and assistance for small businesses challenging breaches of Part IV of the CCA by other market participants. The rationale is that it will assist financially weaker businesses in challenging conduct by stronger rivals.
The new subsections 82(3)-(7) allow an applicant who is seeking compensation for a breach of Part IV to apply during the proceedings for a "no adverse costs order". If granted, this order means that the applicant will not be liable for the costs of the respondent to the proceedings, even if the applicant does not succeed in their case.
A court may only make this order if it is satisfied of the following:
- the proceedings raise a reasonable issue for trial;
- the issue is significant not only for the applicant, but may also be significant for other persons or groups of persons; and
- the disparity between the financial positions of the applicant and any respondents is such that the possibility of an adverse costs order would deter the applicant from pursuing the proceedings.
The court may only determine the above three matters on the basis of evidence filed in the proceedings.
Small businesses and family enterprises may also request assistance from the Small Business and Family Enterprise Ombudsman (the Ombudsman) when applying for a no adverse costs order.
A small business is defined as an business with fewer than 100 employees, or with revenue of $5,000,000 or less for the previous financial year (or current financial year, if the business did not trade in the previous financial year). A family enterprise is a small business operated as a family enterprise (see Australian Small Business and Family Enterprise Ombudsman Act 2015 (Cth) s 6). In the context of no adverse cost orders, it is not clear what the inclusion of family enterprises adds, given that all family enterprises will be small businesses under this definition.
The Ombudsman may assist these businesses by advising the business on arguments and evidence that might be used in an application for a no adverse costs order, and by preparing arguments that may be made in such an application.
Implications for businesses
The provision enabling no adverse cost orders applies to any actions for compensation commenced on or after 1 July 2019. The wording suggests that the conduct that is challenged in proceedings may occur before 1 July 2019, so long as the proceedings themselves commence on or after that date.
The intent of the Bill is clearly to encourage small businesses and family enterprises to more often seek compensation for losses suffered due to the anti-competitive conduct of larger businesses.
The terms of the no adverse costs order provision are broad and do not rely upon standards common in other legal tests (eg the test is not "the public interest", but significance "for other persons or groups of persons"; and a disparity does not need to be "substantial", a word used elsewhere in the CCA, but a disparity such that it would deter the applicant).
Given these factors, it is difficult to predict the exact effect the new protections and assistance for small businesses and family enterprises will have on the number of enforcement actions against larger businesses.
Consequently, all businesses should assess their conduct towards weaker suppliers and acquirers that they engage with, as even conduct ultimately proven not to breach Part IV of the CCA may still result in lengthy, complex legal proceedings and the incurring of irrecoverable costs.
For further information, please contact:
Justin Jones, Partner, Ashurst
justin.jones@ashurst.com
