Will your technology licence or assignment be anti-competitive?

In August, the Australian Commonwealth Government released its response to the Productivity Commission’s Inquiry into Intellectual Property Arrangements. Among the various recommendations made by the Productivity Commission, the Government indicated it supported repeal of section 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA) in conjunction with reforming the per se prohibitions in the CCA.

Repeal of the section has the potential to significantly impact licensing and assignments contractual terms.

What is section 51(3) of the CCA?

Section 51(3) effectively exempts terms in licences or assignments of patents, registered designs, copyright and eligible circuit layouts from part IV of the CCA, which prohibits certain anti-competitive practices. Ambiguously, the exemption applies to terms to the extent they ‘relate to’ intellectual property rights. The exemption does not apply to sections dealing with misuse of market power or resale price maintenance.

The intended purpose of section 51(3) was to reconcile the perceived conflict between certain intellectual property rights which grant IP owners exclusive or ‘monopoly’ rights, and competition law which seeks to promote free and open trade practices for the benefit of the community. It has, however, proved controversial.

What is the problem?

There is considerable uncertainty over the scope of section 51(3), made worse by the lack of judicial consideration of the section, with only one relevant case to date. For example, there has been long standing debate over whether the words ‘relate to’ establish the boundaries of the exemption. In Transfield v Arlo 1 Wilson J indicated that a licensee’s obligation to use best endeavours to establish a market for a patented product could fall within section 51(3). In the same case Mason J, indicated that section 51(3) could not be interpreted too narrowly and allows an owner to impose conditions to protect their IP monopoly.

In contrast, alternative commentators argue that the words ‘relate to’ require a much narrower interpretation – i.e. section 51(3) only exempts conditions that have a ‘direct’ relationship to the IP and incidental clauses which may be anti-competitive are not covered by the exemption.

What does it mean for technology licensing?

There are various provisions commonly used in licensing arrangements which will potentially be impacted by repeal of the section. These include the following 2 common licensing conditions:

  • Territorial Licensing Restrictions – To maximise commercial returns and incentivise licensees, licensors invariably establish territorial restrictions. Such restrictions can have anti-competitive consequences. The case of Universal & Ors v ACCC 2 highlights a situation where Universal and Warner sought to use contractual terms to prevent retailers from selling parallel imports. On appeal to the Full Federal Court, Universal and Warner were found to have breached prohibitions against exclusive dealing. Indeed, as recently as this year the EU was investigating whether geo-blocking in the EU was anti-competitive in relation to, among other things, video games and consumer electronics 3.

Interestingly, in its response, the Government was more cautious about the Productivity Commission’s recommendation that the Copyright Act 1968 (Cth) be amended so consumers would not infringe copyright by circumventing geo-blocking technology 4, simply “noting” the recommendation. The Government will, however, review the current exceptions to the current prohibitions on circumventing geo-blocking technologies in the context of providing consumers with affordable and timely access to copyright content.

  • Improvements – It is common for licensors to include an automatic assignment to the licensor of any changes or improvements made by a licensee to the licensed technology. From the licensor’s perspective, such conditions are justified in that they protect the licensor’s investment and effort in developing the technology. There is an argument that should a licensee retain ownership of any improvements, it is unfairly leveraging the underlying investment by the licensor.

However, such ‘grant back’ provisions can be anti-competitive. The Commission’s report highlighted the US case of US v Pilkington plc and Pilkington Holdings Inc 5 where Pilkington maintained a dominant market position in glass manufacture for over 40 years by requiring improvements made by licensees to its secret process to be transferred back to Pilkington. This was despite expiry of Pilkington’s patents in the process. Similarly, such provisions have the potential to breach EU competition laws by entrenching the licensor’s market position.

Let’s wait and see

Section 51(3) has been subjected to various reviews in the past, so it is unclear whether the Government’s response will ultimately result in any legislative change.

If it is repealed it will certainly be useful to obtain some form of guidance around how the CCA will apply to IP transfers. The EU exempts the application of competition to certain IP transfers through Technology Transfer Block Exemptions which presumes that transfer agreements between competitors with less than 20% market share or non-competitors with a market share of 30% are not anti-competitive. In Canada, the Intellectual Property Enforcement Guidelines indicate that the Competition Bureau ‘generally does not challenge the conduct of a firm that possesses less than 35% of a market’.

In any event, any changes in the Australian approach will need to balance the community benefits of promoting investment in creativity and innovation against the benefits of open and competitive markets.

If you have any queries or would like further information regarding this article, please contact:

Simon McDonald 
Partner
M: 0402 843 198
E: smcdonald@pageseager.com.au

1  (1979) 144 CLR 83 (at 108)

2  [2003] FCAFC 193

3  https://www.itnews.com.au/news/eu-to-investigate-anticompetitive-e-commerce-geoblocking-449732

4  Refer to ‘Australian Commonwealth Government released its response to the Productivity Commission’s Inquiry into Intellectual Property Arrangements’ at page 4.

5  CV 94-345-TUC-WDB

Published: 13 September 2017

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