IP licence restrictions losing their safe harbour from competition laws – so review them now

Licensing or assignment conditions for  IP rights, such as patents, registered designs, copyright or eligible circuit layout rights, have enjoyed limited protection from competition provisions under a specific exemption in section 51(3) of the Competition and Consumer Act (CCA) – but not for much longer, following the passage of a new Bill on 18 February 2019 which will remove the safe harbour for restrictions and conditions attached to licensing or assignment of IP rights from competition law prohibitions (the safe harbour will also be removed from State Competition Codes).

Once it commences (which is six months after receiving Royal Assent, which will happen soon), the removal of the safe harbour brought in by the Treasury Laws Amendment (Strengthening Corporate and Financial Sector Penalties) Bill 2018) will open licensing arrangements to scrutiny for breaches of competition law, such as cartel arrangements and exclusive dealing.

Typical conditions in a licence by which might be affected include:

• exclusivity conditions which give only the licensee a sole or limited right to use and commercialise the IP;
• restrictions on the licensee being able to supply in designated geographic areas, or to certain types of customers or for certain applications or uses;
• restrictions as to when the licensee is permitted to supply goods or services under licence;
• price restrictions for goods or services produced under licence;
• restrictions on the licensee from acquiring goods from a third party.

Cartel conduct: A new risk

There is some concern that if the licensor and the licensee are in competition with each other, or would (but for the terms of the licence) likely be competitors, in relation to the supply and marketing of any of the licensed goods or services, the competition laws may outlaw various licence conditions. Examples may include :

• arrangements or conditions restricting the supply of goods or services by allocation as to territory or type of channel or customer; or
• arrangements or conditions which have a purpose or effect of controlling the price of goods and services produced under licence.

Other examples may be conditions which restrict the resupply of goods that fail to meet certain standards or agreements, those which restrict the resupply of goods in certain geographic areas, field of use restrictions often found in patent licences as well as price or minimum production requirements for products produced under licence.

Other competition risks

The removal of the safe harbour will also expose:

• licence conditions which have the purpose, effect or likely effect of substantially lessening competition in Australian markets; or
• licence conditions which may require or force the acquisition by the licensee, of goods or services from nominated third parties –if that requirement has the purpose, effect or likely effect of substantially lessening competition in Australia.

Further, arrangements which provide exclusive rights to the licensee or restrict the licensee from acquiring goods from a third party need to be tested to see if they may fall within the prohibition against exclusive dealing (section 47 CCA) where there is a substantial lessening of competition.

Prohibitions against misuse of market power and resale price maintenance continue, and remain unaffected by the Bill.

Be warned: this may apply to existing arrangements

It is significant that there is no grandfathering of the repeal for existing licences that have been put in place prior to the Bill becoming law. This means that the repeal will affect all intellectual property arrangements, whether made before or after commencement.

Therefore, a new licence granted with anti-competitive conditions entered into after the commencement of the Bill as well as restrictive provisions of a licence agreement entered into before the commencement of the Bill that are enforced or "given effect to" after the commencement of the Bill are susceptible to breach of the competition provisions

Provisions of an licence agreement found to be in breach of the CCA will be void and unenforceable, and expose the parties to heavy penalties.

Now is the time to act to avoid breaching the CCA

Accordingly, now is the time for parties to have their licensing arrangements reviewed or restructured to ensure they do not fall foul of the CCA.

Businesses should act now to ensure that their existing IP arrangements do not contravene the competition provisions, particularly where:

• a licensor competes or may wish to compete for the supply or production of goods or services with licensees; or
• businesses have substantial market share and have implemented restrictions that may affect competition in a market.