The Repeal of s 51(3) of the Competition and Consumer Act 2010 (Cth)

LESANZ Breakfast Meeting

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Introduction

1. In 1987, I delivered a paper at the Law Council’s Trade Practices Workshop in Melbourne titled “Interaction between intellectual property and sub-section 51(3) of the Trade Practices Act”. At the conclusion of that paper, I somewhat precociously proposed the repeal of sub-section 51(3) and the expansion of the exception in sub-section 51(1) to intellectual property statutes.¹

2. Almost 30 years later, I returned to that topic as a member of the Competition Policy Review, chaired by Prof Ian Harper. In its Final Report published in March 2015, the Harper Committee recommended the repeal of s 51(3) of the Competition and Consumer Act 2010 (Cth) (CCA). That recommendation was not taken up in the legislative reforms enacted through the Competition and Consumer Amendment (Competition Policy Review) Act 2017 (Cth).

3. However, the recommendation has now been enacted by the inconspicuously titled Treasury Laws Amendment (2018 Measures No. 5) Act 2019 and will take effect on 12 September 2019.

4. The implementation of the Harper Committee recommendation is, though, only partial. In conjunction with the repeal of s 51(3), the Harper Committee also recommended the widening of the vertical supply exception to the cartel prohibitions so that the exception would apply to restrictions contained in intellectual property licences. The Harper Committee considered that intellectual property licensing restrictions should be assessed under the standard competition test and should not be prohibited per se. That recommendation has not been implemented.

5. My address briefly comments upon:

(a) the rationale for the repeal of s 51(3);

(b) the desirability of a broader vertical supply exception to the cartel prohibitions; and

(c) following the repeal of s 51(3), the application of the cartel prohibitions to intellectual property licence restrictions.

Repeal of Section 51(3)

6. The rationale for repealing s 51(3) is discussed in the Final Report of the Harper Committee. In short, the Harper Committee considered that the differences between intellectual property rights, and other forms of property and assets, did not justify the statutory exception in s 51(3).

7. In terms of its economic characteristics (and speaking at a level of generality), intellectual property has similarities and dissimilarities with other forms of real and personal property. Generally speaking, intellectual property is established through a statutory right to exclude use. Again, the same is true of most other forms of property rights. The development or acquisition of intellectual property sometimes involves very large investment; but the same is true of many assets used in commerce and industry.

8. It can be accepted, though, that certain types of intellectual property have economic characteristics that differ from physical property. In particular, information and ideas are typically a “public good” in the economist’s sense of that expression. A public good (as distinct from a private good) has two related economic characteristics: “non-rivalrous consumption” and “exclusion difficulties”. Non-rivalrous consumption means that consumption of the good, here ideas or information, by one person does not leave any less for others and therefore the marginal cost of supplying an additional individual is very low or zero. Exclusion difficulties refers to the fact that it is difficult to exclude individuals from enjoying the good, again ideas or information, once it is produced. Consequently, there is a free rider problem that may result in the supply or use of the good being unprofitable. Intellectual property rights address those characteristics and enable ideas and information to be exploited profitably, within the parameters of the statutory rights. Those statutory rights facilitate the exploitation of the ideas or information through licensing arrangements. It is also implicit that the rights licensed may be limited in various dimensions: temporally, geographically and the product field of use.

9. For a long time it has been recognised that there is no fundamental incompatibility between competition law and intellectual property rights. The object of competition law is to prohibit conduct undertaken unilaterally by a corporation with substantial market power, or arrangements entered into between commercial entities, which have the purpose or likely effect of substantially lessening competition. The question that underpins competition law is whether, in the absence of the impugned conduct or arrangement, competition in the relevant market would be materially better, worse or unchanged.

10. In general terms, the commercial exploitation of most assets, including intellectual property rights, increases supply and thereby promotes competition. There is nothing inherently anti-competitive about intellectual property licences, just as there is nothing inherently anti-competitive about leases, licences or other contracts for the use of many assets, including airports, ports, railways and production facilities of various kinds. That proposition generally holds true notwithstanding that a given lease, licence or contract is restricted in its scope.

Cartel prohibitions and vertical supply arrangements

11. Australia’s Competition Act contains statutory per se prohibitions of various forms of conduct described as cartel conduct.

12. An arrangement between two commercial entities will constitute cartel conduct if two conditions are satisfied. First, the entities must be competitors in relation to the supply or acquisition of particular goods or services. I will call them the competitive goods or services. Second, the arrangement must contain one of the following types of provision:

(a) a price fixing provision – which is a provision that has the purpose or likely effect of fixing, controlling or maintaining the price of the competitive goods or services;

(b) a supply restriction – being a provision that has the purpose of preventing, restricting or limiting the production, capacity to produce, supply or acquisition of the competitive goods or services;

(c) a geographic or customer restriction – a provision that has the purpose of allocating between the commercial entities the geographic areas in which they will supply or acquire the competitive goods or services or the classes of persons to whom they will supply or from whom they will acquire the competitive goods or services; and

(d) a bid rigging provision – being a provision that has the purpose of ensuring that, in the case of a request for bids in relation to the supply or acquisition of the competitive goods or services, one or more will bid while others will not.

13 Provisions within intellectual property licences have the potential to constitute cartel conduct within the statutory definitions in Australia’s Competition Act. This can occur where the licensor exploits its intellectual property rights to produce and supply a product in a particular market, and also chooses to licence another commercial entity to do the same, but imposes a cartel type restriction on the licensee.

14. The Harper Committee expressed the view that such licensing restrictions should not be prohibited per se under the cartel prohibitions, and should only be prohibited if they have the purpose or likely effect of substantially lessening competition. That treatment of intellectual property licences is consistent with competition laws throughout the world. It reflects an economic view that intellectual property licences, even granted on a restricted basis, are generally supply enhancing and therefore pro-competitive. On that view, it is inappropriate to apply per se rules and such licences should be assessed under a competition test.

15. Presently, there is an exception to the cartel prohibitions in the case of vertical trading arrangements that fall within the definition of exclusive dealing in s 47 of the CCA. That exception is s 45AR. However, that exception is not generally applicable to intellectual property licenses because s 47 is not framed with intellectual property licences in mind. It is confined to standard forms of exclusive dealing whereby a supplier of goods or services agrees to supply those goods or services to another person exclusively (exclusive distribution), or on the condition that the other person will not acquire competing goods from another supplier (exclusive acquisition) or will not resupply the goods to particular persons or in particular places (restricted distribution). Thus, the restriction relates to the goods or services that are the subject of the primary supply. In the case of intellectual property licences, the primary supply is a licence of the intellectual property rights and typically the restriction relates to goods or services that are produced through the exploitation of those rights. Generally, section 47 has no application to those circumstances. For that reason, the exception to the cartel prohibitions, found in s 45AR, is unlikely to apply to intellectual property licences.

16. It was for that reason that the Harper Committee recommended the enactment of a broader vertical supply exception that would cover intellectual property licences and other vertical conduct that is not within s 47. That recommendation has not yet been adopted. Thus, following the repeal of s 51(3), intellectual property owners who both exploit the intellectual property themselves, and license others to do so, must be conscious of the potential application of the cartel laws to such licences.

Potential cartel conduct

17. Let me say a few words about the potential application of the cartel prohibitions to intellectual property licences following the repeal of sub-section 51(3). It is unchartered waters, and the application of the laws is not without difficulty. It is only possible to identify the issues that may arise.

18. As already mentioned, one of the two elements of the definition of cartel conduct is that the arrangement is made between two persons who are in competition with each other in respect of the supply of particular goods or services. Therefore, the first question to consider is whether the parties to the proposed licensing arrangement are or are likely to be, or but for the licence would be or be likely to be, in competition with each other in relation to the supply of particular goods or services in trade or commerce. In this context, trade or commerce means trade or commerce within Australia or between Australia and places outside Australia.

19. In many cases, there will be no prospect of that condition being satisfied. That will be so if the owner of the intellectual property does not itself exploit the rights to supply goods or services in Australian trade or commerce. In general, therefore, the cartel prohibitions are only likely to be of concern when an owner of intellectual property itself exploits the rights to supply goods or services in Australian trade or commerce, and also licenses another person to exploit the rights to supply competing goods and services in Australian trade or commerce.

20. Difficult questions will arise where the owner of intellectual property exploits the rights to supply goods or services in Australian trade or commerce but, at the time the licence is entered into, the licensee is not a competitor in respect of the supply of those goods or services and is not likely to be a competitor. It is yet to be determined how the cartel prohibitions will apply to licence arrangements between persons who are not competitors at the time the licence is entered into, but have the potential to be competitors by reason of the licence.

21. If the first question is answered in the affirmative, it will then be necessary to consider whether a condition of the licence falls into one of the 4 categories of cartel conduct.

22. A provision that restricts the price of goods or services to be produced pursuant to the licence is at obvious risk of constituting price fixing.

23. Similarly, a territorial restriction that restricts the geographic area in which the licensee can supply goods or services will need close consideration.

24. Other common forms of licensing restriction are field of use restrictions and quality restrictions. Whether they have the potential to infringe the cartel prohibitions will depend on whether the purpose of such restrictions is to prevent, restrict or limit production or supply. Each case will, of course, turn on its own facts. A key question will be whether a licence that enables the licensee to exploit intellectual property rights within a certain field of use, but not in other fields of use, has the purpose of enhancing production and supply or the purpose of restricting or limiting production or supply. That may depend on whether the licensee would otherwise have the right to produce or supply at all.

Conclusion

25. Let me conclude by reiterating two points.

26. First, consistently with the views expressed in the Harper Report, the repeal of 51(3) is a desirable amendment to the Competition Act.

27. Second, and again consistently with the views expressed in the Harper Report, further attention ought to be given to the scope of the exception from the cartel prohibitions for vertical supply arrangements. The current exception, focussed on conduct that falls within s 47 of the Act, is not adequate. Section 47 does not define all forms of vertical dealings, and generally does not apply to restrictions contained in intellectual property licences. The recommendations made in the Harper Report in that respect remain apposite.