End of an era: Repeal of s51(3) of the CCA and implications for your IP

5 mins  05.11.2018 Madeleine Diffey, Justin Oliver, Kylie Diwell

A new bill, if passed, will repeal the IP exemption in the Competition and Consumer Act 2010 (Cth), requiring IP rights holders to ensure that the conditions in their licensing arrangements do not contravene the anti-competitive conduct prohibitions in that Act.


Key takeouts


A historic IP exemption is set to be removed from the CCA, meaning conditions in intellectual property transactions will soon be treated like any other dealing from a competition law perspective.

The repeal will apply to conditions in both existing and future contracts, arrangements and understandings, meaning there is no 'grandfathering' of the current exemption.

Businesses that license their IP should start reviewing their existing contracts and arrangements to ensure that any licence conditions will not contravene the anti-competitive conduct prohibitions in the CCA.

The Treasury Laws Amendment (2018 Measures No. 5) Bill 2018, if passed, will change the way IP rights holders control their IP. This bill was recently passed through the House of Representatives and will repeal the IP exemption (s 51 (3)) in the Competition and Consumer Act 2010 (Cth) (CCA) and equivalent provisions in state legislation. It is now at the second reading stage in the Senate.

Until now, conditional licensing or assignments of certain IP rights (being patents, registered designs, copyright and eligible circuit layout rights) have been exempt from the full ambit of Part IV of CCA. The exemption currently applies to cartel conduct (ie, price fixing, output restrictions, market sharing and bid rigging), exclusive dealing and other arrangements which may substantially lessen competition in a market (but does not extend to misuse of market power or resale price maintenance).

The proposed repeal of s 51(3) is not a new concept but has gained momentum recently, as the Harper Report and the Productivity Commission Inquiry Report both argued that the repeal would improve competition and innovation in the intellectual property sector in Australia. The proposed amendment is said to bring Australia into alignment with comparable jurisdictions such as Europe, Canada and the US.

The Explanatory Memorandum to the bill cites the view in the Productivity Commission Report that "at present, the immediate costs and benefits of removing the exemption under subsection 51(3) are finely balanced" but states that, looking ahead, "the benefits could rise as the level of licensing and cross licensing increases, especially in pharmaceutical and communications markets".

Importantly, the repeal will apply to conditions imposed, or provisions included, in contracts or arrangements on, after or before commencement (with a proposed six month period between the bill receiving Royal Assent and commencement). The Explanatory Memorandum says that this "will give individuals and businesses time to review existing arrangements to ensure they comply with the competition provisions of the CCA".

Key implications - To remove or not to remove, that is the question

Conditional licensing is a cornerstone of IP commercialisation. Stipulating the territory, field of use or even market segment in which an owner's IP rights can be exercised, and imposing quality requirements relating to manufacture, are common features of IP licensing arrangements. These conditions enable IP owners to control the use of their IP assets in the manner they see fit (which is permitted under IP legislation).

Practically, the amendments will mean that, where IP arrangements may:

  • contain cartel provisions (eg, territorial restrictions);
  • amount to exclusive dealing (eg, exclusive licences); or
  • otherwise have the purpose, effect or likely effect of substantially lessening competition in the relevant market (eg, product quality requirements),

then businesses will need to consider whether to remove the offending provisions or seek appropriate authorisation from the ACCC.

There is a real prospect that the ACCC will take action to enforce this broader application of Part IV of the CCA to IP licensing arrangements as these causes of action have typically been easier for the ACCC to pursue than misuse of market power.

The potential penalty for a corporation that breaches Part IV of the CCA is the greater of $10 million, three times the value of the benefit obtained from the offence, and 10 per cent of the corporation's annual turnover (if the value of the benefit cannot be determined) for each act or omission.

The sectors that are likely to be most affected by this amendment are markets in which there are few substitutes or concentrated IP rights (such as pharmaceuticals and telecommunications). However, the effects are likely to be felt more widely given the far reaching application of Part IV of the CCA . In addition to the common restrictions in licences set out above, the following types of arrangements have been highlighted as potential risk areas:

  • patent pooling and cross-licencing between IP rights holders;
  • reverse payment settlements or "pay-for-delay" arrangements – these can be used to settle litigation or disputes, typically where a patent right is set to expire or a patent's validity is called into question and the IP rights holder wishes to delay a third party's entry into the market or prevent them from challenging the patent in return for compensation,

as both these types of arrangements are often entered into by competitors and may include territorial limitations (market sharing) and/or product supply limitations (output restrictions).

How to prepare

We recommend that businesses review their IP licensing arrangements to ensure that any limitations or conditions do not risk contravening the anti-competitive conduct prohibitions in the CCA.

Not every limitation or condition will contravene Part IV, but businesses will no longer be able to rely on the s 51(3) safety net and must now actively consider the competition implications of their IP arrangements.

Authorisation by and notification to the ACCC (depending on the relevant conduct) may play a key role for those businesses who can establish that the licence conditions or limitations will not substantially lessen competition or the public benefit will outweigh the public detriment.

If passed it could affect telcos, pharma, technology, healthcare – industries with lots of IP licensing arrangements.

Please contact us if your business has any concerns or queries about the impact of these changes on its IP arrangements.

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https://www.minterellison.com/articles/cca-and-implications-for-your-ip

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