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Medical biotechnology offers vast opportunity for the treatment of human genetic conditions, including the development and improvement of drugs, diagnostic capabilities and therapeutic techniques. Australian health and medical research has a rich and proud history. This has been recognised in numerous federal government reports, which examine the sustainability of research momentum and the ability of the Australian industry to capitalise on this research base.[1] Australia's increasing $1 billion trade deficit in pharmaceuticals, medical equipment and other health and medical industries has been a major impetus for the push to develop Australia's medical research base.[2]
Many domestic and export market opportunities for the Australian biotechnology industry exist. These opportunities have been taken up for the most part by the existing research sector, and by small companies, whether spin-off companies from research institutions, or companies independently conducting research. The industry is highly competitive and motivated to participate in the biotechnology revolution on an international level. To enable them to do this, intellectual property protection is crucial as a tool to enable trade, collaboration, and competitive advantage.
The international biotechnology industry is heavily dependent on intellectual property protection. The performance of the Australian medical biotechnology industry in terms of protection of research output is undergoing constant improvement. Increased awareness of the need to improve intellectual property management practices is evident within the industry, and has been expressly promoted by the Federal Government.[3] Commercialisation, where appropriate, has been actively encouraged in relation to all sectors of the industry.[4] Patent protection is the lifeblood of most biomedical companies.
The grant of a patent allows a number of commercialisation options. Section 13 of the Patents Act 1990 (Cth) (the 'Patents Act'), gives a patent holder the exclusive right to exploit an invention and to authorise another person to exploit the invention.[5] Thus, a patent holder may choose to exclusively exploit an invention themselves and further develop, or, where appropriate, manufacture, technology. Alternatively, they may choose to transfer ownership, or assign a patent, or allow another party to exploit the invention through a licensing agreement. A number of licensing options are available and the patent holder will generally issue either an exclusive licence which gives the exclusive right to exploit the invention to one licensee, or a non-exclusive licence which gives licensees the right to exploit the invention on a non-exclusive basis.
Transactional dealings in patents such as licensing are a crucial strategy for the biomedical industry. The industry has recently been described as a '... matrix of supply chain relationships along the drug discovery process, with increasing reliance on technology alliances and partnerships.'[6] Research institutions and companies at all stages of the drug discovery continuum are engaged in research activities, with many 'upstream' patent holders holding patents over inventions that are far removed from 'end' products such as drugs.<[7] Licensing arrangements allow patent holders with particular expertise to grant permission to more downstream industry participants to further develop or manufacture technology. Importantly, these arrangements may allow the establishment of collaborative relationships or provide an ongoing income stream to the patent holder. Payment for the licence may be in the form of a single lump sum payment, periodic payments, milestone payments upon the occurrence of particular events, or royalty payments. Royalty payments may be contingent upon the sale or use of the licensed product or technology.
This article reports the findings of a number of empirical studies into access to patents in the biomedical industry, including a recent Australian study jointly conducted by the author (the 'Australian study').[8] In particular, it details the findings of these studies in relation to particular terms commonly found in licence agreements, in the form of reach-through rights. Reach-through rights give patent holders rights to downstream uses of the patented invention. They may take a number of forms, including rights to royalties over future inventions, rights to intellectual property over future inventions, and exclusive licences over future inventions.[9]
Patents are perceived to be an important impetus for innovation. Indeed, the main aim of the patent system is to promote innovation and thereby benefit consumers.[10] Licensing of patents is also perceived to be important in the dissemination of innovation. Reach-through rights allow patent holders to license and realise value on their inventions even when that value is speculative. In this respect, they encourage the dissemination of patented inventions and are likely to have a positive effect on innovation. Reach-through rights may, however, have an inhibitive effect on innovation in that they may restrict in some way, the ability of licensees to exploit the products of their research. The impact of gene patents on healthcare issues may be particularly acute, as the Australian Law Reform Commission recently noted in its initial consideration of the issues surrounding gene patenting and healthcare in Australia.[11]
This article is concerned with the regulation through competition law of terms containing reach-through rights. It considers whether the use of reach-through rights requires regulation, and provides an analysis of how competition law deals with the issue. It then evaluates whether current provisions of the Trade Practices Act 1974 (Cth) (the 'Trade Practices Act') provide an adequate basis for regulating reach-through rights.
Part II of this article provides a brief outline of the cumulative nature of biomedical research and the implications this has for innovation within the industry. Part III provides an overview of patenting and licensing within the biomedical industry, with particular reference to Australia. Part IV discusses the effect of reach-through rights on incentives to conduct research, from a theoretical viewpoint and in light of empirical evidence. Part V overviews the treatment of reach-through rights under s 51(3) of the Trade Practices Act, and Part VI reviews United States ('US') and European Union ('EU') regulation. Part VII concludes by evaluating whether regulation of reach-through rights is desirable, and whether the Trade Practices Act adequately deals with the issue in light of the analysis in Parts V and VI. It will be argued that the issue of reach-through rights highlights some fundamental deficiencies in relation to s 51(3), and that these deficiencies could seriously affect incentives to innovate.
The nature of biomedical research is that it is cumulative and a significant amount of research builds on earlier research. Many biotechnology inventions constitute technological developments that enable subsequent lines of research to be pursued. These technologies are often referred to as research tools, and it is when access to foundational research tools is in some way restricted that concerns arise about the viability of conducting follow-on research.[12] A considerable number of biomedical companies and research institutions conduct upstream and intermediate research and are engaged in the development of research tools or inputs into follow-on research. Many of these companies and institutions are unlikely to ever produce an end product in the sense of a product available to consumers.
Cumulative research patterns are certainly not unique to biomedicine. A substantial body of literature examining incentive allocation in cumulative industries exists.[13] In some cases involving cumulative innovation, this prior knowledge makes follow-on research possible. In other cases, follow-on research would simply be slowed or only possible at greater cost if the researcher did not have the prior research to build on.[14] In each case, the social value of first generation inventions will include part of the social value of follow-on inventions.[15] Providing adequate incentives to inventors at various stages of the innovative process involves considerable challenge.
The pattern of biomedical research has parallels in other high technology industries. The computer software industry, for example, also involves heavy reliance on research tools to facilitate follow-on invention. Impacts on innovation will be particularly acute in biomedicine, however, in that this is an industry that offers great promise in terms of the development of therapeutic, diagnostic and pharmaceutical products. In many instances, potential future applications of initial technologies are unknown at the time these applications are developed. The long pre-commercial phase involved in most medical biotechnology research also means that many follow-on products will constitute new applications rather than improvements that compete with the initial product.[16] An inability on the part of follow-on researchers to conclude bargains with initial innovators may result in important products or technologies in new markets not being developed.
Some research tools in the biomedical field are more 'foundational' than others. For example, Taq polymerase is required for a considerable amount of DNA based research and so limitations on the dissemination of this technology understandably attract considerable attention. Similarly, the technology claimed in the recently publicised junk DNA patents is foundational to much modern genetics research, particularly research relating to the development of diagnostic tests.[17]
It is difficult to agree on a universal definition of research tools when conducting interview-based studies.[18] In this article, the term is interpreted broadly in line with many of the empirical studies examining the effect of research tool patenting on innovation.[19] In line with this, almost any input into research further downstream would constitute a research tool although to those who produce them they are important commercial products.[20] By licensing and allowing others to use research tools, patent holders are assisting innovation in that the number of inventions ultimately available to consumers will be maximised. Licensing is an important component of the Australian industry: most patent holders who participated in the Australian study were engaged in licensing-out activity.[21] Similarly, licensing-in activities were relatively high.[22]
If however, patent holders engage in exclusionary licensing practices in relation to foundational research tools (for example by refusing to license a patent or licensing that patent on restrictive terms), patent holders may hamper the ability of researchers and companies further downstream to innovate.
Although the importance of patents in many industries has been questioned, the evidence suggests that for the biomedical industry in particular, patent protection is very important. In the pharmaceutical industry, it is generally accepted that patent protection is vital in order for firms to recoup the massive research and development ('R&D') expenditure required in order to develop a drug product.[23] For biomedical firms, patent protection over inventions is arguably necessary in order to attract R&D funding.[24] Patents guarantee some return for investment, particularly for upstream products and technologies where the potential of the invention is often unknown.
Once intellectual property protection of inventions has been obtained, these patents constitute crucial business assets. The inventions of many biotechnology companies constitute improvements over preceding inventions, while others are new applications in themselves.[25] In some cases improvements are separately patentable, although in order to exploit a patented improvement the follow-on inventor/licensee will frequently require a licence to the initial invention.
Levels of patenting within the global medical biotechnology industry have increased dramatically. The US biotechnology industry association BIO reports steady increases in issued biotechnology patents in the US from around 2000 patents per year between 1989 and 1992, to more than 7000 patents per year from 1998 to 2002.[26] The Organisation for Economic Co-operation and Development ('OECD') reported similar growth in patenting activity: between 1990 and 2000 the number of biotechnology patents granted by the United States Patent and Trademark Office ('USPTO') rose 15 per cent a year, and 10.5 per cent a year at the European Patent Office ('EPO').[27] It should also be noted at this point that, while there is evidence of extensive patenting activity within the Australian biomedical industry,[28] a vast majority of patents granted in the biotechnology category in Australia have been granted to non-Australians.[29] Thus, the manner in which these patents are exploited becomes an important issue.
Assignments and licences of patents constitute contracts, and are conducted on the basis of contractual principles. Thus, although strict statutory requirements govern the grant of a patent, principles of freedom of contract apply where licensing and other forms of technology transfer of patents is concerned. The ability to enter freely into licence agreements is crucial within many industries, but certainly within the biomedical industry. A committee recently charged with investigating intellectual property and competition law identified a number of reasons why allowing relatively unrestricted contracting in relation to intellectual property rights is important in any industry:[30]
Challenges exist in achieving a balance between allowing efficient and free licensing in relation to the development of particular products, and maintaining a competitive environment to enhance the innovative process at each generation of product development.
Given that patent licence agreements are contractual arrangements, the terms on which such agreements are entered into are subject to negotiation. The parties may bargain to the point where they reach agreement on the terms to be included in the agreement. Understandably, many licensors or initial inventors are reluctant to agree to a licence unless they realise some benefit in the way of rights over an improvement or new invention. Concern about losing competitive advantage may result in restrictions being placed on the way in which licensees can use their inventions.[34]
There are two questions to be considered in assessing reach-through rights and biomedical research: first, why might reach-through rights have a detrimental effect on research? Secondly, are reach-through rights being demanded in practice? These questions will be considered in turn.
Reach-through rights may provide incentives for research. Many licensors are understandably reluctant to license their inventions to downstream innovators without some assurance that they will be entitled to share in the fruits of downstream innovators' research.[35] Their reason for seeking rights to downstream inventions is that they should be entitled to any inventions discovered through use of their upstream inventions, because without the initial invention, downstream research may not be possible. Often the value of an upstream invention and its likely effect on downstream research is unknown at the time it is licensed. These terms may give a patent holder rights to inventions that may not have been foreseen at the time the licence agreement was entered into. If an upstream invention is subsequently determined to be a foundational research tool, setting a value on it too early would deprive the patent holder of valuable income, and allow the licensee to realise a windfall gain. Reach-through rights allow the patent holder to defer decisions about the value of research tools and technologies.
As Michael Heller and Rebecca Eisenberg acknowledged, in agreements for the use of research tools in biomedical research
[i]n principle, [reach-through licence agreements] offer advantages to both patent holders and researchers. They permit researchers with limited funds to use patented research tools right away and defer payment until the research yields valuable results. Patent holders may also prefer a chance at larger payoffs from sales of downstream products rather than certain, but smaller, upfront fees.[36]
Reach-through rights may also assist in the dissemination of technology in that they encourage licensors to license out technology in circumstances where they might otherwise be reluctant to do so.
Reach-through rights may, however, have an inhibitory effect on innovation if they dampen the licensee's incentive to innovate. Licensees/inventors may be reluctant to invest time and money in innovation if they are not entitled to share in the products of their research. For this reason, licensors may face the dilemma of how much freedom to allow the licensee to retain: while they may recognise licensees need some incentive, they may also be mindful of future competition from either the licensee/inventor, or other licensees. Heller and Eisenberg recognised that reach-through rights may prove detrimental in that they
may lead to an anticommons as upstream owners stack overlapping and inconsistent claims on potential downstream products. In effect, the use of [reach-through licence agreements] gives each upstream patent owner a continuing right to be present at the bargaining table as a research project moves downstream toward product development.[37]
Heller and Eisenberg used the term 'anticommons' to describe the situation where a number of different patent holders hold patents over a variety of research inputs required in order to conduct a particular line of research. Researchers will need access to those patents, primarily through licences, and will need to negotiate with various patent holders. Due to the fact that no one has an effective privilege of use over resources, they may be prone to under-use, resulting in a 'tragedy of the anticommons'.[38]
Although there has been some discussion of the potential for anticommons effects within biomedicine, the issue is not peculiar to biomedicine.[39] There are numerous industries that possess the preconditions for an anticommons, and bargaining breakdowns within particular industries have been documented.[40] If there were no impediments to successful bargaining, rights would be traded and resources effectively utilised.[41] But in any industry where agreement with a number of rights holders is required, prohibitive transaction costs[42] may lead parties to decide that exchanging rights is not worthwhile.[43] The issue has received recent attention in biomedicine due to patenting practices within the industry and the grave implications of bargaining breakdowns for the treatment of human suffering.
In considering anticommons issues, the focus is on the effect of multiple reach-through agreements on downstream research. But even single agreements containing reach-through rights may cause problems for downstream researchers.[44] Thus, there are two main issues relevant to reach-through rights in licence agreements for research tools that are necessary to enable research to proceed:[45]
These issues may be exacerbated if broad patent claims are granted. If broad rights are granted over upstream inventions, access to them will be required to enable intermediate and downstream research to proceed. But even where the breadth of patent claims do not extend to a particular use or invention, the use of reach-through licence agreements may in effect widen the scope of the claim to that use.
Thus, despite the advantages that reach-through rights offer to patent holders, they may be problematic for a number of reasons:
All of these matters have been explored to varying degrees in the empirical literature dealing with reach-through rights, although it will become evident that the first becomes the most relevant from a competition law perspective. Nevertheless, it is necessary at this point to consider in totality the empirical evidence that deals with the effect of reach-through rights on innovation. In any case, these matters are often subject to considerable overlap.
In the course of patent licensing negotiations, particular terms may be problematic time and time again.[52] Concern has frequently been expressed that terms claiming reach-through rights may undermine incentives for research. For example, the Human Genome Organisation has stated that further research and development and the role of the patent system as an incentive for research may be seriously affected by the use of reach-through claims.[53] There seems to be no doubt that reach-through rights are being sought, and in many cases included, in licence agreements.
Whether or not terms claiming reach-through rights are inimical to competition will depend in part on the particular patented rights over which they are imposed. Technologies necessary for biomedical research fall into a number of different categories, and relevant factors to consider are the nature of the patented technology in question, and whether the person seeking access to the patented technology is in a competitive relationship with the patent holder. The categories into which research tools fall may be generally described as follows:
While restrictions on the use of technology falling into the first category are likely to have some effect on competition, terms claiming reach-through rights are most likely to be problematic from a competition law perspective in respect of categories two and three. Wide dissemination of these technologies is socially desirable because this may lead to the development of a multitude of products. Where terms claiming reach-through rights operate to discourage the development of new products, competition law may come into play.
A number of studies have been conducted in other jurisdictions with a view to identifying whether there are impediments to successful bargaining within the biomedical industry. One of the issues considered in the course of a number of these studies was the prevalence of provisions claiming reach-through rights.
There is evidence in overseas jurisdictions that reach-through rights in licence agreements are becoming increasingly prevalent. A Working Group established by the United States National Institutes of Health ('NIH') examined access issues encountered by NIH-funded investigators in relation to their intellectual property.[54] They considered the issue of reach-through rights in some detail, and their data suggested that terms giving reach-through rights are common and are often the subject of protracted disputes. Their findings can be summarised as follows:
Other studies have also found that reach-through rights are frequently the subject of controversy. For example, Straus, Holzapfel and Lindenmeir found that reach-through claims to future inventions had been encountered by many of their respondents, and made negotiations more cumbersome.[61] Similarly, royalty stacking caused some problems and threatened the commercialisation of products in some instances.[62] Royalty stacking occurs when a number of royalty commitments are made through a progression of licence agreements so that development of downstream products becomes unattractive or unfeasible.
Some respondents in a recent US study conducted by Walsh, Arora and Cohen[63] acknowledged that clauses claiming reach-through rights in material transfer agreements can delay negotiations.[64] Much of the evidence collected by them related to royalty stacking. Their evidence on whether projects had been stopped due to royalty stacking was more equivocal. The study concluded that circumstances in which royalty stacking had led to the cessation of projects were very limited, although onerous royalty obligations were frequently encountered. It was also found that parties were generally able to take measures to ensure that royalty stacking did not threaten the continuation of projects.[65]
Until recently, there was no evidence as to the extent of terms claiming reach-through rights within the Australian biomedical industry. The author recently co-authored a report detailing the findings of a study investigating patenting and technology transfer practices within the Australian biomedical and pharmaceutical industries.[66] The study involved surveying and interviewing three sets of respondents within the Australian industry: private companies, research institutions, and diagnostic testing facilities.[67]
The study was conducted in the context of a number of broad issues, including the effects of exclusionary practices in relation to foundational patented inventions, and whether there is evidence of an anti-commons effect within the Australian industry. As part of the study, data on the existence of reach-through rights within the Australian industry was obtained. One of the questions investigated was whether the inclusion of reach-through claims in licence agreements is having an inhibitory effect on research, either by restricting access to certain technologies, or through licence stacking. In other words, the authors sought to examine whether access to foundational patents was restricted due to reach-through rights, and whether the stacking of reach-through obligations had led to an anti-commons effect.
Participants in the Australian industry may be at some advantage over participants in other jurisdictions, because our research revealed that a number of biotechnology research tool patents considered to be fundamental to follow-on research are not patented in Australia.[68] This means that Australian researchers and companies can use these patented technologies in research and development without fear of being pursued for infringement. It also means that any use of these technologies will be free of restrictions such as reach-through rights to future inventions, or royalty obligations. However, this does not mean that Australian companies do not encounter reach-through provisions. On the contrary, respondents indicated that these are one of the most problematic terms when it comes to negotiating licences.
Most respondents involved in a high volume of licensing deals regularly encountered provisions claiming rights to future inventions. Many respondents from all sectors had encountered them in at least one instance,[69] and many company respondents said that seeking reach-through rights when licensing-out was routine. A number of respondents specifically stated that they attempt to avoid such terms when licensing-in because they can be so problematic. These were, in many cases, respondents from research institutions who were concerned about their ability to exploit improvements they developed. A number of the technology transfer personnel interviewed appeared to be putting up stronger resistance to the inclusion of reach-through provisions in licence agreements.
In a significant number of cases, however, provisions giving reach-through rights were still included. One researcher from a research institution was of the view that there is a general trend toward licensing agreements becoming more restrictive and that reach-through rights are being demanded on a regular basis. The following comment from a respondent from an upstream biotechnology company engaged in frequent licensing deals was typical:
We have a number of licences where there is provision for the new technology to be licensed back to us. For example, this might include gene targets or gene therapy using our technology. We want the first option to commercialise or at least to get hefty royalties. All our licences have provisions dealing with background and foreground intellectual property and licensor and licensee improvements. These are at the core of negotiations and are the hardest part. We try to get as much downstream as possible. This is the core of our growth path. We need to be careful how we deal with it. It can be a deal breaker.[70]
At the same time, many respondents commented that universities were increasingly likely to seek reach-through rights in their licensing-out agreements.[71] As one university technology transfer officer commented:
In the [Material Transfer Agreements] that we have negotiated with some US institutes they have tried to get in terms saying that they want rights to anything coming out of our research. We fight against this. At the same time we would want a clause of that nature in our out-licences. It might be for licensing back, joint ownership etc. It is a matter for negotiation.[72]
It seems that terms giving reach-through rights are frequently sought, and commonly included in licences. One licensing consultant we interviewed explained the position as follows:
The licensor's first position is to own any improvements and grant back a licence to the licensee. The idea for this is that if they give out a number of licences they are able to put all the technology together. However, the licensee wants to own the technology and license back to the licensor.[73]
Often whether or not terms giving reach-through rights were included in licence agreements depended on the nature of the technology or product being licensed, whether it was core to the activities of the licensee (and of course the patent holder), and the relative bargaining positions of the patent holder and the licensee. The most contentious situations were those involving technologies falling into category three (or non-rivalrous technologies), because respondents licensing-in research tools were reluctant to agree to terms that eroded their rights to profits from future inventions. There was evidence of reach-through rights being claimed in such instances.
Reach-through rights were generally more likely to be tolerated where the technology being developed was non-core to the activities of the licensee, and where licences were non-exclusive. The clear message, however, was that seeking such terms is commonplace and that they can take many forms. Many licensors start out at a position of claiming as much as possible, and settle for the best result they are able to attain. From the data obtained, the following conclusions can be drawn:
An anti-commons effect is most likely to be felt though the accumulation of royalty obligations necessitated by entering into numerous licensing agreements. The effect of royalty stacking is likely to be felt more acutely by smaller, start-up companies and universities than larger, more established biotechnology and pharmaceutical companies.[74] Supporting the data obtained by Walsh, Arora and Cohen, the Australian study indicated that reach-through royalties can be pervasive but are unlikely, as one pharmaceutical company respondent commented, to be a 'show-stopper'. The data overwhelmingly supported the position that royalty stacking is something that companies have to be aware of when licensing-in, and projects are unlikely to be continued if the amount that has already been committed by way of royalties decreases the commercial viability of a project. The important point is that although royalty stacking is an issue for the Australian industry, it appears to be something that industry participants have learnt to anticipate at an early stage in the development of a product.
Intellectual property law is intended to reward innovation. It has been widely recognised that intellectual property law and competition law essentially share the same aim: to benefit consumers by encouraging innovation, and enhancing economic efficiencies. Intellectual property laws encourage innovation and the development of new products, and competition laws control prices by promoting rivalry, and consequently, innovation.[75] To this end, competition laws in many jurisdictions contain a limited exemption for dealings in intellectual property. This recognises the pro-competitive effect that many transactional dealings in intellectual property have in fulfilling an important dissemination function.
However, where a patent holder licenses a patent, two related concerns may arise: first, that the patent monopoly may effectively be extended through these contractual arrangements if they extend the scope of the granted patent and, secondly, that the patent holder may restrict the ability of the licensee to practise the invention as fully as the patent holder was entitled to practise it. For example, where patent holders require that licensees give them rights to future inventions developed using licensed technology this may have the effect of discouraging potential licensees from entering into an agreement. This may have the dual effect of blocking incentives to innovate and undermining competition. In circumstances where there is a detrimental effect on competition, competition law may be utilised to act as a control mechanism over the terms upon which patent licence agreements are entered into.
Competition law is one instrument for regulating the operation of freedom of contract in intellectual property licensing.[76] It should be emphasised, however, that the line between intellectual property law and competition law is far from clear-cut. This accounts to some degree for the diverging approaches to the issue between jurisdictions, as well as the difficulty of delineating the precise stage at which limitations on innovation become anti-competitive.
The questions that this article now addresses are whether reach-through rights are anti-competitive, and whether competition law has a place regulating the use of provisions giving reach-through rights. Competition law is not concerned with every negative effect on innovation, or with eliminating difficulties that licensors and licensees may experience in negotiations. Only licence terms that have some direct impact on competition in a market will be subjected to scrutiny under competition law. Reach-through royalty claims may discourage a licensee from commercialising a downstream invention, may reduce a licensee's profits, or may delay negotiations. Despite that fact that they may have some impact on innovation, they are not likely to arise from anti-competitive behaviour.
It is not the aim of competition law to scrutinize every transaction that fails to maximise incentives to innovate.[77] Competition law is primarily concerned with rights to future inventions where these terms make it less likely that particular inventions will be developed, and where they assist in maintaining an inventor's dominant position.[78] Although the term 'reach-through rights' encompasses all of the situations referred to above,[79] in this article the term 'grant-back provisions' will be used to refer specifically to the situation where rights are claimed to intellectual property and licences over future inventions. It is in these situations that concerns about limitations on competition arise, and the term 'grant-back' is the term used within the legislation of most jurisdictions to cover this scenario. The term reach-through rights will be used to refer more generally to the category of licence terms in which grant-back provisions are included.
The balance of this article will be premised on the following arguments:
It will become evident that this is the general approach taken in other jurisdictions, although the position under Australian competition law is less clearly articulated.
One of the purposes of the Trade Practices Act is to prohibit anti-competitive conduct.[82] Part IV of the Trade Practices Act proscribes certain forms of conduct by companies based on an assessment of whether or not that conduct is anti-competitive, while s 51(3) provides a limited exemption from these provisions for terms and conditions in intellectual property licences.
The most relevant provisions of Part IV for the purposes or this article are:[83]
Section 46 is concerned with the promotion of economic efficiency through competition, for the benefit of consumers.[85] In analysing liability under s 46, it must first be established that the company in question has substantial market power.[86] In considering whether there has been a taking advantage of that market power, it is necessary to consider whether the conduct would have been engaged in under workably competitive conditions.[87] If the company can provide a rational business explanation for engaging in the conduct, this will tend to preclude a finding that there has been a taking advantage of market power.[88]
The result of this recent High Court jurisprudence is that an arguably pro-competitive efficiency justification will in some circumstances operate to render lawful conduct that might otherwise contravene s 46. There has, to some degree, been a narrowing of the circumstances in which liability in respect of s 46 will accrue.[89] This may operate in favour of intellectual property holders where they are able to promote a rational business explanation for imposing a particular term in a licence agreement.
Section 46 probably remains the provision most likely to be contravened through the use of grant-back provisions. It may apply, for example, where a licensor, uses its market power to insist on the inclusion of an exclusive term that has the effect of transferring to the licensor a licensee's rights to a follow-on invention they develop. The licensee may be well placed to practise the improvement alongside the licensor, and losing this right may diminish their incentive to innovate. In that the licensee's incentive to innovate might be reduced, they may be deterred from working on the patented invention in competition with the licensor, or from creating a market for a new product[90] in which the licensee may or may not compete with the licensor. Thus, exclusive grant-back provisions are more likely to be of concern in relation to technologies falling into categories two and three where markets for new products or technologies may emerge.
One of the main concerns that arise in relation to exclusive grant-back provisions is that the practice may allow the accumulation of improvements.[91] This may permit the original patent holder to maintain control of improved technology, even where those improvements render the original patented technology obsolete, and extend beyond the life of the original patent.[92] Such conduct may be unlawful pursuant to s 46 where it operates to extend the period or scope of the patent holder's monopoly.
One scenario that might invoke s 45 is the use of grant-back provisions by a group of companies to exclude entry by other parties. This might involve the mandatory assignment of improvements by a number of follow-on inventors to an original inventor, who then licenses the improvements back to the improvers.[93] This would effectively render the group immune to competition, and would restrict entry into the market. Given the collaborative nature of research relationships within the biomedical industry, such practices could conceivably result in control over areas of intellectual property by vertically integrated groups of research institutions and companies.
Where any potential contravention of these provisions is alleged, the elements of each section must be proved before a contravention is established.
Having an intellectual property right will not necessarily protect the owner of the intellectual property right from Part IV. It is specifically provided that the Trade Practices Act applies generally to intellectual property transactions.[94] Section 51(3) does, however, provide a limited exemption to this blanket application of the Trade Practices Act to intellectual property transactions. Section 51(3) provides that certain terms and conditions in licence agreements will be exempted from the operation of a number of the Part IV provisions, provided that those terms and conditions 'relate to' the subject matter of the licensed intellectual property right.[95] The exemption applies in relation to s 45, but not s 46. It should also be noted that if a term or condition in a licence is not exempted by s 51(3), it does not necessarily follow that it is anti-competitive. It simply means that it will not automatically attract the exemption.
Section 51(3) has rarely been relied on, and there has been debate over its relevance and how much certainty it provides to owners of intellectual property in conducting transactions for the exchange of intellectual property rights.[96] It is not clear what conduct is exempted by s 51(3) in that the term 'relates to' is ambiguous.[97] In the only decision that dealt with how s 51(3) should be interpreted, Mason J stated that the exemption in s 51(3) will not apply where a term in a licence seeks to obtain an advantage collateral to the subject matter of the invention or in other words, to extend the scope of the intellectual property right.[98] This decision has been used to support differing interpretations of s 51(3). A broad interpretation of 'relates to' would exempt almost any term or condition. A narrow interpretation would require the term or condition to relate directly to the intellectual property right so that a vast majority of terms would fail to be exempted.[99]
Given this, the objectives of s 51(3) need to be borne in mind when making an evaluation of its effectiveness. Although the original objectives of s 51(3) are unclear, it was concluded by the National Competition Council ('NCC') in their inquiry into the exemption that s 51(3) was probably enacted to prevent a perceived clash between intellectual property law and competition law.[100] The section may also provide intellectual property owners with greater certainty in which to undertake licensing or assignment of intellectual property rights. This greater certainty can help reduce the costs associated with compliance with competition laws and encourage more licensing activity.[101]
The ability to contract for the exchange of intellectual property rights assists in the efficient dispersion of intellectual property rights. To this end, in reviewing s 51(3) the Intellectual Property and Competition Review Committee ('IPCRC') recognised that caution should be exercised in any change to the law that impacts on the ability of intellectual property holders to contract effectively.[102] Nonetheless, the benefits of competitive markets need to be borne in mind in ensuring that holders of intellectual property rights do not go beyond the scope of market power conferred by an intellectual property right.[103] Their view was that s 51(3) did not achieve an adequate balance.
The IPCRC recommended a number of changes to s 51(3) to improve its efficacy. They recommended repealing and replacing s 51(3) with an amended version of the sub-section with the main amendments being as follows:
In addition, the IPCRC recommended that the body charged with monitoring anti-competitive conduct, the Australian Competition and Consumer Commission ('ACCC'), issue Guidelines to clarify when s 51(3) is likely to apply to particular terms and conditions. The IPCRC's approach generally represented an adoption of the 'scope of the grant' approach, which in itself may present difficulties in interpretation in some circumstances.[105] However, in principle, it arguably provides a clearer approach than that currently provided under s 51(3).[106] It would also operate as a wider exemption, as s 51(3) presently operates in narrow circumstances. Section 51(3) in its current form fails to achieve its aim of assisting innovation by encouraging the dissemination of intellectual property rights.
Some difficulties inherent in s 51(3) would, however, remain despite the proposed amendments. The much-criticised 'relates-to' test would be retained along with uncertainty as to its interpretation. The meaning of this phrase may, to some degree, be clarified as a result of the amendments to s 51(3). The phrase is likely to be given a wider interpretation: terms that relate directly to the intellectual property statute would never involve a substantial lessening of competition. This tends to support the argument that a broader interpretation of 'relates to' would be adopted. This argument does not, however, provide any definitive guidance as to which particular terms would be exempted by s 51(3), although ACCC Guidelines would presumably offer some clarification.
The challenge lies in achieving a balance between allowing the exercise of intellectual property rights and ensuring that intellectual property rights holders are not able to extend the scope of their intellectual property rights.[107] As the IPCRC pointed out, this latter concern is particularly important in a jurisdiction such as Australia where intellectual property rights are relatively strong.[108] The need to maximise business certainty must be offset against competing concerns, such as the effects of licensing on dynamic efficiencies associated with licensing intellectual property.[109] While it is recognised that providing a general exemption that balances these views is difficult, the case of grant-back provisions provides an example of a situation where increased certainty to both licensors and licensees would surely be beneficial.
Because exclusive grant-backs have the potential to contravene sections 45 and 46, it is appropriate to evaluate the effect of individual terms on competition. For example, a common form of exclusive grant-back is a provision that exclusively licenses or assigns improvements to the licensor but allows the improver to continue to use the improvement on a royalty free basis. Depending on the particular technology involved, such a clause may or may not be anti-competitive, and assessment of whether such a term constitutes a misuse of market power is appropriate. The imposition of such a term in a licence agreement over a gene sequence patent (or indeed any research tool falling into category three) may not only have a grave impact on innovation, it may also deter an improver from developing an important new product in a new market. Allowing holders of research tool patents to consume such a significant share of the social surplus of improvements would extend the monopoly granted to the holder of the research tool patent far beyond that encompassed in the patent grant.
As argued above, however, non-exclusive grant-back provisions are unlikely to ever contravene competition law on the basis that they promote the wide dissemination and use of technology among multiple parties.[110] More certainly exempting non-exclusive grant-backs would provide greater market certainty in licensing on these terms, and would involve relatively little cost in terms of lost innovation. Non-exclusive grant-backs would rarely, if ever, operate to extend the scope of a patent holder's right beyond what would be considered to be commensurate with the social contribution the patent makes.
The Government announced they would partly accept the recommendations of the IPCRC, by expanding the operation of s 51(3) to all intellectual property statutes, but by accepting the remaining recommendations in limited form.[111] Specifically, they declined to expand the operation of s 51(3) to apply to all of the Part IV provisions, with the result that the exemption still will not apply to s 46. They did accept that the sub-section would apply subject to a substantial lessening of competition test, and that Guidelines would be issued by the ACCC to assist in the operation of s 51(3). At the date of writing, s 51(3) had not been amended and remains in its current form.
The Government's response has been criticised as a result of the fact that it watered down the recommendations of the IPCRC.[112] The operation of s 51(3) is unlikely to alter dramatically. The 'relates to' test will be retained, and it is this test that is arguably the most problematic element of s 51(3). In addition, the continued exclusion of certain provisions, including s 46, from the operation of s 51(3) is arbitrary.[113]
In its TPC Background Paper dealing with the interaction between intellectual property and the Trade Practices Act,[114] the then Trade Practices Commission ('TPC') considered how terms and conditions in licence agreements would be dealt with pursuant to Part IV and s 51(3). They addressed, inter alia, the issue of grant-back provisions.[115] Specifically, they concluded that such a term will not attract the exemption in s 51(3), because it will not relate to the subject matter of the patented initial invention.[116]
The TPC also considered whether grant-back provisions are likely to contravene Part IV. They recognised that whether or not grant-back provisions are anti-competitive will depend on the nature of the term giving rights to future inventions. The effect of such a provision where the licensee is no longer able to utilise the improved technology may well be to discourage future research and development and, therefore, may be anti-competitive.[117] It will usually depend on the number of parties able to subsequently utilise the improved technology. A licence of the improved technology to the initial inventor on a non-exclusive basis will generally be viewed as pro-competitive, because multiple parties will have the right to exploit the invention. The initial inventor may be at a disadvantage, however, because they are not privy to the experience and knowledge of the follow-on inventor.[118]
However, the TPC indicated that if the initial inventor insists on an assignment or exclusive licence, this will generally be viewed as being anti-competitive, as it will prevent the licensee from utilising the invention, and will usually have the effect of discouraging further research and development.[119] By preventing the creation of a new market, the licensee may contravene s 46.[120] A contravention of s 46 may also arise because the initial inventor will increase its market power despite having invented only the initial invention.[121] The TPC also indicated that s 45 may be contravened where the contract or arrangement substantially lessens competition.
The proposed amendments to s 51(3) are likely to have limited practical impact on the treatment of grant-back provisions as considered in the TPC Background Paper. Under a wider interpretation of s 51(3), some grant-back provisions may be exempted. However, terms that have the potential to breach s 46 would not attract the exemption. In the event that a term potentially breaches s 45, the substantial lessening of competition test will continue to apply.
For companies in a cumulative industry such as biomedicine, increased certainty in employing the use of grant-back provisions would be desirable. As argued above, non-exclusive grant-back provisions should be more certainly exempted from competition law. Exclusive grant-backs are more likely to impact on the development of new products in biomedicine if they are imposed in licences of technologies falling into categories two and three. Where technology is non-rivalrous, exclusive restrictions on the exploitation of improvements could have grave effects on the advancement of socially useful inventions. However, data from the Australian study indicates that non-rivalrous technology is generally licensed on a non-exclusive basis. Patent holders understandably recognise that these research tools are most valuable if widely disseminated. This profit incentive benefits both patent holders and the research community, and the dynamic efficiencies associated with broad dissemination of these technologies are increased.
Exclusive grant-backs over technologies falling into category two are more problematic. There may be a number of circumstances in which they are pro-competitive, and again this will depend on the particular technology involved and the composition of the term in question. Likewise, exclusive grant-backs over category one or rivalrous technologies may reduce incentives to innovate but are less likely to hinder the process of competition in particular markets.
Perhaps the largest markets for the Australian biomedical industry are the US and European markets. A consideration of the treatment of licensing arrangements in those jurisdictions is therefore necessary.
In the US, the treatment of terms and conditions in intellectual property licensing agreements is dealt with by Antitrust Guidelines for the Licensing of Intellectual Property Rights, jointly produced by the US Department of Justice and Federal Trade Commission ('the Agencies') (hereafter 'the Guidelines').[122] The Guidelines are based on three premises:
The Guidelines recognise, however, that while many licensing arrangements are welfare-enhancing and pro-competitive, antitrust concerns may still arise. To this end the Agencies will focus on the actual effects of an arrangement, not its formal terms.[124] Restrictions in licensing arrangements will usually be evaluated on a rule of reason analysis, in that any anti-competitive effects will be weighed against any pro-competitive effects that arise.[125] Restraints that are clearly anti-competitive will be per se unlawful,[126] and the Guidelines also allow an antitrust 'safety zone' to encourage licensing activity. The safety zone will apply where:
If market share data is unavailable, the Agencies will assess whether or not there are four or more independently controlled technologies that are substitutable for the technologies controlled by the parties at comparable cost, or whether or not there are four or more independently controlled entities that have the capacity and incentive to engage in research and development activities that are a close substitute for those of the parties to the licensing agreement.[128]
Licensing is generally viewed as pro-competitive, and a licensor's freedom to deal with their intellectual property will generally only be fettered by the following limitations:
The Agencies may analyse the competition effects of agreements in respect of technology or innovation markets. A technology market consists of the intellectual property that is licensed or its close substitutes.[130] A technology market analysis will be used when rights to intellectual property are marketed separately from the products in which they are used.[131] An innovation market is a market in new or improved goods and services. An innovation market analysis may be used where a licensing arrangement may adversely affect competition to develop new or improved goods or processes, and the effects on innovation cannot be adequately addressed through the analysis of goods or technology markets.[132]
The Guidelines state that it will be necessary to apply this approach when considering whether grant-back provisions are pro-competitive or anti-competitive.[133] In recognising that grant-back provisions that allow the licensee to continue to use the technology are generally pro-competitive, even where an agreement contains a term that requires an exclusive licence back to the licensor, the provision will not be deemed to be per se unlawful.[134] The Guidelines retain a rule of reason approach in respect of agreements that may appear to be anti-competitive. The Agencies are directed to consider a number of factors in undertaking this analysis including:[135]
Other relevant considerations include the scope of rights claimed by the licensor, (and whether they cover one invention or a number of inventions in a general field) and how far into the future grant-backs extend.[137]
The US Guidelines therefore recognise that reach-through rights are inherently pro-competitive, in adopting a flexible approach even towards terms that appear to be anti-competitive. This approach is reflective of the approach taken by US courts to dealing with grant-back provisions.[138] Non-exclusive grant-back provisions will almost always be treated as being pro-competitive. Exclusive grant-back provisions will be treated as being pro-competitive unless some injury to competition can be shown in that the patent holder has '... appropriated to itself technology that would otherwise have entered the public domain, or entered it sooner, or that would have been controlled and developed by multiple competing firms rather than one.'[139]
The Treaty Establishing the European Community[140] contains provisions regulating anti-competitive conduct within the EU.[141] There are a number of Group Exemptions contained in regulations that exempt certain conduct from these provisions, generally where the conduct is deemed to be in the public interest. In order to qualify for the exemption, the conduct must satisfy the criteria under the regulations: if these criteria are satisfied the conduct is automatically exempted. Most relevant to date has been Regulation (EC) No 240/96 (31 January 1996) (no longer in force).[142] This exemption was aimed primarily at facilitating the dissemination of technology, and it operated on a narrow basis. In essence, the exemption only applied to exempt conduct where it was considered highly unlikely to be anti-competitive.[143] The benefits of the exemption could be withdrawn where the effects of the exempted agreement were incompatible with Article 81(3) of the Treaty.[144]
Regulation 240/96 allowed an initial inventor/licensor to require a licensee in particular circumstances to license-back to the licensor, provided the requirement for a licence was non-exclusive and reciprocal.[145] That is, in addition to the requirement of non-exclusivity, provided a licensor agreed to 'share in future experience and inventions made by the licensor', the exemption permitted a grant-back term.[146] A requirement that the licensee assign improvements or new applications was not permitted.[147]
The Regulation distinguished between severable improvements which can be practised independently of the original technology, and non-severable improvements which can only be practised in conjunction with the original intellectual property protected technology, although it will not always be clear which category some improvements fall into.[148] The position in relation to reciprocality differed depending on whether improvements were severable or non-severable.[149] For example, the Regulation permitted insistence by a licensor on an exclusive licence of a licensee's non-severable improvements during a licence term provided the licensor reciprocated,[150] but in the case of severable improvements it appeared that licensees must have been entitled to remain free to use (and license) their own improvements.[151] Non-symmetrical arrangements after the expiry of the contract, such as a right on the part of the licensor to use the licensee's improvements in return for royalty payments only, were also more likely to be tolerated in the case of non-severable improvements.[152]
Thus, provisions that restricted the licensee from using improvements or new applications that they had developed were deemed to be anti-competitive. In laying down these requirements, the exemption accordingly aimed to preserve potentially competitive relationships that arise in the course of vertical dealings.[153]
As of 1 May 2004, the EU adopted a new competition law regime. The main aims of the reform of the competition system are generally to:
Regulation 240/96 was due to expire in 2006, and in 2001 the Commission adopted a mid-term review report of this Regulation.[155] Submissions were invited in relation to the TTBE Mid-Term Report, and the operation of Regulation 240/96. This procedure was aimed at evaluating the effectiveness of Regulation 240/96 over the duration of its operation. The Report was critical of the way in which technology transfer agreements were evaluated under Regulation 240/96. In particular, it found that the Regulation focused more on the form of the agreement than on the actual effects of the market. In addition to analysing the policy approach on which the Regulation is based, the Report found that:[156]
The outcome of the review was the drafting of a revised Regulation.[157] As of 1 May 2004, Regulation 240/96 ceased to be operative, and the Commission of the European Communities adopted a new exemption for technology transfer agreements.[158] The Commission has also issued draft guidelines aimed at providing explanation and guidance as to the operation of the Revised TTBE, and the application of Article 81 to licensing agreements that fall outside the scope of the Revised TTBE.[159] Major changes to the current system are:[160]
In relation to grant-back provisions, the Revised TTBE deals more leniently with non-exclusive, non-reciprocal grant-backs of severable improvements or new applications, by including them within the parameters of the exemption. The Mid-Term Report recognised that excluding these provisions from the exemption on a wholesale basis is inappropriate given that in some instances they will not affect the licensee's ex ante incentive to innovate and may be pro-competitive.[162]
However, exclusive grant-backs or obligations to assign are not exempted.[163] Instead, these terms will need to be individually evaluated in order to determine their effect on competition.[164] In the event that they are anti-competitive they may be excluded from the agreement, which will still benefit generally from the block exemption.
Current approaches to intellectual property licensing within these three jurisdictions vary considerably. The US approach allows the US antitrust authorities to examine all licensing arrangements to evaluate their anticompetitive effect. Under the rule of reason approach, the authorities will need to balance the market position of the licensor, the impact of the provision on the licensee's incentive to innovate, and any special efficiencies.[165] The US Licensing Guidelines recognise that even exclusive grant-back provisions may have pro-competitive effects that should render them permissible.
Grant-back provisions are treated strictly under the current European exemption. The changes to the EU competition regime will align the EU more closely with the US position.[166] The aim of the Revised TTBE is to provide a less prescriptive and formalistic approach to obligations in technology transfer agreements, and to take better account of the economic implications of licence terms. Nevertheless it may have the following drawbacks:[167]
Despite these shortcomings, the adoption of the new EU competition regime intensifies the gap between the position under the Trade Practices Act, and the position in other jurisdictions. Despite being statutorily based, the exemption contained in the Trade Practices Act provides very little guidance to intellectual property holders. Both the US and European approaches provide a 'safe harbour' and terms that fall within this safe harbour are automatically exempted from competition law provisions. Detailed guidance is given for dealing with terms that fall outside these 'safe harbours'. The exemption provided in both of these jurisdictions is wider than that provided under s 51(3).
Consideration was given to international approaches by the NCC[168] and the IPCRC,[169] which both recommended changes to the current s 51(3) regime. Any analysis of the breadth of an exemption for intellectual property law from competition laws must involve a careful balancing of the costs and benefits of an exemption. The US has opted for a wide exemption, but would a broader exemption (in conjunction with the business certainty this arguably provides) provide an appropriate regulatory environment for Australia?
There are many difficulties inherent in enacting an optimal policy for dealing with intellectual property licensing arrangements. It has been suggested that the following principles should guide the application of competition law analysis to intellectual property law:
[Principle 1] There should not be a presumption that an intellectual property right creates market power.[170]
[Principle 2] Competition policy should acknowledge the basic rights granted under patent law.
[Principle 3] A licensing restriction should be permitted if it is not anticompetitive relative to the outcome that would result if the licence were proscribed; otherwise, an evaluation of the potential efficiency effects of the restriction on the pricing and diffusion of the intellectual property should be made.[171]
There are costs associated with exempting a greater range of conduct from the operation of competition laws: stronger incentives by way of intellectual property protection do not necessarily equate with social benefit.[172] One outcome of stronger intellectual property protection is decreased price competition.[173] Immunity from competition may also operate to reduce incentives to innovate where patent holders hold a position of dominance in a market.[174] At the same time, intellectual property rights can grant significant power to an innovator, and the boundaries of intellectual property rights can in some circumstances be more difficult to determine than those of tangible property.[175] These factors would tend to militate against a broad exemption.[176]
On the other hand, business certainty and innovation dissemination are the primary benefits of a broad exemption.[177] Allocative efficiency is likely to be increased as a result of confidence in the legality of intellectual property dealings.[178] Intellectual property possesses unique characteristics such as its significant social benefit and its ease of appropriability that tend to support stronger rights for intellectual property holders.[179] The necessity to combine complementary assets offers further support.[180]
Although an analysis of the effectiveness of the US and EU regimes can only be made with the benefit of hindsight and the accumulation of regulatory experience,[181] both the US and the EU have rich histories in monitoring the intellectual property/competition interface. Both regimes have accorded wider benefits to holders of intellectual property rights, and provided thresholds below which conduct will be deemed to be pro-competitive. In the author's view, these benefits are warranted given the important dissemination function of licensing. A broader exemption need not entail wholesale exemption for terms in intellectual property licences from competition law. Competition law analysis will be undertaken in respect of those terms that are not facially pro-competitive. Different dealings in intellectual property rights can have different consequences, and the US and EU regimes provide useful examples of more tailored approaches to the regulation of terms and conditions in intellectual property licensing.
The remainder of this article will summarise the likely effects of grant-back provisions in biomedicine in Australia, before considering the effectiveness of s 51(3) in monitoring the interplay between patents and competition in relation to the example of grant-back provisions.
It has been argued that providing a wider exemption from competition law that makes some attempt to delineate the circumstances in which terms in intellectual property dealings will be exempt from competition law is important in any context. It is particularly crucial in the context of biomedicine, where transactional dealings in patents constitute a critical method of information dissemination. Where reach-through rights, and particularly grant-back provisions, are used as a method of accounting for the risks involved in disseminating patents, they assist in facilitating dissemination.
These factors become very important in cumulatively structured industries. Survey evidence from the Australian survey revealed general similarities in business practices between Australian and international biomedical companies, as well as growth in patent ownership and transactions involving patented technologies. Significant upstream and intermediate research is conducted in Australia, and Australian companies and research institutions demonstrated heavy reliance on licensing-out activity. Section 51(3) offers little by way of certainty to holders of patents.
Empirical evidence suggests that, as in other jurisdictions, reach-through rights are frequently sought by licensors. Often, these terms may have some impact on innovation but will not contravene competition laws. For example, reach-through royalties may dampen incentives to innovate but will not be anti-competitive. Competition law is not solely concerned with maximising incentives to innovate in intellectual property licensing agreements. It is grant-back provisions that give rise to concern. However, in a great many instances where non-rivalrous technologies are subject to grant-back provisions, these provisions give non-exclusive rights. In a few circumstances, exclusive rights over technology that is likely to assist in the development of alternative but competing uses may be sought, and it is these cases that may give rise to competition law issues.
Under s 51(3) as currently drafted (in conjunction with the TPC Background Paper), grant-back provisions would probably fail to attract the exemption in s 51(3) despite the fact that they will be anti-competitive in only a limited set of circumstances. Grant-back provisions may be exempted under the amended exemption, although this is far from certain. Indeed, a very wide interpretation of the exemption may operate to exempt all terms falling into the class of grant-back provisions.[182] The difficulty arises from treating grant-back provisions as a blanket category without consideration of the different circumstances in which they might be pro-competitive.
There is agreement within each of the jurisdictions discussed that grant-back provisions are potentially pro-competitive, particularly where they are non-exclusive. There should be enough flexibility in approach, however, to recognise that there may be many circumstances in which terms claiming exclusive rights are pro-competitive. To take a simple example, a licensee may invent an improvement or application it has no intention of exploiting. The licensor many have particular expertise in that area of technology. In this instance, a term giving rights to the licensor would be in the interests of all parties. Sub-contracting and exclusive licensing of technologies are important components of the pharmaceutical and biotechnology industries, and coordination of research efforts through licensing drives the innovative process.
Having said this, competition law undoubtedly has a role to play in monitoring the use of terms containing grant-back provisions. Because grant-backs have the potential to impact on incentives to innovate, contractual freedom should not be unfettered. This issue is particularly important for an industry such as the biomedical industry that is cumulative in nature.
The approaches taken under the US Guidelines and the Revised TTBE offer interesting counterpoints for comparison. The Guidelines make some attempt to set out the circumstances to be considered in making an assessment of reach-through terms. Even so, it is recognised that grant-backs that appear to be facially anti-competitive need to be scrutinised more closely to determine whether their pro-competitive effects outweigh any negative effects on competition.
In reviewing the operation of their technology transfer rules, the EU has endeavoured to provide more flexibility and expand the circumstances in which grant-backs are permissible. It sought to align the EU position more closely with the US position. Extensive reference was made to the US Licensing Guidelines in undertaking the review of the TTBE, although the revised EU approach nonetheless retains significantly more rigidity than the US approach.
The question of how grant-back provisions should be dealt with highlights some inherent weaknesses in s 51(3). First, the necessity to categorise grant-back provisions as a general class fails to take account of the many different forms grant-backs may take. Consequently the narrow exclusion in s 51(3) would provide no protection to licensors, even where the term claimed is clearly pro-competitive. It is unlikely that a term claiming non-exclusive rights to a new invention and giving reciprocal rights would attract the exemption.
Further, s 46 is often the provision most likely to be contravened where licensees consider grant-back provisions to be problematic. This provision is not covered by s 51(3). It might be argued that pro-competitive terms are unlikely to breach s 46 in any event, however, situations that are equivocal could be envisaged. The TPC Background Paper is very general and fails to consider any of these 'equivocal' situations.
In short, in the case of grant-back provisions, neither s 51(3) nor the TPC Background Paper provide any significant assistance to companies except in narrowly defined circumstances. While flexibility in approach is desirable, this should not be at the expense of some level of guidance. This guidance is unlikely to be provided by an amended s 51(3), although it remains to be seen whether a new set of Guidelines provide more detailed assistance.[183] Unfortunately, however, this is an instance in which s 51(3) is largely redundant, and fails to achieve its aims.
Finally, a primary issue for biomedical companies is the international nature of their research and marketing — many licensing agreements will be entered into across jurisdictions. Difficulties arise due to the disparity in approaches across jurisdictions, and in ensuring compliance with each approach. Section 51(3) and the TPC Background Paper provide limited assistance in this regard to either Australian companies, or to foreign companies operating independently, or in collaboration with Australian companies. Certainty in the context of intellectual property dealings is an important aid to the dissemination of innovation. The clear lack of any attempt at harmonisation with other jurisdictions further reduces the level of certainty.
[A]lmost any licence agreement probably contains provisions that could be omitted or rewritten so as to create greater incentives to innovate. But antitrust intervenes only when a type of practice as a class can be said to pose significant competitive risks. This certainly cannot be said of grantback clauses as a general matter.[184]
Reach-through rights and, in particular, grant-back provisions, provide an interesting case study in relation to the efficacy of s 51(3), and an illustration of the complex issues surrounding the intersection between intellectual property law and competition law. The difficulty in determining the point at which competition law should step in to protect the innovative process is highlighted by the disparity in approaches across jurisdictions, and the depth of sentiment expressed by study respondents in relation to the issue of reach-through rights generally, and grant-back provisions in particular. The challenge from a policy perspective lies in discerning the appropriate balance between intellectual property laws and competition laws.
Section 51(3) is aimed at providing sufficient certainty to intellectual property holders to allow them to disseminate their protected technologies and products. In that s 51(3) provides very limited certainty, the section fails to achieve this aim. As such, it is likely to have some effect on the willingness of patent holders to disseminate their technology. There is ample evidence of grant-back provisions being sought in practice, but at present neither licensors nor licensees are given any real guidance as to the circumstances in which these terms will become anti-competitive as opposed to merely having some impact on innovation.
[∗] B Com LLB (Comb) (Hons), PhD Candidate, Faculty of Law, University of Tasmania. Many thanks to Dr Dianne Nicol, Lynden Griggs, Rhys Edwards, Professor Don Chalmers and two anonymous referees for their helpful comments on drafts of this article.
[1] See Health and Medical Research Strategic Review Committee, Parliament of Australia, The Virtuous Cycle — Working Together for Health and Medical Research — Health and Medical Research Strategic Review (1999) (the 'Wills Review'); Biotechnology Australia, Australian Biotechnology: A National Strategy (2000) ('National Strategy'); Biotechnology Australia, Developing Australia's Biotechnology Future: Discussion Paper (1999); Ralph Committee, Parliament of Australia, Review of Business Taxation — A Tax System Redesigned: Final Report (1999). See also Commonwealth of Australia, Backing Australia's Ability: An Innovation Action Plan for the Future (2001).
[2] Health and Medical Research Strategic Review Committee, above n 1, 125–6.
[3] See, eg, Biotechnology Australia, National Strategy, above n 1, 11, 19–20; Biotechnology Australia and Spruson and Ferguson, Biotechnology IP Management Manual (2001); Australian Research Council et al, National Principles of Intellectual Property Management for Publicly Funded Research (2001) National Health and Medical Research Council <www.nhmrc.gov.au/research/general/ipman.pdf> at 11 March 2004.
[4] For example, the Biotechnology Innovation Fund assists companies by providing grants for early-stage commercialisation. See AusIndustry, Fact Sheet: Biotechnology Innovation Fund (2003) <http://www.ausindustry.gov.au/content/content.cfm?ObjectID=01A28EB4-A066-4D7E-99AAA16094536488 & L2Parent=0786C9BE-08B7-4973-93429A645AEEC8E4 & L3Parent =FD34329B-F6F6-4C98-B963D0A59C20A603> at 11 March 2004.
[5] 'Exploit' includes making, hiring, selling and otherwise disposing of the invention: Patents Act sch 1.
[6] Statement by Alex To, Head of Biotechnology Research Group, Credit Suisse First Boston contained in Ernst & Young, Convergence: Ernst & Young's Biotechnology Industry Report, Millenium Edition (2000) 17.
[7] The terms 'upstream' and 'downstream' are used here to describe the position of institutions and companies in the research and development continuum. Researchers and companies at the furthest upstream end of the continuum produce broadly enabling technologies, while companies at the furthest downstream end produce drugs, diagnostic products and other therapeutics. Many researchers and companies fall somewhere between these two extremes, and are classified broadly as 'intermediate'. Note, however, that this distinction is not static: see Arti Rai, 'Fostering Cumulative Innovation in the Biopharmaceutical Industry: The Role of Patents and Antitrust', (2001) 16 Berkeley Technology Law Journal 813 n 9 ('... these classifications are quite fluid. Thus, for example, research identifying a gene linked to a disease might be quite "upstream" if the commercial goal is a drug therapy. By contrast, if the commercial goal is a diagnostic test, research identifying the gene might be relatively "downstream."').
[8] Dianne Nicol and Jane Nielsen, 'Patents and Medical Biotechnology: An Empirical Analysis of Issues Facing the Australian Industry' (Occasional Paper No 6, Centre for Law and Genetics, 2003). The focus of the report was on medical applications.
[9] See Michael Heller and Rebecca Eisenberg, 'Can Patents Deter Innovation? The Anticommons in Biomedical Research (1998) 280 Science 698, 699; Rebecca Eisenberg, 'Bargaining Over the Transfer of Proprietary Research Tools: Is This Market Failing or Emerging?' in Rochelle Dreyfuss, Diane Zimmerman and Harry First (eds), Expanding the Boundaries of Intellectual Property: Innovation Policy for the Knowledge Society (2001) 223; National Institutes of Health, Report of the National Institutes of Health Working Group on Research Tools (1998) <http://www.nih.gov/news/researchtools/index.htm> at 3 October 2002 ('NIH Report'). Reach-through rights in licence agreements are distinct from reach-through claims in patents. In the latter case, the issue is whether the patent claims are interpreted so broadly as to enable patent holders to claim royalties over any product developed that utilises the patented technology: See OECD, Genetic Inventions, Intellectual Property Rights and Licensing Practices: Evidence and Policies (2002) 15–16. The Australian Patent Office released new guidelines for the examination of reach-through claims in patent applications in November 2003: see IP Australia, Australian Patent Office Manual of Practice and Procedure (1996) vol 2, [3.12.10], [10.10].
[10] See generally the discussion on the economic rationales for the patent system in Richard Nelson and Roberto Mazzoleni, 'Economic Theories About the Costs and Benefits of Patents' in National Research Council, Intellectual Property Rights and Research Tools in Molecular Biology (1997); and the discussion in Intellectual Property and Competition Review Committee, Review of Intellectual Property Legislation Under the Competition Principles Agreement: Final Report (2000) (the 'IPCRC Report') 22–3.
[11] Australian Law Reform Commission, Gene Patenting and Human Health, Issues Paper 27 (2003) ('ALRC Issues Paper'); Australian Law Reform Commission Gene Patenting and Human Health, Discussion Paper 68 (2004) ('ALRC Discussion Paper').
[12] It should be noted that the term 'research tool' is subject to varying interpretations. A narrow definition would limit research tools to those technologies that are traditionally understood to comprise methodologies employed in research laboratories for identifying potential drugs. Notable examples are recombinant DNA technology, polymerase chain reaction, Taq polymerase, and genes and receptors. A broad definition, however, would encompass virtually all upstream and intermediate technologies that primarily constitute inputs into further research and are not in themselves end products. As well as the 'foundational' tools that would be encompassed in a narrow definition, examples might include genomics databases, combinatorial libraries, clones and transgenic mice.
[13] See, eg, Suzanne Scotchmer, 'Standing on the Shoulders of Giants: Cumulative Research and the Patent Law' (1991) 5 Journal of Economic Perspectives 29; Jerry Green and Suzanne Scotchmer, 'On the Division of Profit in Sequential Innovation' (1995) 26 Rand Journal of Economics 20; Howard Chang, 'Patent Scope, Antitrust Policy, and Cumulative Innovation' (1995) 26 Rand Journal of Economics 34; Robert Merges and Richard Nelson, 'Market Structure and Technical Advance: The Role of Patent Scope Decisions' in Thomas Jorde and David Teece (eds), Antitrust, Innovation, and Competitiveness (1992) 185.
[14] See Frederic Scherer, 'The Economics of Human Gene Patents' (2002) 77 Academic Medicine 1348, 1361–3; Scotchmer, above n 13, 31.
[15] Scotchmer, above n 13, 31.
[16] Rai, above n 7, n 4 points out that the cumulative nature of biopharmaceutical research can be differentiated from cumulative innovation in most other industries. In many industries, the second generation improvement competes in the same end product market as the first generation product. In contrast, most second-generation improvements within the context of the biopharmaceutical industry occur in the pre-commercial stage prior to the development of a marketable product such as a drug.
[17] The so-called 'junk' DNA patents are a series of patents that claim a method of using non-coding regions of human DNA to predict mutations in coding sections of DNA. The patents are potentially very broad. The patent holder, Genetic Technologies Ltd, has entered into a number of licence agreements, and has indicated a willingness to actively enforce the patents. For details see ABC Television, 'Patently a Problem', Four Corners, 11 August 2003 <http://www.abc.net.au/4corners/content/2003/transcripts/s922059.htm> at 11 March 2004.
[18] See also NIH Report, above n 9; Eisenberg, above n 9, 229.
[19] See, eg, NIH Report, above n 9; John Walsh, Ashish Arora and Wesley Cohen, 'Effects of Research Tool Patenting and Licensing on Biomedical Innovation' in Wesley Cohen and Stephen Merrill (eds), Patents in the Knowledge-Based Economy (2003) 285, 287; cf Joseph Straus, Henrik Holzapfel and Matthias Lindenmeir, Empirical Survey on 'Genetic Inventions and Patent Law' (2002).
[20] See Eisenberg, above n 9, 228–9.
[21] See Nicol and Nielsen, above n 8, 100–3. See also Ernst & Young, Australian Biotechnology Report (1999) 35.
[22] See Nicol and Nielsen, above n 8, 184–6. See also Ernst & Young, above n 21.
[23] See, in particular, Richard Levin et al, 'Appropriating The Returns from Industrial Research and Development' (1987) 3 Brookings Papers on Economic Activity: Microeconomics 783; Wesley Cohen, Richard Nelson and John Walsh, 'Protecting Their Intellectual Assets: Appropriability Conditions and Why US Manufacturing Firms Patent (or Not)' (Working Paper No 7552, National Bureau of Economic Research, 2000).
[24] See, eg, the discussion in Scherer, above n 14, 1351–2.
[25] Sometimes referred to as 'non-severable', as opposed to 'severable' inventions: see Steven Anderman, EC Competition Law and Intellectual Property Rights: The Regulation of Innovation, (1998) 110.
[26] Biotechnology Industry Association, Biotechnology Industry Statistics <http://www.bio.org/er/statistics.asp> (2004) at 11 March 2004.
[27] OECD, 'Biotechnology Statistics in OECD Member Countries: Compendium of Existing and National Statistics' (Working Paper No 2001/6, OECD Directorate of Science, Technology and Industry, 2001).
[28] See Nicol and Nielsen, above n 8, 100–3, 184–6.
[29] While around 10 per cent of patents granted each year originate in Australia, only two per cent of patent applications filed in the biotechnology category up until 1998 originated in Australia. Note that the biotechnology category includes both medical and agricultural biotechnology. It also includes gene patents. The author thanks Jodi Lawler and Rod Crawford from IP Australia for providing this data. See further Dianne Nicol and Jane Nielsen, 'The Australian Biomedical Industry and Access to Intellectual Property: Issues for Patent Law Development' [2001] SydLawRw 16; (2000) 23 Sydney Law Review 347, 361–2.
[30] IPCRC Report, above n 10, 210–11.
[31] See also Robert Merges and Richard Nelson, 'On the Complex Economics of Patent Scope' (1990) 90 Columbia Law Review 839, 843; John Barton, 'Patents and Antitrust: A Rethinking in Light of Patent Breadth and Sequential Innovation' (1997) 65 Antitrust Law Journal 449, 453–5.
[32] See also Edmund Kitch, 'The Nature and Function of the Patent System' (1977) 20 Journal of Law and Economics 265; Merges and Nelson, above n 31; Heller and Eisenberg, above n 9.
[33] Non-rivalrous, or non rival-in-use technologies refer to the situation where the use of a research tool or technology by one party will not normally reduce the profits of others from using it, in that resulting products generally not compete. Conversely, rival-in-use technologies will usually be used to develop products that will compete with one another.
[35] Indeed, allowing initial innovators to coordinate subsequent research (and thereby development of their initial patents) may provide social benefits and is therefore an important justification for the patent system: see Kitch, above n 32, Nelson and Mazzoleni, above n 10.
[36] Heller and Eisenberg, above n 9, 699.
[37] Ibid.
[38] Ibid. See also Eisenberg, above n 9, 230–1.
[39] The concept was initially advanced by Michael Heller: Michael Heller, 'The Tragedy of the Anticommons: Property in the Transition from Marx to Markets' (1998) 111 Harvard Law Review 621.
[40] See, eg, Robert Merges, 'Contracting into Liability Rules: Intellectual Property Rights and Collective Rights Organizations' (1996) 84 California Law Review 1293.
[41] Ronald Coase, 'The Problem of Social Cost' (1960) 3 Journal of Law and Economics 1.
[42] Broadly defined, transaction costs of licensing intellectual property include the costs of searching for a licensee or licensor, negotiating a licence, monitoring performance, and enforcing the terms of the licence and protecting against infringement: Clarisa Long 'Proprietary Rights and Why Initial Allocations Matter' (2000) 49 Emory Law Journal 823, 827–8.
[43] See Heller, above n 39. The reasons for breakdown in negotiations within industries reliant on cumulative innovation will vary from industry to industry: see Merges and Nelson, above n 31, 843–4.
[44] See Nicol and Nielsen, above n 8.
[45] These issues are canvassed in detail in Walsh, Arora and Cohen, 'Effects of Research Tool Patenting', above n 19. The focus of this article was to report the results of an empirical study into primarily, these issues. See also John Walsh, Ashish Arora and Wesley Cohen, 'Working Through the Patent Problem' (2003) 299 Science 1021; Nicol and Nielsen, above n 8, 53–7.
[46] See Heller and Eisenberg, above n 9.
[47] See Rai, above n 7.
[48] Heller and Eisenberg, above n 9, 699–700.
[49] See NIH Report, above n 9.
[50] Heller and Eisenberg, above n 9. See also ALRC Issues Paper, above n 11, 175.
[51] See also Straus, Holzapfel and Lindenmeir, above n 19, 17.
[52] See Eisenberg, above n 9, 223–50.
[53] HUGO Ethics Committee, Statement of Patenting of DNA Sequences (2000) Human Genome Organisation <http://www.hugo-international.org/hugo/patent2000.html> at 11 March 2004.
[54] NIH Report, above n 9. The NIH Study culminated in the release of a set of Guidelines, the response to which was fairly guarded. One of the recommendations contained in these Guidelines was the drafting of a uniform Material Transfer Agreement with provisions as to reach-through claims excluded. See National Institutes of Health, Basic Guidelines for the Transfer of Research Tools to and from Recipients of NIH Funds (1998). The Guidelines were released as Appendix A to the NIH Report and are available at <http://www.nih.gov/news/researchtools/appenda.htm?> at 3 October 2003. Material Transfer Agreements are agreements for the exchange of tangible materials required for research. The same issues that arise in relation to the licensing of technologies can also arise in relation to the exchange of materials for research purposes.
[55] NIH Report, above n 9, 13–14.
[56] Eisenberg, above n 9, 230.
[57] NIH Report, above n 9, 14.
[58] Ibid 10–11.
[59] Ibid 15.
[60] Ibid.
<[61] Straus, Holzapfel and Lindenmeir , above n 19, 17.
[62] Ibid 6–7.
[63] Walsh, Arora and Cohen, 'Effects of Research Tool Patenting', above n 19; Walsh, Arora and Cohen, 'Working Through the Patent Problem', above n 45.
[64] Walsh, Arora and Cohen, 'Effects of Research Tool Patenting', above n 19, 321.
[65] Ibid 299–300.
[66] Nicol and Nielsen, above n 8.
[67] For a detailed discussion on the methodology employed, see ibid 64–71.
[68] Ibid 41–9.
[69] The average number of licensing-in deals recorded per respondent was relatively low. For example, of the 23 company respondents who had licensed in patents, 14 had between one and four licensing-in deals. Single transactions may require more than one in-licence. Thus it would be fair to conclude that, relatively speaking, issues relating to reach-through rights were encountered in a significant proportion of transactions.
[70] Nicol and Nielsen, above n 8, 163–4.
[71] See also ibid 10—11.
[72] Ibid 166.
[73] Ibid 164.
[74] Walsh, Arora and Cohen, 'Effects of Research Tool Patenting', above n 19, 301–2.
[75] IPCRC Report, above n 10, 24.
[76] There are other measures of ensuring that patent rights do not impact too heavily on the innovative process. For example, strengthening the statutory grounds for obtaining a patent can operate to reduce the scope of patents granted. Other methods facilitate access to patents or rectify bargaining breakdowns. There is provision in the Patents Act, for example, for application to be made for a compulsory licence to a patent: see s 133 Patents Act. Similarly, a practice-based research exemption currently operates in Australia that exempts research with no commercial implications from liability for patent infringement; see Nicol and Nielsen, above n 8, 218–22; see also Advisory Council on Intellectual Property, Patents and Experimental Use, Issues Paper (2004).
[77] See Herbert Hovenkamp, Mark Lemley and Mark Janis, IP and Antitrust: An Analysis of Antitrust Principles Applied to Intellectual Property Law (2002) vol 2, 25–6.
[78] Barton, above n 31, 461.
[79] See the text accompanying n 9, above.
[80] Hovenkamp, Lemley and Janis suggest that one possible circumstance is where a patent holder attempts, through the imposition of a non-exclusive grant-back provision in a licence agreement, to extend the life of a patent that is near its expiry by claiming rights to a significant improvement. They conclude, however, that the law should not readily intervene to 'level the playing field' where a licence agreement reflects marketplace risks at the time the agreement was negotiated: the law should not protect licensees who have foolishly acceded to restrictive terms. In addition, it is likely that a licensee in this instance will receive some benefit in return, for example, a reduced royalty rate: Hovenkamp, Lemley and Janis, above n 77, 25–5—25–6.
[81] The circumstances in which a term giving an exclusive grant-back may be in breach of competition law will be discussed below at Part V(A)(1).
[83] The other sections in Part IV are s 47 (exclusive dealing), s 48 (resale price maintenance) and s 50 (prohibiting anti-competitive mergers).
[84] These provisions will be referred to as 'section 45'.
[85] Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd [1989] HCA 6; (1989) 167 CLR 177 ('Queensland Wire'), 191(Mason CJ and Wilson J); Melway Publishing Pty Ltd v Robert Hicks Pty Ltd (2001) 205 CLR 1 ('Melway'), 13 (Gleeson CJ, Gummow, Hayne and Callinan JJ); Boral Ltd v Australian Competition and Consumer Commission (2003) 195 ALR 609 ('Boral'), 625 (Gleeson CJ and Callinan J).
[86] Melway, 13-4 (Gleeson CJ, Gummow, Hayne and Callinan JJ); Boral, 636 (Gleeson CJ and Callinan J).
[87] Melway, 48 (Gleeson CJ, Gummow, Hayne and Callinan JJ). A causal nexus must be established between the market power and the exclusionary conduct such that it can be said that the conduct is materially facilitated by the market power: 23.
[88] Melway, 17-9 (Gleeson CJ, Gummow, Hayne and Callinan JJ); Boral, 625 (Gleeson CJ and Callinan J).
[89] See, for example, Frank Zumbo, 'The Boral Case: Has the High Court Done Justice to s 46?' (2003) 11 Trade Practices Law Journal 199, 222.
[90] Trade Practices Commission, Background Paper: Application of the Trade Practices Act to Intellectual Property (1991) ('TPC Background Paper'), 27.
[91] Although the same practice may be undertaken using non-exclusive grant-backs, non-exclusive grant-backs will not give the licensor the same degree of market power that a licensor will gain by accumulating patent rights through exclusive grant-backs.
[92] Hovenkamp, Lemley and Janis, above n 77, 25–7.
[93] Ibid 25–9.
[94] Trade Practices Act s 51(1)(i).
[95] Sections 45, 45A and 47 are covered by the exemption, but ss 46, 48 and 50 are not.
[96] See IPCRC Report, above n 10, 207–12; National Competition Council, Review of Sections 51(2) and 51(3) of the Trade Practices Act 1974: Final Report (1999) ('NCC Report'), 193–7.
[97] See TPC Background Paper, above n 90, 12–13.
[98] Transfield Pty Ltd v Arlo International Ltd (1980) 144 CLR 83. The implications of this decision are discussed in the TPC Background Paper, ibid 12–13.
[99] IPCRC Report, above n 10, 207. In many cases, these terms would be unlikely to contravene the Trade Practices Act in any event.
[100] NCC Report, above n 96, 160–4, 166.
[101] Ibid 165–7.
[102] IPCRC Report, above n 10, 210–11.
[103] Ibid 211.
[104] The IPCRC recommended that s 51(3) be replaced with the following sub-section:
a contravention of Part IV of the Trade Practices Act, or of s 4D of that Act, shall not be taken to have been committed by reason of the imposing of conditions in a licence, or the inclusion of conditions in a contract, arrangement or understanding, that relate to the subject matter of that intellectual property statute, so long as those conditions do not result, or are not likely to result, in a substantial lessening of competition.
Ibid 213. They also recommended the expansion of s 51(3) to apply to all intellectual property statutes.
[105] NCC Report, above n 96, 190.
[106] Brent Fisse, 'Intellectual Property Rights and Competition Law' (2001), (copy on file with author) 3.
[108] Ibid 211.
>[109] OECD, Competition Policy and Intellectual Property Rights (1989) 15.
[110] See Part V, 'Reach-Through Rights and Competition Law in Australia'.
[111] Government Response to Intellectual Property and Competition Review Recommendations, Information Package available at <http://www.ipaustralia.gov.au/ pdfs/general/response1.PDF> at 31 May 2004.
[112] Ian Eagles and Louise Longdin, 'Competition in Information and Computer Technology Markets: Intellectual Property Licensing and Section 51(3) of the Trade Practices Act 1974' (2003) 3 Queensland University Journal of Technology Law and Justice Journal 28, 36-7, Fisse, above n 104.
[113] See also ibid 3–4.
[114] TPC Background Paper, above n 90.
[115] Of the categories of reach-through rights, grant-back provisions are the most likely to undermine competition by reducing incentives to innovate. Reach-through royalties are likely to make development of a downstream product unprofitable, but it is difficult to conceive of a situation where this will be anti-competitive.
[116] TPC Background Paper, above n 90, 27.
[117] Ibid.
[118] Ibid.
[119] Ibid. This is unlikely to be the case where the follow-on research is conducted on a contract basis.
[120] Ibid.
[121] Ibid. The TPC point out in the TPC Background Paper, that s 45 may be contravened where an exclusive grant-back provision substantially lessens competition, although this is unlikely to be the case where the agreement between the licensor and the licensee is a contract for the development of improvements: ibid 27.
[122] US Department of Justice and the Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property, (1995) ('US Guidelines') <http://www.usdoj.gov/atr/public/guidelines/ipguide.htm> at 27 October 2003.
[123] US Guidelines, § 2.0.
[124] Ibid § 3.1.
[125] Ibid §§ 3.4, 4.2.
[126] Ibid § 3.4.
[127] Ibid § 4.3.
[128] Ibid.
[129] See ibid §§ 3.1, 3.3, 4.1. In practice, this will not apply to companies in a horizontal competitive relationship.
[130] Ibid § 3.2.2. A technology market analysis will be used when rights to intellectual property are marketed separately from the products in which they are used.
[131] Ibid.
[132] Ibid § 3.2.3. Innovation market analysis may be used in conjunction with goods or technology market analysis.
[133] Ibid § 5.6.
[134] Ibid.
[135] Ibid.
[136] '...such as (1) promoting dissemination of licensees' improvements to the licensed technology' (2) increasing the licensors' incentives to disseminate the licensed technology, or (3) otherwise increasing competition and output in a relevant technology or innovation market.': ibid.
[137] Alan Gutterman, Innovation and Competition Policy (1997) 317–8.
[138] See, eg, Transparent-Wrap Machine Corp v Stoke & Smith Co [1947] USSC 38; 329 US 637, 72 USPQ 148 (1947), where the court treated an exclusive grant-back as part of the consideration given for the licence.
[139] Hovenkamp, Lemley and Janis, above n 77, 25–8. There is considerable case law in support of this statement. See, eg, San Marino Electronic Corp v George J Meyer Manufacturing Co 155 USPQ (BNA) 617 (CD Cal 1967) affirmed in [1970] USCA9 169; 422 F2d 1285 (9th Cir 1970).
[140] [2002] OJ C 325/65.
[141] Article 81 prohibits practices, decisions or agreements 'which have as their object or effect the prevention, restriction or distortion of competition' within the EU. Article 82 prohibits the abuse of a position of dominant market power.
[142] Commission Regulation (EC) 240/96 on the Application of Article 81(3) of the Treaty to Certain Categories of Technology Transfer Agreements [1996] OJ L 31/2 ('Regulation 240/96'). Article 81(3) provided a limited exemption from the application of Article 81, but not Article 82.
[143] See NCC Report, above n 96, 189.
[144] Commission Regulation (EC) 240/96 on the Application of Article 81(3) of the Treaty to Certain Categories of Technology Transfer Agreements [1996] OJ L 31/2, Article 7. Although use of the withdrawal power has been very limited, the threat of its use has been utilised to induce parties to change their conduct: see Anderman, above n 25, 85.
[145] Commission Regulation (EC) 240/96 on the Application of Article 81(3) of the Treaty to Certain Categories of Technology Transfer Agreements [1996] OJ L 31/2, Recital 20 and Article 2(1)(4). Article 2(1)(4) applies in respect of severable improvements, and provided the term does not require disclosure of the know-how communicated by the licensor that is still secret.
[146] Ibid Recital 20. Article 2(1)(4) implements this principle. It states that any grant-back obligation placed on the licensee must be accompanied by a provision '... that the licensor undertakes to grant an exclusive or non-exclusive licence of his own improvements to the licensee'. It has, however, been pointed out that this represents only a partial implementation of the reciprocity principle set out in Recital 20 and as such the principle has the potential to be far more wide-reaching: see Anderman, above n 25, 111–18.
[147] Commission Regulation (EC) 240/96 on the Application of Article 81(3) of the Treaty to Certain Categories of Technology Transfer Agreements [1996] OJ L 31/2, Article 3(6).
[148] See Anderman, above n 25, 118.
[149] See ibid 111–18.
[150] Commission Regulation (EC) 240/96 on the Application of Article 81(3) of the Treaty to Certain Categories of Technology Transfer Agreements [1996] OJ L 31/2, Article 2(1)(4).
[151] See Anderman, above n 25, 111–2, 115.
[152] See generally ibid 113–5, 117.
[153] See ibid 83.
[154] See Mario Monti, EU Competition Policy After May 2004 (Paper presented at the Fordham Annual Conference on International Antitrust Law and Policy, New York, 24 October 2003) <http://europa.eu.int/comm/competition/speeches/index_speeches_by_ the_commissioner.html> at 31 May 2004.
[155] Commission Evaluation Report on the Transfer of Technology Block Exemption Regulation No 240/96: Technology Transfer Agreements Under Article 81, COM (2001) 786 ('Mid-Term Report').
[156] See ibid. See also Kirtikumar Mehta and Luc Peeperkorn, Licensing of Intellectual Property Under EU Competition Rules: The Review of the Technology Transfer Block Exemption Regulation (Statement to the FTC/DOJ Hearings on Competition and Intellectual Property Law and Policy in the Knowledge-Based Economy, Washington, 22 May 2002) <http://www.ftc.gov/opp/intellect/020522mehtadoc.pdf> at 12 March 2004. See also Summary of Submissions on TTBE Review Report, Annex 1 (2002) <http://europa.eu.int/comm/competition/antitrust/technology_transfer/summary_of_ comments.pdf> at 20 January 2004.
[157] See Commission Regulation (EC) No 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements [2004] OJ L 123/11 ('Revised TTBE') and Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements [2004] OJ C 101/02 ('TTBE Guidelines'). See also 'Commission Proposes New Safe Harbour for the Licensing of Patents and Know-How', EU Press Release (3 October 2003) Stockholms Universitet <http://www.juridicum.su.se/jurweb/utbildning/ master/master_of_european_intellectual_property_law/Commissionpressroom.pdf> at 31 May 2004.
[158] See Commission Regulation (EC) No 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements [2004] OJ L 123/11.
[159] Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements [2004] OJ C 101/02.
[160] See Commission Regulation (EC) No 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements [2004] OJ L 123/11 and Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements [2004] OJ C 101/02; Monti, above n 154, 4; David Hull and Amy Toro, 'Reform of the Technology Licensing Rules' (2004) The European Antitrust Review, 34; John Ratliff, Axel Gutermuth and Rajeshree Bhojnani, European Commission Proposes New Competition Rules for Technology Licensing (2003) Wilmer Cutler Pickering Hale and Dorr LLP <http://www.wilmer.com/files/tbl_s29Publications/FileUpload5665/2904 /News_215243279180219011515101300.pdf> at 31 May 2004.
[161] Parties who are competitors will not benefit from the block exemption if their combined market share exceeds 20 per cent. Parties who are not competitors will not benefit from the block exemption if their individual market share exceeds 30 per cent. Note that this analysis applies to product markets only, and special rules apply to technology markets.
[162] Mid-Term Report, above n 153, 38.
[163] Commission Regulation (EC) No 772/2004 of 27 April 2004 on the Application of Article 81(3) of the Treaty to Categories of Technology Transfer Agreements [2004] OJ L 123/11, Articles 5(1)(a) and 5(1)(b).
[164] Relevant factors in making this evaluation include the payment of consideration in return for exclusivity, and the market position of the licensor on the technology market: see Guidelines on the Application of Article 81 of the EC Treaty to Technology Transfer Agreements [2004] OJ C 101/02, guidelines 99–102.
[165] Barton, above n 31, 461–2.
[166] Although it should be recognised that the two approaches are very different in the timing of the review of licensing arrangements, with the detailed EU approach being intended to facilitate review prior to entry into licence agreements: Gutterman, above n 137, 13. The European approach also represents an ex ante attempt to prescribe rules governing intellectual property licensing, while the US Guidelines are intended to be applied ex post: Nancy Gallini and Michael Trebilcock, 'Intellectual Property Rights and Competition Policy: A Framework for Analysis of Economic and Legal Issues' in Robert Anderson and Nancy Gallini (eds), Competition Policy and Intellectual Property Rights in the Knowledge-Based Economy (1998) 17, 21–41.
[167] See generally Hull and Toro, above n 160, 36–7.
[168] NCC Report, above n 96, 186–92.
[169] IPCRC Report, above n 10, 204–6.
[170] Indeed, intellectual property will confer market power only in rare cases: Edmund Kitch, 'Elementary and Persistent Errors in the Economic Analysis of Intellectual Property' (2000) 53 Vanderbilt Law Review 1727, 1729–39. An accumulation of intellectual property rights could, however, operate to confer market power.
[171] Gallini and Trebilcock, above n 166, 22.
[172] Federal Trade Commission, To Promote Innovation: The Proper Balance of Competition and Patent Law and Policy (2003) ch 1, 14.
[173] Ibid.
[174] See Willard Tom and Joshua Newberg, 'Antitrust and Intellectual Property: From Separate Spheres to Unified Field' (1997) 66 Antitrust Law Journal 167, 199–200.
[175] Richard Gilbert and Willard Tom, 'Is Innovation King at the Antitrust Agencies?: The Intellectual Property Guidelines Five Years Later' (2001) 69 Antitrust Law Journal 43, 83–6.
[176] James Langenfeld, 'Intellectual Property and Antitrust: Steps Toward Striking a Balance' (2001) 52 Case Western Reserve Law Review 91, 94–7.
[177] See, eg, NCC Report, above n 96, 193–9.
[178] Willard Tom and Joshua Newberg, 'US Enforcement Approaches to the Antitrust-Intellectual Property Interface' in Anderson and Gallini, above n 166, 343, 359.
[179] These arguments are summarised in Langenfeld, above n 176, 93–94. See also OECD, above n 109, 8.
[180] Langenfeld, above n 176, 93; IPCRC Report, above n 10, 210.
[181] A general analysis undertaken by Richard Gilbert and Willard Tom indicates that the US antitrust agencies have adhered to the principles espoused in the 1995 Guidelines since their inception: Gilbert and Tom, above n 175.
[182] This implication of adopting a very wide view would tend to suggest that a narrower interpretation of the amended s 51(3) is likely.
[183] See the discussion in Eagles and Longdin, above n 112, 37–40; Charles Lawson, 'Patenting Genes and Gene Sequences and Competition: Patenting at the Expense of Competition' [2002] FedLawRw 4; (2002) 30 Federal Law Review 97, 122. Note also that the ALRC has proposed that the ACCC develop guidelines on the relationship between intellectual property and competition law with particular regard to patented genetic materials and technologies: ALRC Discussion Paper, above n 11, 674.
[184] Hovenkamp, Lemley and Janis, above n 77, 25–6.
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