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Melbourne University Law Review |
DALE CLAPPERTON[∗] AND STEPHEN CORONES[†]
[Australian copyright law is poised on the brink of major change. Even before a finalised test case of the Digital Agenda Amendments, Australia had committed to a wholesale rewrite of those reforms under the Australia–United States Free Trade Agreement. This article falls broadly into two parts. Part II examines the intellectual property laws relating to digital rights management technologies. It explores the history of so-called ‘anti-circumvention’ laws nationally and internationally, as well as important precedents. Part III examines whether Australian competition law is equipped to address any anti-competitive conduct facilitated by technological protection measures, which can be used to lock in consumers and lock out competitors. Important US precedents including Lexmark International Inc v Static Control Components Inc and Chamberlain Group Inc v Skylink Technologies Inc are analysed under Australian law, both before and after the full implementation of the Australia–United States Free Trade Agreement, including an examination of relevant provisions of Part IV of the Trade Practices Act 1974 (Cth), especially the intellectual property exception in s 51(3).]
CONTENTS
The debate over the underlying policy objectives of intellectual property (‘IP’) law and competition law (and, indeed, the appropriate relationship or ‘interface’ between the two) has a long history. In the middle of the 20th century, the Austrian economist, Joseph Schumpeter, recognised the important pro-competitive effects of invention and innovation. He described competition in terms of a dynamic process of rivalry in which entrepreneurs and innovators constantly seek to discover new profit opportunities. This dynamic competition for profits produces ‘the new commodity, the new technology, the new source of supply, the new type of organisation’.[1] All firms are subject to a ‘perennial gale of creative destruction’[2] in which new markets are created and old ones are destroyed.
At the beginning of the 21st century, this process of ‘creative destruction’ has increased dramatically. Invention and innovation are increasingly driving the so-called ‘new’ economy. New and better high technology products are constantly being released in areas as diverse as entertainment, telecommunications, media, computers and health care. These new technologies displace successful incumbents. Competition in the new economy is being driven by a ‘winner takes all’ game to capture the ‘transient monopolies’ that are necessary to provide incentives to make investments.[3]
IP laws have a crucial role to play in this process as they are necessary to prevent market failure arising from ‘free-riding’ (copying by others without payment).[4] Invention and innovation have the properties of a ‘public good’: once they are in the public domain it is difficult to prevent their use by others unless they are protected by IP laws. Without some form of statutory protection there would be little or no incentive to innovate.
The exclusive property rights granted by IP statutes were once regarded with a high degree of suspicion by regulators entrusted with the enforcement of competition laws. However, their role is now better understood and they are seen, for the most part, as pro-competitive.[5]
First, IP rights provide their owners with limited monopoly rights which they themselves can exploit through manufacture and marketing or through licensing others to do so. These limited monopoly rights serve as an incentive to innovate — innovation is the process by which new products are developed based on inventions. Second, licensing is often the best way of ensuring that IP rights find their way into the hands of the most efficient producers and distributors so that the final products incorporating the IP rights can be produced and distributed most efficiently.
This article is concerned with amendments to the Copyright Act 1968 (Cth) which provide for technological protection measures (‘TPMs’). While the underlying policy objective to prevent copying can be justified as pro-competitive, we believe that TPMs may be used for anti-competitive purposes. They can deny access to copyright, as well as prevent copying, and thereby prevent interoperability with other products. In this way, markets can be protected from competition and market power can be lifted from one market to another in an anti-competitive way. This article explains how TPMs can be used in an anti-competitive manner and considers whether the competition provisions of the Trade Practices Act 1974 (Cth) (‘TPA’) are adequate to deal with the problem.
All analogue technologies, such as audio tapes, video cassette recorders (‘VCRs’), vinyl records and printed books, suffer from a common flaw — only imperfect copying of analogue material is possible. Such copying necessarily involves a loss of quality, the effect of which is cumulative — a copy of a copy of a copy of analogue material is often of such a low quality that it is unsuitable for many purposes. This effect has acted as a natural disincentive to wide scale copying of material that infringes copyright. Nevertheless, large copyright holders greeted new developments in analogue technology (including cable television, audio tapes and VCRs) with trepidation. Amid predictions of market destruction and bankruptcy in the entertainment industries, early attempts by copyright lobbyists to secure legislative protection, or to suppress new technologies through litigation,[6] typically failed.
As a result, copyright holders turned to self-help, in the form of embryonic ‘rights management’ methods more commonly known (at the time) as ‘copy-protection’. Copy-protection typically operated by attempting to degrade artificially the quality of any copies made. However, copy-protection had no legal protection and could be freely circumvented.
Digital technologies,[7] unlike analogue, allow perfect reproduction of material. In a digital environment, a copy of a copy of a copy of a copy is identical to the original, and digital information is ideally suited for transmission over long distances with no loss of quality.
In the early 1980s, the spread of digital technology into the home entertainment market caused even greater concern to copyright holders. Over time, methods of technological self-help evolved into what is now known as digital rights management (‘DRM’). Paradoxically, while the digital environment is more susceptible to infringing copying and distribution of copyright material, it also has a much greater potential to prevent such infringing activity. This is because digital technology lends itself to the creation and enforcement of sophisticated DRM systems, which, using encryption and other means, control not only potentially infringing copying of material, but also access to the material itself.
Initially, these DRM systems did not enjoy any legal status or protection. Arguing that ‘digital is different’, groups representing the interests of copyright holders lobbied at both national and international levels for legal protection of their DRM systems to prevent ‘piracy’ allegedly facilitated by the digital revolution.[8] Such lobbying was partially successful. In 1992, the United States passed the Audio Home Recording Act of 1992 (‘AHRA’),[9] which required all digital audio recording devices manufactured, imported or distributed within the United States to use a DRM system known as the ‘Serial Copy Management System’.[10] This primarily affected the then newly released DAT and minidisc formats, which, as it turned out, were less than commercially successful — possibly due in part to consumer dissatisfaction with the restrictive Serial Copy Management System they were required to contain.
In markets, DRM technology effectively creates a technology bottleneck that resembles an ‘essential facility’. By denying access to the DRM technology the owner can effectively preclude competition in dependent markets.[11] Anti-circumvention laws therefore give copyright owners the legal power to create closed technology platforms which exclude competitors from interoperating with them.
To illustrate the nature of the problem, consider that DRM technology is used in connection with music sold over the internet. The major record companies are the owners of the copyright in the music.[12] They agree to allow the music to be sold only on the condition that the downloaded music is protected by a DRM technology. The music can be played on a buyer’s PC, but only using software produced by licensees of the DRM technology. Other software will be unable to read or play the downloaded music files. Likewise, if the buyer wishes to use the songs on a portable player such as a Walkman or iPod, they can only do so using a portable player which implements the DRM technology. Competition in the downstream market for compatible portable players and PC software is precluded.[13]
DRM technology can thus be seen to lock in the consumer who downloads music under one DRM technology to using a portable player (such as an iPod) which employs a compatible DRM technology. Simultaneously, it can be seen to lock out competitors who cannot get a licence for the use of the DRM technology to produce competing compatible products.
This means that a consumer must buy a multitude of different devices, each supporting different but incompatible standards and DRM technologies, or resort to a potentially illegal circumvention of the DRM to ‘format-shift’ their legally purchased content.[14]
Taking console games platforms (such as the Sony PlayStation, or the Microsoft Xbox) as an example, it is likely that the use of DRM systems in such platforms is motivated by more than merely a desire to prevent or deter the infringement of copyright. Peter L Higgs identifies three motives:
• to prevent the unauthorised manufacture or casual duplication by others of software that the company has the rights to publish and to distribute;
• to ensure that hardware produced by the company can only run software authorised or published by the company; and
• to enforce distribution channel and format segmentation strategies.[15]
To this list can be added:
• to ensure that software designed to be used on hardware produced by the company can only be used on hardware produced by the company. This creates a platform lock-in by imposing significant ‘switching costs’ upon users — a user with a significant investment in games in a format compatible with Platform A would have to repurchase those games in a format compatible with Platform B in order to switch platforms;[16]
• to restrict or prohibit the resale or transfer of legitimately manufactured and purchased software after their initial purchase. Such controls contribute significantly to platform lock-in because they raise switching costs — if a user cannot resell or transfer their purchased software, switching platforms would require them to write off their investment in that software;
• to prevent arbitrage and facilitate geographical price discrimination — that is, selling products at different price points in different countries. Apple Computer Inc is currently under investigation by the European Commission for alleged violations of EU competition law for engaging in such conduct;[17]
• to restrict or prevent the production of ‘unauthorised’ accessories — that is, third-party add-ons or other products which must interoperate with company-produced ‘authorised’ hardware and/or software; and
• to restrict or prevent a company’s products from being serviced by ‘unauthorised’ service agents.
While the first of these motives (preventing infringing copying) is relatively uncontroversial,[18] the use of DRM to create and enforce the other controls identified above has been widely condemned,[19] and has been the subject of recent litigation in the United States.[20]
The WIPO Copyright Treaty[21] and the WIPO Performances and Phonograms Treaty[22] resulted from the 1996 World Intellectual Property Organization (‘WIPO’) Diplomatic Conference on Certain Copyright and Related Rights Questions. They took effect in 2002 after each received the required 30 country notifications.[23]
Collectively and informally known as the ‘Internet Treaties’, the WCT and WPPT constitute the first international attempt to prescribe minimum standards of legal protection for DRM technologies. Their approach differs from that of the AHRA, in that they seek to prevent the circumvention of DRM systems, not mandate the inclusion of DRM in particular classes of technology. Article 11 of the WCT provides:
Contracting Parties shall provide adequate legal protection and effective legal remedies against the circumvention of effective technological measures that are used by authors in connection with the exercise of their rights under this Treaty or the Berne Convention and that restrict acts, in respect of their works, which are not authorized by the authors concerned or permitted by law.[24]
The terms of this provision are quite broad and leave substantial latitude to states in their implementation of the provision. The term ‘effective technological measures’ is not further defined, creating some uncertainty.
Notably, the Internet Treaties only require that adequate protection and effective remedies be provided against ‘the circumvention of effective technological measures’ — that is, the act of circumvention itself. Strictly construed, the Internet Treaties do not require restrictions on devices and technology which might be used to perform the circumvention.
The US implemented art 11 of the WCT by amendments contained in Title I of the Digital Millennium Copyright Act of 1998 (‘DMCA’).[25] Subject to narrow exceptions, the amendments prohibit the circumvention of ‘a technological measure that effectively controls access to a work protected under this title’,[26] and commercial dealings with tools capable of circumventing protection measures (‘circumvention devices’).[27]
The anti-circumvention provisions of the DMCA arguably go beyond the requirements of the Internet Treaties.[28] Some commentators have suggested that US copyright lobbyists sought the implementation of a stronger level of protection in the hope that other countries would model their implementation of the Internet Treaties on the DMCA.[29]
Australia’s decision in mid-1998 to relax controls on parallel importation[30] did not go unnoticed by the US, and attracted significant criticism. Australia’s system of IP protections, which had been described by the US from 1995 to 1998 as providing, ‘[w]ith a few exceptions … world class intellectual property protection’[31] was described in 2000 as providing merely ‘[i]n general … sound intellectual property protection’.[32]
The US was also ‘concerned with the recent Australian minimalist approach towards intellectual property protection in several important areas’ and ‘made these concerns known to the Australian Government on numerous occasions.’[33]
During the 1990s, the US placed Australia on a statutory ‘watch list’ of countries with inadequate protection for IP rights in eight out of 10 years,[34] because of concerns over Australia’s plan to remove controls on parallel importation.[35]
Australia participated in the drafting of the WIPO Internet Treaties, but is not yet a signatory to them.[36] Nonetheless, the Australian Government legislated to implement the Internet Treaties to bring Australian copyright law into the 21st century and maintain the balance between the rights of copyright owners and copyright users in the digital environment.[37] The Copyright Amendment (Digital Agenda) Act 2000 (Cth) (‘Digital Agenda Amendments’) was an independent implementation of the Internet Treaties, one which adhered more closely to the letter of the Internet Treaties than the DMCA.
This departure from the ‘precedent’ of the DMCA generated significant controversy amongst copyright holders. The US reported that ‘US copyright interests have stressed deep concern about the [draft] digital agenda legislation’[38]
and that
[t]he [copyright] industry is concerned that the legislation … would allow for unfettered worldwide trafficking in devices and services aimed at hacking through encryption, password protection and other technologies copyright owners use to manage access to and use of their works.[39]
On the issue of TPMs, the House of Representatives Standing Committee on Legal and Constitutional Affairs’ Advisory Report on the Copyright Amendment (Digital Agenda) Bill 1999 observed:
At their most extreme positions, the copyright owners wish to manage all access to copyrighted material, both lawful and unlawful, apart from access for a few enumerated, legitimate purposes. Conversely, the copyright users wish to have uncontrolled access to all copyrighted material, and leave the copyright owners to obtain redress for any consequent infringement of their copyright through infringement actions.[40]
The Digital Agenda Amendments to the Copyright Act 1968 (Cth) define a ‘technological protection measure’ as:
a device or product, or a component incorporated into a process, that is designed, in the ordinary course of its operation, to prevent or inhibit the infringement of copyright in a work or other subject-matter by either or both of the following means:
(a) by ensuring that access to the work or other subject matter is available solely by use of an access code or process (including decryption, unscrambling or other transformation of the work or other subject-matter) with the authority of the owner or licensee of the copyright;
(b) through a copy control mechanism.[41]
The Act then defines a ‘circumvention device’ as:
a device (including a computer program) having only a limited commercially significant purpose or use, or no such purpose or use, other than the circumvention, or facilitating the circumvention, of an [sic] technological protection measure.[42]
Subject to narrow exceptions (which are nonetheless broader than those contained in the DMCA), the Digital Agenda Amendments prohibit a wide range of dealings with circumvention devices.[43]
However, unlike the DMCA, the amendments do not prohibit the use of a circumvention device. The Government’s rationale for banning the manufacture of, and commercial dealings with, circumvention devices (as opposed to their use) was that ‘the most significant threat to copyright owners’ rights lies in preparatory acts for circumvention, such as manufacture, importation, making available online and sale of devices, rather than individual acts of circumvention.’[44]
The exceptions allowed by the Digital Agenda Amendments do not include many existing exceptions to copyright generally, such as fair dealing, and making backup copies of computer software.
The Digital Agenda Amendments’ anti-circumvention provisions were considered by the High Court in Stevens v Kabushiki Kaisha Sony Computer Entertainment.[45]
Sony PlayStation games consoles contained a proprietary DRM system developed by Sony. Similar to the region-coding system for DVDs, PlayStations were programmed on a regional basis such that a PlayStation console in one region would not play PlayStation games from any other region. Genuine PlayStation discs contained an ‘access code’ which corresponded to the geographical area in which the disc was intended to be used. The access code was embedded in the disc in such a way that any attempt to copy the disc (that is, the PlayStation game and the associated access code) would result in the game being copied, but not the access code.
When a disc was inserted into a PlayStation console, the console checked for the presence of the access code on the disc, and unless the disc contained an access code which matched the region-coding of the console, the console would refuse to play the disc.
The effect of this system was twofold. First, copies — including backup copies legally made under Copyright Act 1968 (Cth) s 47C — of PlayStation games would not work on an unmodified PlayStation console, because they lacked the necessary access code. Second, original PlayStation games which were imported from overseas would not work on an unmodified PlayStation console, because the access code they contained was from the wrong geographical area.
Eddy Stevens sold and installed so-called ‘mod chips’ which modified PlayStation consoles so they would play games without requiring the presence of the correct access code on the disc. A group of Sony corporations filed suit against Stevens in 2001,[46] alleging inter alia that he had unlawfully sold circumvention devices contrary to s 116A of the Copyright Act 1968 (Cth).[47] Whether the mod chips were a circumvention device turned upon whether Sony’s access code DRM system was a TPM within the meaning of s 10(1) of the Copyright Act 1968 (Cth).
At first instance, Sackville J held that because the access code DRM did not prevent the making of a copy of a PlayStation game (which would infringe the copyright subsisting in the game as a computer program), but instead rendered the copy unusable on an unmodified PlayStation, the DRM was designed merely to deter or discourage the infringement of copyright in PlayStation games, not prevent it.[48] On this construction, the access code DRM system did not constitute a ‘technological protection measure’ within s 10(1) of the Copyright Act 1968 (Cth).
Sony submitted that the definition of ‘technological protection measure’ should be construed broadly so as to include a device which had the practical effect of discouraging infringement of copyright (the ‘practical effect argument’).[49] However, Sackville J ultimately adopted a narrower construction, holding that to ‘prevent or inhibit the infringement of copyright in a work’, a TPM must physically prevent acts of infringement, and that merely having a ‘general deterrent or discouraging effect’ was insufficient.[50] It followed that if the only way in which the DRM ‘inhibited’ infringement of copyright in PlayStation games was by discouraging the copying of them, the DRM system was not a TPM within the meaning of the Copyright Act 1968 (Cth).[51]
In the alternative, Sony argued that the access code DRM prevented users of an infringing copy of a game (a computer program) from reproducing a substantial part of the computer program in the random access memory (‘RAM’) of the PlayStation console by playing it (the ‘reproduction in RAM argument’).[52] This reproduction would only infringe copyright in the game if it reproduced a substantial part of the game in a ‘material form’ as defined in s 10(1) of the Copyright Act 1968 (Cth).[53]
The definition of ‘material form’, as it then stood,[54] included ‘any form (whether visible or not) of storage from which the work or adaptation, or a substantial part of the work or adaptation, can be reproduced.’[55] Sackville J held that a reproduction could only be ‘in material form’ if it was amenable to further reproduction, and that, because it was not possible to replicate the information stored in the RAM of the PlayStation console, it was not ‘in material form’. The reproduction in RAM argument therefore failed.[56]
In a late amendment to their pleadings, Sony advanced a further alternative argument: that PlayStation games embodied cinematograph films, and that their DRM prevented their infringing reproduction in the RAM of the console (the ‘cinematograph film argument’).[57] On the ‘very sketchy’[58] evidence led in support of this argument, his Honour was unable to conclude that the alleged copying constituted the making of a copy of a cinematograph film for the purposes of s 86(a) of the Copyright Act 1968 (Cth).[59]
Since Sony failed to make out any of their alternative arguments, it followed that the mod chips which Stevens was alleged to have distributed were not circumvention devices and Sony’s claim under s 116A of the Copyright Act 1968 (Cth) failed.[60]
However, Sackville J noted in obiter dicta that, on the evidence before him, if the access code DRM had been a TPM, he would have found that the mod chips were circumvention devices.[61]
Sony appealed to the Full Federal Court.[62] The decision of the Full Federal Court in July 2003, while acknowledging that the construction issue was finely balanced, and the definition ambiguous,[63] unanimously preferred a wider definition of ‘technological protection measure’ which included DRM systems that deterred or discouraged infringement.[64] French J noted that issues of competition policy had been pressed upon the Court, but considered that it was the role of Parliament to address any competition issues arising from these laws.[65]
The Full Federal Court (Finkelstein J dissenting) went on to reject Sony’s reproduction in RAM argument,[66] and rejected the cinematograph film argument.[67]
Stevens appealed to the High Court. In October 2005, the High Court unanimously agreed with the reasoning and conclusions of Sackville J and overturned the decision of the Full Federal Court.[68] Kirby J noted, in passing, that Sony’s DRM systems,
[i]n effect, and apparently intentionally … reduce global market competition. They inhibit rights ordinarily acquired by Australian owners of chattels to use and adapt the same, once acquired, to their advantage and for their use as they see fit.[69]
Kirby J found that one of the purposes of Sony’s regional access code was non-copyright related, namely, to enforce ‘global market price differentiation’.[70] His Honour went on to say that
where a choice of interpretation has to be made, the existence of the additional non-copyright purpose of enforcing global market price differentiation does constitute a reason to prefer an outcome that is consistent with the balances ordinarily inherent in copyright legislation over a result that is not.[71]
The implementation of the Digital Agenda Amendments in 2000 appears to have placated some US concerns, if only temporarily. In 2001, the Office of the United States Trade Representative (‘USTR’) reported that Australia had ‘[taken] final action to implement the 1996 WIPO Copyright and WIPO Performances and Phonograms Treaties.’[72]
In 2002, the USTR noted that Australia had ‘not ratified’ the Internet Treaties,[73] and in 2003 (after Sony’s initial defeat before the Full Federal Court) the USTR reported Australia has ‘not yet fully enacted the legislation necessary to enable Australia to accede to [the Internet Treaties]’. Further, it described the Digital Agenda Amendments as ‘a step toward aligning Australian copyright laws with the obligations imposed by [the Internet Treaties]’ but complained that it was ‘weak in its treatment of technological protection measures.’[74] At about the same time, formal negotiations for the AUSFTA[75] began.
The United States is the world’s largest producer and exporter of copyrighted materials and ‘copyright industries’ account for over five per cent of US GDP.[76] It is perhaps then not surprising that since at least the 1980s, the US has sought to impose US standards of IP protection upon all other countries by tying IP protection to issues of international trade.[77] The US pursuit of ever-increasing minimum standards of IP protection in multilateral and bilateral forums has been referred to as the ‘global ratchet for intellectual property rights.’[78]
This ‘global ratchet’ manifested itself as Chapter 17 of the AUSFTA, the largest chapter in both content and substance.[79] It requires significant amendments to Australian IP laws, perhaps most importantly by requiring Australia to abandon its independent implementation of the Internet Treaties, and instead adopt TPM protections modelled closely on the controversial US DMCA.[80]
Under the AUSFTA, the definition of ‘technological protection measure’ is expanded to ‘any technology, device, or component that, in the normal course of its operation, controls access to a protected work, performance, phonograph, or other protected subject matter, or protects any copyright.’[81]
Effectively, this amendment abolishes the critical distinction between ‘access controls’ and ‘copying controls’ (on which the decision in Stevens v Sony turned). The AUSFTA also requires Australia to widen significantly the definition of ‘circumvention device’[82] and prohibits the use of a circumvention device,[83] as opposed to prohibiting only commercial dealings with them.
During the passage of the Digital Agenda Amendments, the Australian Government committed to review the operation of the amendments within three years of commencement. Law firm, Phillips Fox, was appointed to conduct this review which commenced in April 2003, and it delivered its report in January 2004.[84] The Phillips Fox Review was conducted after the decision in Sony v Stevens (Federal Court Appeal),[85] but before the High Court overturned that decision. More importantly, the report was delivered before the AUSFTA was finalised.
The Phillips Fox Review specifically considered whether the definition of ‘technological protection measure’ achieved the objects of the Digital Agenda Amendments as expressed in the Explanatory Memorandum.[86]
In their submissions, copyright owners generally supported the interpretation given by the Full Federal Court,[87] and, in one case, even argued for a wider interpretation.[88]
The Phillips Fox Review found that it was appropriate to amend the existing definition of ‘technological protection measure’ to resolve the uncertainty created by Sony v Stevens (Federal Court Appeal).[89]
To better meet the objectives of the Digital Agenda Amendments, and to create a more appropriate balance between the rights of copyright holders and users of copyright material,[90] the Phillips Fox Review also recommended that:
• the definition of ‘technological protection measure’ be amended so as to accord with the interpretation favoured by Sackville J in Sony v Stevens (First Instance);
• the exceptions to the prohibitions on dealing with circumvention devices[91] be broadened to allow for the supply or use of a circumvention device for any use or exception allowed under the Copyright Act 1968 (Cth), including fair dealing and access to a legitimately acquired ‘non-pirated’ product; and
• the use of circumvention devices be otherwise prohibited.[92]
These recommendations are inconsistent with the AUSFTA, and in fact represent almost a complete reversal of its position. The Government did not formally respond to the Phillips Fox Review until May 2006 (a delay of over two years), and even then did not address the merits of the recommendations or the reasons for their rejection, stating only that they had been ‘superseded’ by the AUSFTA obligations.[93]
The main proponents of the copyright provisions of the AUSFTA were the major content providers and owners of copyright material operating in publishing, music, film and computer software, supported by copyright collecting societies and industry think tank organisations such as the Australian Copyright Council.[94]
These organisations represent the same interest groups who had substantial influence in the negotiation stages of the AUSFTA. One commentator remarked on the process of developing the AUSFTA:
While there was a space made for US government and particular global owner interests to assert their preferences, there was no corresponding respect for unwelcome Australian perspectives from civil society interest groups like the Electronic Frontiers Australia, Australian Digital Alliance, Australian Library and Information Association, local free software and open source advocates, IP academics, or even passing reference to the findings of the government’s own IP expert committees.[95]
Another noted that the IP chapter ‘gives all the appearance of a United States shopping list.’[96]
Reaction from the public and consumers of copyright material was uniformly negative. Electronic Frontiers Australia Inc opposed the IP chapter in its entirety, noting that the ‘proposed circumvention device bans are overly strict and have more potential to be used as weapons against competition and innovation than for it.’[97] Linux Australia criticised the anti-circumvention provisions as overly broad, with exceptions which were restrictive and unclear.[98] The Australian Consumers’ Association felt that
the prohibitions in the [Digital Agenda Amendments] currently go too far and extending such measures would intrude into consumers’ lives excessively, particularly given the unresolved and potentially very broad definition of Technological Protection Measures (TPM).[99]
The Australian Vice-Chancellors’ Committee said the AUSFTA was ‘very much pitched at the interests of copyright holders at the expense of users to such an extent that it alters [the balance of copyright] very much in favour of owners.’[100]
The Joint Standing Committee on Treaties (‘JSCOT’) reviewed the AUSFTA, and, while they recommended the adoption of the AUSFTA, JSCOT made a number of recommendations concerning the IP chapter to address what they perceived as imbalances which the AUSFTA would create. JSCOT’s recommendations included that:
• the Australian fair dealing exception to copyright be replaced with an open-ended exception modelled on the US ‘fair use’ defence;[101]
• the standard of originality required to obtain copyright protection be reviewed, with a view to adopting a higher standard such as that in the US;[102] and
• the Australian Government ensure that exceptions will be available to allow for the use of parallel imported material and equipment.[103]
The Government has not formally responded to these recommendations.
A Senate Select Committee then reviewed the AUSFTA, and its implementing legislation. The negotiation of the IP chapter has been characterised as a ‘failure of sound and transparent policy making’ which was ‘far too detailed and will seriously hinder future IP policy making.’[104]
The recommendations of Labor senators on the Senate Select Committee concurred with this assessment, stating their concern that
Australia entered into the Intellectual Property (IP) obligations of [the AUSFTA] in a manner that cut across established processes for copyright law reform and which did not appear to be part of a strategic vision of intellectual property.[105]
They went on to make 13 recommendations relating to IP, including recommendations on fair use, the requisite standard of originality and parallel importation, which echoed the recommendation of the JSCOT report.[106] Like the recommendations made by the JSCOT report, the recommendations of the Labor senators were not taken up by the Government. Australia has until 1 January 2007 to implement its TPM obligations under the AUSFTA.[107]
While Australia has had only one case considering its anti-circumvention laws, companies in the US were quick to embrace the equivalent provisions of the DMCA.[108] Many of these cases were not brought by copyright holders to enjoin ‘piracy’ of their digital works, but were instead arguably abuses of the law, brought to suppress lawful competition within markets.
Chamberlain Group Inc (‘Chamberlain’) manufactured and sold garage door openers and wireless remote controls compatible with both their own garage door openers and those produced by other manufacturers (‘universal transmitters’).[109] Skylink Technologies Inc (‘Skylink’) also manufactured and sold universal transmitters, and was Chamberlain’s only significant competitor in the market for universal transmitters.[110]
Chamberlain developed a new model of garage door opener, which used a copyrighted ‘rolling code’ computer program to operate the garage door openers, purportedly as a security measure.[111] Users of this newer model garage door opener, incorporating the rolling code protection, were unable to use transmitters produced by companies other than Chamberlain. Skylink then began selling a new model of their universal transmitter, which, although it did not incorporate Chamberlain’s rolling code protection, could ‘trick’ Chamberlain’s newer garage door openers into operating.[112]
Chamberlain sued Skylink, claiming inter alia that both Chamberlain’s garage door openers and transmitters contained computer programs protected by copyright, that the rolling code system was a TPM which controlled access to those programs, and that Skylink’s universal transmitter was a circumvention device.[113] Chamberlain’s motion for summary judgment on the DMCA claims was denied because of disputes of material fact, including whether Chamberlain’s rolling code software was a work protected by copyright.[114] The United States District Court invited Skylink to file its own motion for summary judgment, seeking dismissal of the DMCA claims against them.[115] This motion was later granted, with the Court holding that:
• the burden of proof fell on Chamberlain to establish that Skylink circumvented a TPM (not, as Chamberlain argued, that Skylink must prove that it was authorised to circumvent the TPM);[116] and
• Chamberlain never explicitly or implicitly restricted purchasers of their garage door openers from using universal transmitters produced by companies other than Chamberlain.[117]
The Court also observed that purchasers of Chamberlain’s garage door openers have a reasonable expectation that they can replace their original Chamberlain transmitter with a competing universal transmitter without violating federal law.[118]
Chamberlain appealed against the dismissal of their DMCA claims to the Court of Appeals for the Federal Circuit. The Court of Appeals noted an underlying premise that
copyright laws authorize members of the public to access a work, but not to copy it. The law therefore places the burden of proof on the party attempting to establish that the circumstances of its case deviate from these normal expectations; defendants must prove authorized copying and plaintiffs must prove unauthorized access.[119]
The Court rejected the notion of an implied prohibition on access emanating merely from a lack of explicit authorisation.[120] It noted that adopting Chamberlain’s construction of the DMCA would ‘grant manufacturers broad exemptions from both the antitrust laws and the doctrine of copyright misuse’[121] and ‘allow virtually any company to attempt to leverage its sales into aftermarket monopolies.’[122] Moreover, the Court found that the DMCA did not create a new de facto exclusive right of a copyright holder to regulate access to works protected by copyright (as Chamberlain in effect argued)[123] but, rather, that it merely prohibited ‘forms of access that bear a reasonable relationship to the protections that the Copyright Act otherwise affords copyright owners.’[124]
The Court of Appeals concluded that on its proper construction, the circumvention device prohibition in § 1201(a)(2) requires:
(1) ownership of a valid copyright on a work, (2) effectively controlled by a technological measure, which has been circumvented, (3) that third parties can now access, (4) without authorization, in a manner that (5) infringes or facilitates infringing a right protected by the Copyright Act, because of a product that (6) the defendant either (i) designed or produced primarily for circumvention; (ii) made available despite only limited commercial significance other than circumvention; or (iii) marketed for use in circumvention of the controlling technological measure.[125]
Since Chamberlain had not shown a lack of authorisation,[126] as required by the fourth element, or the ‘critical nexus between access and protection’ required by the fifth element,[127] Skylink was entitled to summary judgment and the Court of Appeals affirmed the decision of the lower court.
It should also be noted that, had Chamberlain’s DMCA claims gone to trial, they may have been unable to establish a valid copyright on their rolling code software,[128]
which would have also defeated their claim. For the purposes of Skylink’s motion for summary judgment, it was assumed that a valid copyright existed and this issue was not further explored. Most importantly, the Court of Appeals in this case limited the scope of the DMCA, by requiring a link to an actual or potential infringement of copyright (not merely the doing of an act which the copyright holder seeks to prohibit). Such a link is not required on the face of the law.
Many printer manufacturers sell their printers cheaply, and make most of their profits by charging a substantial mark-up on consumables (such as ink and toner cartridges used by their printers). This represents a modern adaptation of the classical business model of giving away razors and charging for the blades.
Lexmark International Inc (‘Lexmark’) was a major manufacturer of inkjet and laser printers, and ink and toner cartridges for those printers. New ‘genuine’ toner cartridges for laser printers were expensive and a secondary market had developed for refurbished or ‘remanufactured’ toner cartridges — that is, used genuine cartridges which have been cleaned, repaired and refilled with toner.
Lexmark adopted a policy of selling new toner cartridges under two different models. ‘Prebate’ cartridges were sold at a discounted price, but purported to impose a contractual obligation on the purchaser (by means of a ‘shrink-wrap’ agreement on the packaging) to use the cartridge only once, and then return the empty cartridge to Lexmark.[129] ‘Non-prebate’ cartridges were sold without the discount and without the limitation on reuse and return.[130] Both types of toner cartridge contained a microchip which communicated with the printer, for functions such as reporting the amount of toner remaining in the cartridge.[131] The microchip also performed an authentication ‘handshake’ with the printer, designed to prevent the printer from operating with toner cartridges produced by anyone other than Lexmark.[132] The authentication process would also prevent a prebate cartridge from operating if it had been refilled by anyone other than Lexmark or their authorised agents.[133]
Static Control Components Inc (‘SCC’) produced a range of technology products, including products used in the remanufacturing of inkjet and toner cartridges produced by Lexmark and other companies. One of these products, the ‘SMARTEK’ chip, was a replacement for the microchip in Lexmark toner cartridges. It allowed prebate cartridges with the replacement SMARTEK chip to be refilled by companies other than Lexmark or their authorised agents and still be used with Lexmark printers.[134] These remanufactured cartridges were then sold to consumers as a low cost alternative to the new Lexmark cartridges.[135] The SMARTEK chip contained a verbatim copy of a tiny piece of software in the Lexmark chip, known as the Toner Loading Program (‘TLP’).[136]
Lexmark sued SCC, claiming that:
1 SCC’s reproduction of the TLP on their SMARTEK chip was a violation of copyright;
2 SCC violated the DMCA by selling a product that circumvents access controls on the TLP; and
3 SCC violated the DMCA by selling a product that circumvents access controls on the software located within the printer (the ‘Printer Engine Program’).
Following an evidentiary hearing, the District Court decided that Lexmark had shown a likelihood of success on each claim and entered a preliminary injunction against SCC.[137] SCC appealed that decision to the Court of Appeals for the Sixth Circuit.
First, the Court of Appeals considered whether the TLP was copyrightable. Under US law, copyright protection only extends to the original expression of an idea, as opposed to the underlying idea itself, or to the functional or factual aspects of the work.[138] Copyright protection does not extend to ‘any idea, procedure, process, system, method of operation, concept, principle or discovery, regardless of [its] form.’[139]
In the Court’s opinion, ‘[g]enerally speaking, “lock-out” codes fall on the functional-idea rather than the original-expression side of the copyright line’ and that ‘[t]o the extent compatibility requires that a particular code sequence be included in the component device to permit its use, the merger and scenes a faire doctrines generally preclude the code sequence from obtaining copyright protection’,[140] citing authorities involving interoperability issues in the context of computer games.[141]
The Court held that, as functionality and efficiency constraints precluded any material changes to the TLP,[142] and because it was almost impossible to change the TLP without breaking the authentication handshake,[143] the TLP functioned as a lock-out code and was not copyrightable. Therefore, Lexmark’s copyright infringement claim was dismissed.
This finding rendered moot a fair use defence which was raised by SCC and rejected by the District Court. However the Court of Appeals chose to comment on the lower court’s reasoning in rejecting that defence.[144] The fair use defence comprises a four-factor test:
1 the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
2 the nature of the copyrighted work;
3 the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
4 the effect of the use upon the potential market for or value of the copyrighted work.[145]
The District Court had held that the first, third and fourth factors weighed heavily in favour of Lexmark, and that the second favoured SCC only slightly.[146] The Court of Appeals disagreed with the lower court’s reasoning on the first and fourth elements. While acknowledging that a profit-making purpose generally militates against a finding of fair use,[147] it is not the case that any profit-making purpose weighs against fair use, as the crux of this factor ‘is not whether the sole motive of the use is monetary gain’ — the question is whether ‘the user stands to profit from exploitation of the copyrighted material without paying the customary price.’[148] The Court of Appeals held that, on the evidence before it, it was far from clear that SCC had copied the TLP to exploit the TLP itself, preferring the view that SCC had copied the TLP merely to permit refilled prebate cartridges to function with Lexmark’s printers.[149]
On the fourth factor, the Court of Appeals held that the lower court had erred in considering the effect of SCC’s copying on the market for toner cartridges and should have instead considered the effect on the market for the copyrighted work — that is, the market for TLPs.[150] Any harm to Lexmark’s market for toner cartridges or prebate programme was not relevant as ‘that is not the sort of market or value that copyright law protects.’[151]
Lexmark’s DMCA claims fared no better than their copyright claim. The Printer Engine Program software resides in the unprotected, unencrypted memory of the laser printer, and can be freely copied from that memory.[152] The DMCA requires that a technical measure must effectively control access[153] and does ‘not extend to a technological measure that restricts one form of access but leaves another route wide open.’[154] Their DMCA claim relating to protection of the Printer Engine Program failed for this reason.
The DMCA claim concerning protection of the TLP failed because the SMARTEK chip did not provide ‘access’ to the TLP; rather it was a replacement for the TLP.[155]
As Lexmark failed to establish a likelihood of success on any of its claims, the Court of Appeals vacated the preliminary injunction against SCC and remanded the case to the District Court for further proceedings.[156]
In effect, the object of Lexmark’s DMCA claims was not to prevent infringement of their copyrighted work — it was to prevent competitors from supplying cheaper cartridges for use with Lexmark’s printers.
Tape silos are large and expensive devices used by computer systems and servers to store massive amounts of computer data. They are typically used in large corporate environments such as banks and telecommunications carriers to support the operation of mission-critical computer systems such as mainframe computers. The reliability and constant availability of these silo systems are critical for the businesses that employ them. Tape silo failures are extremely destructive and costly, and there is a significant market for the service and maintenance of the silos.
StorageTek produced and sold tape silos, and also provided maintenance services and parts for their silos. StorageTek silos operated using computer software contained within them, which was divided into software that operated the silo system (‘Functional Code’) and software for the maintenance of the system (‘Maintenance Code’).[157] The Maintenance Code, if activated, produced error messages (‘fault symptom codes’) concerning the operation of the silos which were necessary to diagnose faults with the silos and properly service them. When StorageTek sold a silo, it contained both the Functional Code and the Maintenance Code, but the customer was only licensed to use the Functional Code. Although both types of code were loaded into memory when a silo booted, the Maintenance Code was normally disabled and could only be enabled or activated by use of a special password used with a proprietary algorithm called ‘GetKey’.
Custom Hardware Engineering & Consulting Inc (‘CHE’) was an independent business that repaired tape silos produced by StorageTek. In order to diagnose problems with the silos, CHE would circumvent the GetKey password system to enable the Maintenance Code and intercept and interpret the fault symptom codes produced by it. As part of this process, CHE would reboot the tape silos, causing both the Functional Code and Maintenance Code to be copied into the memory of the silo.
StorageTek sued CHE, alleging inter alia that by rebooting the silos and causing the Maintenance Code to be copied into the memory as a normal part of the booting process, CHE had infringed StorageTek’s copyright in the Maintenance Code. StorageTek further alleged that CHE’s circumvention of the GetKey password system to activate the Maintenance Code violated the DMCA. CHE counterclaimed, alleging inter alia that StorageTek had engaged in illegal monopolisation and tying under §§ 1–2 of the Sherman Act.[158]
StorageTek sought a preliminary injunction to restrain CHE from circumventing GetKey and using the Maintenance Code to diagnose faults with the tape silos. CHE relied on several defences to StorageTek’s claims, including a specific exception in the US DMCA to facilitate the repair and maintenance of computer systems.[159]
This exception, set out in 17 USC § 117(c) (1998), provides that:
it is not an infringement for the owner or lessee of a machine to make or authorize the making of a copy of a computer program if such copy is made solely by virtue of the activation of a machine that lawfully contains an authorized copy of the computer program, for purposes only of maintenance or repair of that machine, if —
(1) such new copy is used in no other manner and is destroyed immediately after the maintenance or repair is completed; and
(2) with respect to any computer program or part thereof that is not necessary for that machine to be activated, such program or part thereof is not accessed or used other than to make such new copy by virtue of the activation of the machine.
CHE argued many other defences, including that they enjoyed the benefits of their customers’ licences to copy the code into memory in order to activate the tape silos, and that their copying was fair use.
The District Court characterised CHE’s conduct as free-riding on StorageTek’s investment in producing the Maintenance Code[160] and, finding that StorageTek had demonstrated a substantial likelihood of success, granted a preliminary injunction.[161] CHE appealed from that decision to the United States Court of Appeals.
The Court of Appeals held that the District Court had misconstrued the § 117(c) exception[162] by focusing on the purpose of ‘repair’ while ignoring the wider definition of ‘maintenance’ within the statute.[163] The Court noted that the extrinsic materials supported a reading of ‘maintenance’ which encompassed the ongoing monitoring of systems for problems, and the policy underlying § 117(c) was ‘to ensure that independent service organizations do not inadvertently become liable for copyright infringement merely because they have turned on a machine in order to service its hardware components.’[164]
The Court concluded that CHE was likely to succeed on the § 117(c) defence. The Court also held that CHE was likely to succeed on their argument that, as an agent of the silo owner, it was protected by the silo owner’s licence to copy the software to boot the silo.[165]
Turning to the DMCA claims, the Court held that under the reasoning in Chamberlain, to the extent CHE’s activities did not constitute copyright infringement, StorageTek could not maintain an action under the DMCA.[166] As in Chamberlain, there was not a sufficient nexus between the circumvention complained of and the rights protected by copyright law.[167]
After disposing of a related trade secret issue, the Court of Appeals concluded that the District Court had erred in law when considering StorageTek’s copyright and DMCA claims, and that it had overlooked material factors in its analysis of the DMCA and trade secret claims.[168] Furthermore, the Court of Appeals held that the District Court had abused its discretion in granting the preliminary injunction, which was vacated, and remanded the case for further proceedings.[169]
The District Court later granted summary judgment to CHE on the copyright and DMCA claims against them.[170]
Davidson & Associates Inc, trading as Blizzard Entertainment (‘Blizzard’), created and sold computer games. Many of these games could be played against other players over the internet, using a service supplied by Blizzard known as ‘Battle.net’. When a user connected to the Battle.net service, Battle.net would carry out a ‘secret handshake’ with the user’s game, performing certain checks in an attempt to prevent the use of infringing copies of the Blizzard games with the Battle.net service.
For various reasons, many users of the Battle.net service became dissatisfied with the quality and reliability of Battle.net, and sought to develop an alternative service. Tim Jung and others collaborated to develop an open-source software project named ‘bnetd’ which interoperated with the Blizzard games and offered online gaming functionality similar to the Battle.net service. By necessity, the developers of bnetd used reverse engineering techniques to obtain information necessary to produce the bnetd software. However, as the bnetd developers did not have access to the information necessary to emulate the secret handshake and perform the anti-infringement tests, the bnetd software omitted these tests, consequentially allowing the use of potentially infringing copies of games with the bnetd software.
Blizzard sued Jung and other parties involved with the bnetd project, claiming inter alia that they had infringed Blizzard trademarks and copyrights, breached the End User Licence Agreements (‘EULA’) under which the games were published, breached the Battle.net terms of use (‘TOU’), and that bnetd was a circumvention device.
Early in the case, the District Court entered a consent decree which resolved many of the claims made against the defendants. In the consent decree, the defendants agreed that they had incorporated copyrighted materials created by Blizzard into the bnetd software without authorisation. The parties agreed that the remaining claims, including breach of the EULA and TOU, and the DMCA claims, would be resolved by the Court on the parties’ existing motions for summary judgment.[171]
The TOU provided inter alia that users of the games must not ‘reverse engineer … disassemble or de-compile in whole or in part any Battle.net software’, ‘host or provide [online gaming services] for any Blizzard software programs or emulate or redirect the communication protocols used by Blizzard as part of Battle.net’ or ‘use Blizzard’s intellectual property rights contained in Battle.net to create or provide any other means through which Blizzard entertainment software products … may be played by others, including, not limited to, server emulators.’[172] The EULA also contained a prohibition on reverse engineering.[173]
Although it is well-established that reverse engineering of computer software can be protected as fair use,[174] US courts have held that reverse engineering can be prohibited by contract.[175] Since the defendants had previously agreed to the ‘click-wrap’ EULA and TOU agreements which prohibited reverse engineering, the District Court held they had waived their fair use right to reverse-engineer the software.[176] The Court also held that because bnetd circumvented the Battle.net secret handshake, it was a circumvention device within the meaning of the DMCA and that the reverse engineering exception in the DMCA did not apply.[177]
The defendants appealed from this decision to the US Court of Appeals for the Eighth Circuit, which affirmed the decision of the District Court.[178]
US copyright law differs from that of Australia in a number of important respects. In our opinion, divergence will continue even after the AUSFTA is fully implemented. Many of these differences will be problematic for producers of interoperable products. In this section, we consider the IP law issues raised in the US cases considered in the preceding section and how those issues would be dealt with under Australian copyright law.
As the decision of the Court of Appeals in Lexmark demonstrates, US copyright law protects only works with a ‘creative spark’ or ‘minimal degree of creativity’[179] and will not protect the functional aspects of computer software. Well-established doctrines of merger[180] and scenes à faire[181] are ‘staples of copyright law’ used to ascertain the ‘elusive boundary line’ between idea and expression.[182]
The threshold for obtaining copyright protection in Australia is significantly lower: it merely requires ‘labour and expense’ or ‘industrious collection’.[183] As an example, compilations of factual information such as telephone directories are protected by copyright in Australia,[184] but not in the United States.[185]
The Copyright Act 1968 (Cth) defines ‘computer program’ as ‘a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result’[186] and computer programs are protected as literary works.[187]
As applied to computer software, the High Court of Australia held that the verbatim copying of 127 bits[188] of computer data — an amount less than half the size of the Lexmark TLP — infringed the copyright which subsisted in the program from which it was copied.[189] Under Australian law, it is highly likely that the TLP at issue in Lexmark would be protected by copyright. By reproducing the TLP, SCC would have infringed Lexmark’s copyright in the program, unless a defence was available to them.
The Digital Agenda Amendments, the DMCA, and the AUSFTA all require that a TPM must protect a work in which copyright subsists. Subtle differences in the scope of copyright protection for computer code (especially functional codes used to facilitate technological lock-outs) will be critical in determining the legality of steps taken to create interoperable products.
The copyright exception for ‘fair use’ copying which exists in the United States has no exact equivalent under Australian law. Fair use is an ‘open-ended’ defence, and as seen in the decision of the Court of Appeals in Lexmark, although a commercial or profit-making purpose weighs against the application of a fair use defence, it does not preclude it completely.[190]
Australian copyright law instead recognises a purpose-based ‘fair dealing’ exception, permitting limited copying only for the purposes of:
1 research or study;[191]
2 criticism or review;[192]
3 news reporting;[193] and
4 judicial proceedings or obtaining legal advice.[194]
Any copying other than for these purposes (for example, for commercial purposes, or for reverse engineering to produce interoperable products) cannot fall within the fair dealing exception, and a defendant would have to rely on a more specific exception such as that in s 47D of the Copyright Act 1968 (Cth).
In the United States, reverse engineering to produce interoperable products has been held to be fair use,[195] but is not otherwise specifically protected at law. In Australia, s 47D of the Copyright Act 1968 (Cth) provides:
(1) Subject to this Division, the copyright in a literary work that is a computer program is not infringed by the making of a reproduction or adaptation of the work if:
(a) the reproduction or adaptation is made by, or on behalf of, the owner or licensee of the copy of the program (the original program) used for making the reproduction or adaptation; and
(b) the reproduction or adaptation is made for the purpose of obtaining information necessary to enable the owner or licensee, or a person acting on behalf of the owner or licensee, to make independently another program (the new program), or an article, to connect to and be used together with, or otherwise to interoperate with, the original program or any other program; and
(c) the reproduction or adaptation is made only to the extent reasonably necessary to obtain the information referred to in paragraph (b); and
(d) to the extent that the new program reproduces or adapts the original program, it does so only to the extent necessary to enable the new program to connect to and be used together with, or otherwise to interoperate with, the original program or the other program; and
(e) the information referred to in paragraph (b) is not readily available to the owner or licensee from another source when the reproduction or adaptation is made.[196]
This exception was inserted by the Copyright Amendment (Computer Programs) Act 1999 (Cth) and has yet to be judicially considered. However, it is doubtful whether the conduct of SCC in Lexmark would benefit from this section.
On the other hand, it could be argued that SCC’s verbatim reproduction of the TLP in their SMARTEK chips was ‘to make independently another … article [the SMARTEK chips], to connect to and be used together with, or otherwise to interoperate with … any other program [the software in the Lexmark printers].’[197] The requirement that the reproduction be made ‘for the purpose of obtaining information’[198] may be more problematic. It could perhaps be argued that in Lexmark, the ‘information necessary’ was the TLP itself.
We consider that s 47D, read as a whole, deals with copying and adaptation by way of reverse engineering and would not extend to a verbatim reproduction of the original, even where it was the only way to achieve interoperability. Although the title of the provision, ‘Reproducing Computer Programs To Make Interoperable Products’, may support a wider construction, the extrinsic materials do not.
The Explanatory Memorandum for the Copyright Amendment (Computer Programs) Bill 1999 (Cth) states that:
New s 47D exempts from infringement the reproduction of a program in the course of finding out how it interfaces with other programs, if done for the purpose of independently creating an [sic] interoperable software or other product and if the information is not already available.[199]
The Second Reading Speech talks of the need for an exception to ensure that ‘decompilation’ (a technical process often used in reverse engineering computer software) to create interoperable products is permitted, and the Minister responsible stated that:
the change to allow decompilation in the circumstances I have described will ensure that only interface information may be discovered and that this information may be used only for the purpose of making an interoperable product. This limited sanctioning of decompilation will not weaken the existing proscription of software piracy.[200]
The s 47D exception would seem to be confined to copying necessary for reverse engineering and would not extend to verbatim copying of original software, even where this is the only way to achieve interoperability. By the use of check sums, digital signatures or other authentication mechanisms, companies could exploit this shortcoming of the exception. By following Lexmark’s approach and essentially making their software ‘reverse engineering-proof’, companies might be able to preclude competitors from developing interoperable products.
Section 47H provides that certain exceptions (including the reverse engineering exception in s 47D) cannot be excluded or limited by agreement.[201] This protection is essential, as almost every licence agreement or EULA for commercial technology products purports to prohibit reverse engineering, which would render the s 47D exception essentially ineffective — as was clearly demonstrated in the bnetd Case.[202]
This is one of the few areas where Australian copyright law is more conducive to the production of interoperable technology products than US law.
Some licence agreements purport to restrict the use of competing products or services. For example, the Apple iTunes Music Store terms of service provide that the user ‘will not access the Service by any means other than through software that is provided by iTunes for accessing the Service’ and requires the use of ‘authorised’ digital player devices.[203]
If these terms ‘exclude or limit, or have the effect of excluding or limiting’ the operation of s 47D, they would have no effect, under s 47H, against a person undertaking reverse engineering to produce an interoperable product. However, these terms would be binding on users of the original product, who wished to use the competing interoperable product. Although s 47H protects the producers of interoperable products, it fails to protect the users of such products. The inclusion of such contractual conditions may constitute exclusive dealing under s 47(2) of the TPA, and will be examined later in this article.[204]
As the law currently stands,[205] while commercial dealings with circumvention devices are prohibited,[206] the use of circumvention devices and the actual circumvention of TPMs are not prohibited. The implementation of the remaining anti-circumvention provisions of the AUSFTA will change this situation by 1 January 2007,[207] but an exception may be available for
non-infringing reverse engineering activities with regard to a lawfully obtained copy of a computer program, carried out in good faith with respect to particular elements of that computer program that have not been readily available to the person engaged in those activities, for the sole purpose of achieving interoperability of an independently created computer program with other programs.[208]
The legislation implementing these provisions of the AUSFTA has not yet been released.
Under the Digital Agenda Amendments, a ‘circumvention device’ is defined as:
a device (including a computer program) having only a limited commercially significant purpose or use, or no such purpose or use, other than the circumvention, or facilitating the circumvention, of an [sic] technological protection measure.[209]
Whether any given interoperable product falls within this definition is a question of fact and will depend on the nature and purpose of the product itself. It is likely that products whose main purpose is bypassing a TPM to facilitate interoperability (such as copying TPM-protected Apple iTunes music to a non-Apple portable player) will be found to be a circumvention device.
Additionally, because the definition tests for a ‘commercially significant purpose or use,’ there is a risk to products, such as open-source computer software, which are distributed for free or on non-commercial terms. It may be that any open-source software which circumvents a TPM will be prohibited as a circumvention device for this reason.
While the AUSFTA does not use the term ‘circumvention device’, its equivalent provisions deal with devices (including software) or services that:
(A) are promoted, advertised, or marketed for the purpose of circumvention of any effective technological measure;
(B) have only a limited commercially significant purpose or use other than to circumvent any effective technological measure; or
(C) are primarily designed, produced, or performed for the purpose of enabling or facilitating the circumvention of any effective technological measure.[210]
The scope of these provisions is considerably wider than the definition of ‘circumvention device’ under the current Copyright Act 1968 (Cth). An interoperable product would not currently be a circumvention device if it has a commercially significant purpose or use other than circumvention of a TPM.
Under the AUSFTA, the same product might be a circumvention device merely because it was ‘promoted, advertised, or marketed’ for the purpose of circumvention, or designed or produced to facilitate circumvention.
A literal reading of the AUSFTA would require that any device advertised for the purpose of circumvention be prohibited as a circumvention device, even where the device is not, in fact, capable of circumventing a TPM.
Under the Digital Agenda Amendments, circumvention devices may only be made or imported:
(a) for use only for a permitted purpose relating to a work or other subject-matter that is not readily available in a form that is not protected by a technological protection measure; or
(b) for the purpose of enabling a person to supply the device, or to supply a circumvention service, for use only for a permitted purpose.[211]
A circumvention device is taken to be used for a permitted purpose only if:
(a) the device … is used for the purpose of doing an act comprised in the copyright in a work or other subject-matter; and
(b) the doing of the act is not an infringement of the copyright in the work or other subject matter under section 47(D) …[212]
It seems then that a circumvention device may be lawfully made or imported to facilitate any reverse engineering necessary to produce interoperable products under s 47D, but cannot otherwise be lawfully made or imported to achieve interoperability by circumventing a TPM.
Circumvention devices may only be supplied to a person who is a ‘qualified person’, and if that person gives the supplier a lengthy declaration containing their name, address and justification for obtaining the device.[213]
‘Qualified person’, in the context of the production of interoperable products, means a person referred to in s 47D(1)(a) — that is, the owner or licensee, or their agent, of a copy of the original computer software, who performs the reverse engineering permitted by that section.[214]
Like the exceptions for making and importing circumvention devices, the exceptions for supplying circumvention devices facilitate the making of interoperable products. However, if the interoperable products themselves constitute a circumvention device, they do not allow the supply of those products.
Unlike the reverse engineering exception in s 47D of the Copyright Act 1968 (Cth), the exceptions in s 116A, allowing the making, importation and supply of circumvention devices, are not protected by a provision analogous to s 47F. The effect of this is that a contractual prohibition on the making, importation or supply of circumvention devices will be effective, at least to the extent that it does not have the ‘effect of excluding or limiting’ an exception relating to computer software protected by s 47H.[215]
Australian copyright law currently provides some exceptions to facilitate the production of interoperable products. However, these exceptions are very narrow and have not yet been judicially considered. At least some conduct identified in overseas precedents (for example, Lexmark) would seem to fall outside these exceptions.
The exceptions allow circumvention devices to be used to create interoperable products but, as a practical matter, do not allow interoperable products to be circumvention devices. Under the current law, care must be taken to give interoperable products a commercially significant purpose or use other than circumventing a TPM. Once implemented, the AUSFTA will impose an even greater constraint, including constraints on the marketing, advertising and design of interoperable products.
Anti-circumvention laws protect copyrighted material from infringement — anti-circumvention laws by design, copyright law as a result of a degree of judicial restraint in interpreting the relevant legislation. The scope of copyright protection, and the available defences and exceptions to infringement, will therefore define the overall scope of anti-circumvention protection.
The US has a high standard of originality, limited protection for functional computer software and a broad fair use defence. There is a very real danger that an anti-circumvention law which acts as an infringement control in the US will act as an access control if introduced into a jurisdiction with a low standard of originality and limited defences, such as Australia. The devil is well and truly in the detail, and much will depend on the exact wording of the legislation which will implement the AUSFTA-mandated changes.
In this Part, we examine the competition law issues raised by the US cases canvassed in Part II(E) and consider how they would be dealt with under Australian competition law. Lexmark and Chamberlain demonstrate that DRM technology is being used (or misused) by companies — not to protect their IP rights, but in an attempt to hinder or preclude competition in aftermarkets. Owners of DRM technology can unilaterally refuse to license the technology to companies seeking to develop competing products. Such conduct could be challenged under Part IV of the TPA.
Not all practices facilitated by DRM are anti-competitive. DRM is used to enforce region-coding systems for the distribution of DVDs and PlayStation games. Region-coding facilitates geographic price discrimination, but price discrimination is common in industries with high fixed costs and low marginal costs, such as the production of motion pictures and computer software. Such discrimination can be economically efficient, and while it may be unpopular with consumers who are forced to pay higher prices, it is not prohibited as such under the TPA.
However, DRM can undermine competition. Part II(F)(3)–(10) discussed in depth how anti-circumvention laws can inhibit the development and sale of interoperable products where such products must circumvent a TPM in order to function.
The use of region-coding is another example of DRM undermining competition in the free market.[216] Copyright holders have zealously guarded their exclusive right to control importation of copyright material.[217]
The Australian Government in the late 1990s decided on policy grounds to remove those rights for most categories of material.[218]
The use of DRM and region-coding by copyright holders amounts to a de facto reintroduction of these rights, allowing copyright holders to eliminate arbitrage and charge monopoly prices in each discrete country. The copyright holders have used DRM technology to circumvent the Government’s policy to allow parallel importation of many types of material. The Government has responded to this by announcing that they will remove anti-circumvention protection from DRM that enforces geographical market segmentation.[219]
We will consider two broad categories of cases. The first category draws attention to the relationship between copyright and contract. The right to control use of or access to a work or other subject matter in which copyright subsists is not one of the exclusive rights comprised within copyright. However, this has not prevented copyright owners from using contracts[220] to impose restrictions on use and access of digital material, and using DRM to enforce those restrictions.
These restrictions often go beyond the exclusive rights granted to copyright holders. The terms of such contracts are almost universally on a ‘take it or leave it’ basis, notwithstanding the contract law notion that a contract is a voluntary bargain between two parties. Consumers (and competitors) have no choice but to accept the imposition of restrictive conditions in licences if they want access to content.
Lexmark falls into this category. It will be recalled that the prebate cartridges were sold in packaging carrying a purported contractual agreement on the carton, which contained a condition that the cartridge would be used only once, and the empty cartridge then returned to Lexmark.[221]
In the second category of cases, there is no contractual restriction. DRM is used in isolation to achieve the same ends, including by impeding the lawful uses of consumers’ chattels.[222] Chamberlain is an example of this type of case. In that case, there was no express restriction on a customer’s ability to use a non-Chamberlain remote control to operate their garage doors, but their rolling code software had the same effect, rendering competing remote controls incompatible with the Chamberlain door opener.
The need for interoperability is a feature of many markets. This is especially so in the computer industry and other high technology industries such as telecommunications. Hardware and software companies can use DRM to lock out their competitors’ products by preventing interoperation.
Markets for complements (‘aftermarkets’) also lend themselves to this kind of control. For the purposes of competition law, a critical preliminary issue is to decide whether there is one market, which includes a durable piece of equipment and complementary spare parts and service, or whether there are multiple markets, consisting of a ‘primary’ market, for the durable piece of equipment (motor vehicle, computer hardware, printer) and a number of complementary or ‘secondary’ markets (such as spare parts or toner cartridges) in which the manufacturer of the primary product competes with third-party suppliers.
Consider the case of motor vehicle manufacturers. They have an advantage because they are generally vertically integrated, supplying in both the primary and secondary markets. This advantage is amplified by the advent of DRM. Thus, in selling spare parts which contain some amount of material protected by copyright (such as navigation systems, anti-lock brakes, ignition systems and emission controls), DRM can be used to prevent interoperation with ‘non-genuine’ parts. In this way, third-party suppliers can be locked out of the secondary markets.
Two theories have been advanced to explain the conduct of buyers in aftermarkets.[223] According to the first theory, buyers of original equipment are sophisticated and have access to sufficient information to make an assessment of ‘whole life’ costs (equipment plus parts and service) at the time of purchase. This limits the ability of the equipment manufacturer to charge high prices for parts and service. Thus, if there is competition in the primary market for the original equipment, this implies that there will be competition in the aftermarkets and both markets constitute the one relevant market for competition law purposes.
According to the second theory, buyers are unable to assess ‘whole life’ costs at the time of purchase. The existence of high switching costs means the seller of the original equipment can ‘hold up’ customers, who are locked in for as long as they use the original equipment. In this case, there are separate relevant markets for the original equipment, spare parts and repair services.
The second theory was adopted in the Kodak photocopier case, Eastman Kodak Co v Technical Services Inc,[224] in the US. The Eastman Kodak Co (‘Kodak’) held 220 patents covering spare parts required to service its machines. Originally it cooperated with independent service organisations (‘ISOs’) which repaired and serviced its photocopiers and they flourished. Subsequently, Kodak adopted a more restrictive policy in relation to the servicing of its equipment and withdrew its cooperation. It sold replacement parts only to owners of Kodak equipment who serviced the equipment themselves or used Kodak’s service. The District Court granted summary judgment in Kodak’s favour.[225] The Court of Appeals reversed this finding.[226] The US Supreme Court affirmed the Court of Appeals.[227]
The Supreme Court rejected Kodak’s central argument that competition in the primary market precluded market power in the aftermarket. The Court accepted that where consumers face significant information and switching costs, they are locked into a particular brand of equipment.[228] The Court concluded:
In the end, of course, Kodak’s arguments may prove to be correct. It may be that its parts, service, and equipment are components of one unified market, or that the equipment market doesn’t discipline the aftermarkets so that all three are priced competitively overall, or that any anticompetitive effects of Kodak’s behavior are outweighed by its competitive effects. But we cannot reach these conclusions as a matter of law on a record this sparse.[229]
The Supreme Court stated:
The Court has held many times that power gained through some natural and legal advantage such as a patent, copyright, or business acumen can give rise to liability if ‘a seller exploits his dominant position in one market to expand his empire into the next’.[230]
On remand, Kodak was found by the District Court to have used its monopoly over Kodak parts to gain a monopoly over the service of Kodak equipment contrary to § 2 of the Sherman Act.[231] This was confirmed on appeal.[232] The Ninth Circuit devised a ‘single monopoly’ theory for patents, under which the patentee is entitled to only one monopoly. While the patents may have given Kodak a monopoly in relation to some of the parts, Kodak was creating a second monopoly in the service market by refusing to sell the parts to ISOs.[233]
Switching to a new product may entail transaction costs and learning costs. There may also be contractual disincentives which make it more difficult for customers to switch. Massimo Motta observes:
the existence of switching costs effectively differentiates goods that would otherwise be perceived as perfectly identical. One might be perfectly indifferent, before opening a bank account, between two banks that charge similar rates and give similar services. However, after having opened an account at a particular bank, the existence of switching costs would make it worth changing banks only if the alternative bank will give much better rates or services. Products that are ex ante identical after a purchase become ex post differentiated.[234]
The question whether there was a separate, secondary market for brand-specific spare parts arose in Australia in Regents Pty Ltd v Subaru (Aust) Pty Ltd.[235]
It was alleged that Subaru (Aust) Pty Ltd (‘Subaru’) had misused its market power contrary to s 46 of the TPA by terminating Regents Pty Ltd’s (‘Regents’) distributorship, and thereafter refusing both to supply it with genuine Subaru spare parts and to authorise it to resell such parts and service Subaru cars. The applicant’s case depended on a finding that there were separate markets for cars and Subaru parts. The respondents contended that there was only one relevant market: that for the sale of cars and ancillary services.
Nicholson J adopted the first theory set out above and concluded that there was only one relevant market: namely, that for the supply of motor vehicles, parts and ancillary services. The aftermarket was merely a sub-market of this broader market.
The existence of a separate Subaru parts aftermarket depended on the ‘commercial realities’ faced by consumers.[236] Nicholson J found that the respondent’s contentions regarding the relevant product market could be made out on the basis of the following evidence:
• There was evidence of cross-elasticity of demand and supply at the wholesale level. If the price of Subaru parts was raised, buyers (retailers of parts) switched their patronage to other brands of cars or parts, or to non-genuine parts. On the supply side, manufacturers of Subaru parts and non-genuine parts could adjust their production plans.[237]
• There was also evidence of cross-elasticity of supply and demand at the retail level. Non-genuine parts were not available for the majority of Subaru lines (81 per cent), so that substitution only took place in a few lines. However, these few lines were the high volume lines and there was evidence of strong substitution.[238]
• As regards the interrelationship between cars and the parts market, it was established that the gross profit margin on parts was around 50 per cent while the margin on the sale of motor vehicles was only between seven to 14 per cent. There were two reasons for the substantial difference in profit margins: first, the close and vigorous competition in relation to the supply of new motor vehicles; and second, the absence of competition in relation to Subaru parts.[239]
His Honour concluded:
the high prices of Subaru spare parts result from substantial regard by the respondent to prices of such parts in relation to other marques of cars. It is not therefore open to the inference that the prices only exist due to lack of competition in the market for Subaru parts. Rather the price results from the pricing of parts being competitive with other marques of cars and parts. That is a competition evidencing the interconnection and complementarity of the cars and parts markets, as the case for the respondent contends.[240]
Thus, while the parts of other car manufacturers were not physically substitutable for Subaru parts, Subaru, in pricing its parts, nevertheless had regard to the prices of parts for other makes of cars to ensure that consumers did not reject Subaru cars because Subaru parts were too expensive.[241]
In Australia, since the introduction of s 4E of the TPA, courts have applied the economic test in defining markets and have rejected attempts to define markets in terms of a single trademarked product such as Salomon ski boots,[242] Toyota brand vehicles,[243] or a single copyright work.[244]
The courts have not, however, rejected the possibility that a single brand product may constitute a separate economic market. In Melway Publishing Pty Ltd v Robert Hicks Pty Ltd,[245] the holding of the trial judge — that ‘there is a separate directory market in each major city’[246] and that the Melbourne one was dominated by the Melway Street Directory,[247] a copyrighted product — was upheld on appeal to the High Court.[248]
Original equipment, parts and service are likely to comprise one relevant market (a ‘cluster market’) for the purposes of competition law in the following circumstances:
1 there is effective competition in the market for the original equipment;[249]
2 there is sufficient information available to customers to allow them to predict ‘whole life’ costs at the time of purchase of the original equipment;[250]
3 there are low switching costs;[251] and
4 the original equipment has a short life and high turnover by customers.
However, these factors cannot conclusively establish that a cluster market exists. In Regents v Subaru, Nicholson J acknowledged that:
Whether dealings in a particular product can constitute a market will depend on whether the circumstances require the market to be more broadly delineated. This in turn will depend on whether the concept of substitutability leads in reality and in the long run to coverage of a wider field.[252]
His Honour also acknowledged that ‘[s]pare parts not readily interchangeable for those of other machines may … lead to the finding of the existence of such a market.’[253]
His Honour cited Hugin Kassaregister AB v Commission of the European Communities[254] as authority for this proposition.[255] In Hugin, the Court of Justice of the European Communities held that a Swedish company, Hugin Kassaregister AB, and its British subsidiary, Hugin Cash Registers Pty Ltd (jointly ‘Hugin’), occupied a dominant position in the market for the supply of parts for their cash registers,[256] because these parts were not interchangeable with parts from other brands and could not otherwise be economically reproduced,[257] even though Hugin had only 12 per cent of the market for cash registers within the European Communities.[258]
That a manufacturer can be dominant in the supply of its own spare parts was implicit in the European Court of Justice’s judgments in Volvo AB v Erik Veng (UK) Ltd[259] and Consorzio Italiano della Componentistica di Ricambio per Autoveicoli v Régie Nationale des Usines Renault,[260] both of which involved the use of IP rights to preclude competition in the market for spare parts for certain brands of vehicles.
Nicholson J distinguished the situation in Regents v Subaru from these overseas authorities because of the ‘degree of wholesale and retail substitutability and complementarity of the parts and cars.’[261]
In a case such as Lexmark where DRM is used to completely eliminate substitute products, the ‘commercial reality’ for consumers is that a separate market for brand-compatible products will probably exist.
Cento G Veljanovski has identified a number of factors which, if all or most are present, may suggest that a cluster market exists. These factors include:
• effective competition in the market for the durable product;
• a high proportion of current to historical sales of the durable product;
• the initial purchasers’ knowledge of, and ability to predict, ‘whole life’ costs;
• transparent costs for complementary products;
• many repeat purchasers;
• low switching costs;
• competition in the market for complementary products; and
• a high degree of technical change leading to short life of equipment.[262]
In many cases, it is likely that a separate market will exist for DRM technology itself. Such a market can exist even without actual trade in DRM technology within that market. In Queensland Wire Industries Pty Ltd v Broken Hill Proprietary Co Ltd,[263] three judges of the High Court (Deane, Dawson and Toohey JJ) held that actual trade is not required to establish that a market exists. Deane J (with whom Dawson J agreed generally) held that ‘a market may exist … if there exists a demand for (and the potential for competition between traders in) such goods at that level, notwithstanding that there is no supplier of, nor trade in, those goods at a given time’.[264]
Dawson J elaborated on this in his concurring judgment:
The existence or non-existence of sales of a product cannot conclude whether a market exists or not. It must be sufficient to constitute a market that there is a product for exchange, regardless of whether exchange or negotiation for exchange has actually taken place.[265]
Toohey J relied in his judgment on a broader market for steel and steel products, but noted that if it were necessary to consider a market for the particular steel product in issue, ‘the absence of existing buyers does not mean that there is no market for [the product].’[266]
This approach has been adopted by the Full Federal Court in subsequent cases,[267] and confirmed by the High Court in NT Power Generation Pty Ltd v Power and Water Authority.[268] Where a DRM technology or class of technologies exist, and there is a demand or potential demand for access to it, this will be sufficient to establish a market for competition law purposes, even where the DRM owner has not and will not sell or allow others access to it.
In the VirginMega Case,[269]
the French competition authority held that there were three relevant markets: a market for DRM for music; a market for portable digital music playing devices; and a market for the online sale of downloadable music.[270] In the market for DRM for music, Apple’s FairPlay DRM system competes with other systems, including the Microsoft Windows Media Audio (‘WMA’) DRM system. Microsoft integrates its WMA DRM system with the Microsoft Windows operating system, which is used on the vast majority of PCs in the world, giving the Microsoft DRM system a massive installed base of users. The European Commission had previously referred to Microsoft as having a ‘leading position in the DRM solutions market.’[271] For these reasons, the French competition authority considered it unlikely that Apple held sufficient market share to give it a dominant position in the market for DRM.[272]
If, owing to incompatibilities between DRM systems, consumer behaviour, or ‘commercial realities’, the market had been defined more narrowly (as a market for FairPlay-compatible DRM systems), Apple would almost certainly have substantial market power within that market.
Section 47(2) of the TPA includes within the practice of exclusive dealing conditions which restrict a buyer from acquiring goods or services from a competitor of the supplier. Section 47(2) provides:
A corporation engages in the practice of exclusive dealing if the corporation —
(a) supplies … goods or services;
(b) supplies, or offers to supply, goods or services at a particular price; or
(c) gives or allows, or offers to give or allow, a discount, allowance, rebate or credit in relation to the supply of goods or services by the corporation;
on the condition that the person to whom the corporation supplies … goods or services …
(d) will not, or will not except to a limited extent, acquire goods or services … directly or indirectly from a competitor of the corporation …; or
(f) in the case where the corporation supplies … goods or services, will not re-supply the goods or services to any person, or will not, or will not except to a limited extent, re-supply the goods or services:
(i) to particular persons or classes of persons or to persons other than particular persons or classes of persons …
The conduct in Lexmark would fall within s 47(2)(b) or (c) and s 47(2)(d) or (f), in that Lexmark supplied toner cartridges at a particular price,[273] or gave a discount or allowance (the prebate),[274] but:
1 on the express contractual condition that the customer would not acquire the services of a cartridge remanufacturer to refill the cartridge;[275]
2 on the express contractual condition that the customer would not resupply the empty toner cartridge to anyone other than Lexmark;[276] and
3 on the implied condition that the customer would not acquire remanufactured cartridges from remanufacturers.[277]
In order to fall within the definition of ‘exclusive dealing’ in s 47(2)(d), it is sufficient that the condition is implied and not legally enforceable. The High Court observed in Visy Paper Pty Ltd v Australian Competition and Consumer Commission[278] that the word ‘condition’ in s 47 has a meaning ‘uncircumscribed by contract law notions’.[279]
This is clear from s 47(13)(a), which provides:
A reference to a condition shall be read as a reference to any condition, whether direct or indirect and whether having legal or equitable force or not, and includes a reference to a condition the existence or nature of which is ascertainable only by inference from the conduct of persons or from other relevant circumstances.
While a ‘condition’ for the purposes of s 47 need not necessarily have legal or equitable force, it must involve more than a mere hope or expectation.[280] The implied condition described above (Point 3) might fall into the category of a ‘mere hope or expectation’ but the express contractual provisions on the carton containing the toner cartridge would almost certainly be a ‘condition’ within the meaning of s 47.
To be prohibited by s 47, the condition must have the purpose or likely effect of substantially lessening competition.[281] In assessing this, the first step is to define the relevant market in which the competition occurs. The substantial lessening of competition test focuses on the likely future conduct of firms in the market on a ‘with’ and ‘without’ basis. In the words of the Trade Practices Tribunal (now the Australian Competition Tribunal) in Re Queensland Co-Operative Milling Association Ltd,[282] it is necessary to ask: will the conduct at issue allow the parties to ‘give less and charge more’?[283] The essential question is not whether ‘the conduct harms competitors’, but ‘how might the conduct harm consumers’?
In assessing the effect or likely effect of a restrictive condition in a licence, it is necessary to ask: what is likely to happen in the future with the condition (‘the factual’), and what is likely to happen in the future without the condition (‘the counterfactual’).[284] The proper question to ask is therefore: ‘looking into the future, will the condition reduce competition that would otherwise have existed in the market but for the condition?’[285]
In Universal Music Australia Pty Ltd v Australian Competition and Consumer Commission,[286] the Full Federal Court found that the conduct of Universal Music Australia Pty Ltd (‘Universal’) and Warner Music Australia Pty Ltd (‘Warner’) in seeking to dissuade retailers from selling imported stock fell within the definition of ‘exclusive dealing’. Communications by Universal and Warner with retailers as to the terms of trade were characterised as supply on the condition that the retailers would not acquire non-infringing copies from a competitor, and as a refusal to supply if retailers acquired non-infringing copies from a competitor.
The Full Federal Court held that the conduct did not have the effect or likely effect of substantially lessening competition. The evidence was that many retailers purchased non-infringing copies either by direct importation or by purchasing stock imported by others. Accordingly, the conduct did not have the effect of substantially lessening competition.[287] This may have been because it was ‘nipped in the bud’ by the Australian Competition and Consumer Commission’s (‘ACCC’) intervention, or the fact that many retailers were not intimidated by the threats.
However, the Full Federal Court held that it did have the proscribed purpose of substantially lessening competition. By dissuading retailers from purchasing imported stock they were able to restrict intra-brand competition in relation to their own CD titles even though there was evidence of inter-brand competition with CD titles of other suppliers.
Each of the appellants was responsible for a sixth of the total CDs sold wholesale in Australia. The Full Federal Court held:
In the case of a true commodity, such as wheat, elimination of competition from a supplier holding one-sixth of the market might have little effect on competition in that market; the customers might simply transfer their business to the remaining five suppliers in the market, who might compete fiercely for that business. However, CD titles are not an homogeneous commodity. Each is unique. Each appeals to a different audience, although audiences overlap. If intra-brand competition is eliminated, there is no direct price competition or any direct competition in relation to the aggregation of unique titles. Of course, each title is in competition with the titles of other suppliers in the same market and that, over time, would impose some competitive pressure. However, if a major supplier could hold the line against intra-brand competition from imports, it could determine in its own time whether to respond to competition from other suppliers and, if so, how to do this. We are satisfied this comfortable situation would apply to a significant proportion of the available titles, and amount to a substantial lessening of competition …[288]
In Lexmark, the effect of the contractual conditions was to deny cartridge remanufacturers an essential input ingredient (empty toner cartridges), and the effect of the DRM was to prevent customers from using remanufactured cartridges in their printers. But what was the purpose of these measures?
Lexmark could have undoubtedly claimed reasonable commercial motives for their conduct. The prebate programme could be justified as a response to customer dissatisfaction with the previous rebate programme, and the DRM justified to protect Lexmark from dishonest diversion of cartridges on which the prebate had been given.
For a condition to offend against s 47 because its purpose was to substantially lessen competition, that need not be its only purpose. Section 4F(1)(b) of the TPA provides that for the purposes of the TPA:
a person shall be deemed to have engaged or to engage in conduct for a particular purpose or a particular reason if:
(i) the person engaged or engages in the conduct for purposes that included or include that purpose or for reasons that included or include that reason, as the case may be; and
(ii) that purpose or reason was or is a substantial purpose or reason.
It would then be sufficient that one of Lexmark’s purposes was to lessen competition substantially, even if they also had legitimate purposes in mind, so long as lessening competition was a substantial or operative purpose.