Eagles, Ian; Longdin, Louise --- "Competition in Information and Computer Technology Markets: Intellectual Prtoperty Licensing and s 51(3) of the Trade Practices Act 1974 (2003)" [2003] QUTLawJJl 3; (2003) 3(1) Queensland University of Technology Law and Justice Journal 28

[*] Professor of Law, University of Auckland.

[**] Senior Lecturer in Commercial Law, University of Auckland.

[1] Refusals to license and misuse of market power under s 46 of the Trade Practices Act 1974 (Cth) (TPA) are not addressed in what follows. They are exhaustively and illuminatingly analysed in S Corones, ‘Technological Tying in the Computer Industry: When Does it Contravene Section 46 of the Trade Practice Act?’ (2003) 3 Queensland University of Technology Law and Justice Journal 48.

[2] A Blayse, Subsection 51(3) of the Trade Practices Act 1974 and the Interaction of Intellectual Property and Competition Law 3 <http://www.necg.com.au/pappub/papers-blayse-iptalk-may01.pdf> .

[3] For an analysis of the social and economic drivers of this process of intellectual property expansionism see I Eagles, ‘Intellectual Property and Competition Policy: The Case for Neutrality’ in CER Rickett and G W Austin (eds) International Intellectual Property Law and the Common Law World (2000) 285.

[4] L Longdin, ‘Parallel Importing Post TRIPS: Convergence and Divergence in Australia and New Zealand’ (2001) 50 International and Comparative Law Quarterly 54.

[5] For a typical reaction see the submissions of the Australian Information Industry Association to the Review of the Trade Practices Act, July 2002 (‘AIIA Submissions’).

[6] Review of Intellectual Property Legislation under the Competition Principles Agreement, Final Report, Commonwealth of Australia, (September 2000).

[7] See <http://www.law.gov.au/WWW/SECURITYLAWHOME.NSF/Web+Pages/A6C3825011D8A8B1CA256C330000CF9A?OpenDocument> at 11 February 2003.

[8] Section 51(3) provides that:

A contravention of a provision of this Part other than section 46, 46A or 48 shall not be taken to have been committed by reason of:

(a) the imposing of, or giving effect to, a condition of:

(i) a licence granted by the proprietor, licensee or owner of a patent, of a registered design, or of a copyright, or of such EL rights within the meaning of the Circuit Layouts Act 1989, or by a person who has applied for a patent or for the registration of a design; or

(ii) an assignment of a patent, of a registered design, of a copyright or of such EL rights, or of the right to apply for a patent or for the registration of a design;

to the extent that the condition relates to:

(iii) the invention to which the patent or application for a patent relates or articles made by the use of that invention;

(iv) goods in respect of which the design is, or is proposed to be, registered and to which it is applied;

(v) the work or other subject matter in which the copyright subsists; or

(vi) the eligible layout in which the EL rights subsist;

(b) the inclusion in a contract, arrangement or understanding authorizing the use of a certification trade mark of a provision in accordance with the rules applicable under Part XI of the Trade Marks Act 1955, or the giving effect to such provision; or

(c) the inclusion in a contract, arrangement or understanding between:

(i) the registered proprietor of a trade mark other than a certification trade mark; and

(ii) a person registered as a registered user of that trade mark under Part IX of the Trade Marks Act 1955 or a person authorized by the contract to use the trade mark subject to his or her becoming registered as such a registered user;

of a provision to the extent that it relates to the kinds, qualities or standards of goods bearing the mark that may be produced or supplied, or the giving effect to the provision to that extent.

[9] It is assumed for present purposes that licences and assignments involving software fall under the definition of either ‘goods’ or ‘services’ under the TPA even when software is not supplied via any physical medium such as a disk, CD-ROM or DVD but is installed directly on machines or supplied on line via the Internet. Given the different modes of supply and the inherent nature of the software supplied (a digital stream of zeros and ones) it is not surprising that judicial interpretation of consumer protection statutes in Australia and the United Kingdom has failed to produce a clear bright line answer as to whether or when software is ‘goods’ or ‘services’ a hybrid of them both or whether it is neither and just falls through the statutory cracks. See Toby Construction Products Pty Ltd v Computer Sales Pty Ltd [1983] 2 NSWLT 48; Beta Computers (Europe) Ltd v Adobe Systems (Europe) Ltd [1996] EWCA Civ 1296; [1996] 4 All ER 481 and St Albans City Council v International Computers Ltd [1996] EWCA Civ 1296; [1997] FSR 251. Under s 4 TPA, while the definition of ‘goods’ is not exhaustive it seems that software would have to be equated with ‘electricity’ to be caught. If software is a ‘service’ as seems more likely, it would have to be squeezed under a ‘[right (including a right in relation to or interest in real or personal property), benefit, privilege or facility that is to be granted or conferred in trade or commerce].’ To clarify the position in New Zealand ‘software’ is deemed to be goods under the Commerce Act 1986 by the Consumer Protection (Definition of Goods and Services) Bill 2002.

[10] At least under ss 47(2) and (3) as opposed to s 47(6) of the TPA according to ACCC v Universal Music Pty Ltd [2000] FCA 1800. See also Broederbund Software Inc v Computermate Products Aust Pty Ltd (1992) ATPR 41-155.

[11] Unlike its New Zealand equivalent which has no application to business acquisitions, see Commerce Act 1986 (NZ), s 45.

[12] Eagles, above n 3, 329; S Corones, Competition Law in Australia (2nd ed, Sydney, 1999) 301.

[13] For an example of the rebuttable presumption approach to scope of grant see Image Technical Services v Eastman Kodak [1997] USCA9 2479; 125 F 3d 1195 (9th Cir, 1997). While there are other decisions of the Federal Circuit which suggest a substantial role for ‘scope of grant’ (see In Re Independent Services Organisation Antitrust Litigation [2000] USCAFED 54; 203 F 3d 1322 (Fed Cir, 2000) these cannot stand with the more considered rejection of ‘scope of grant’ as an absolute defence as in United States v Microsoft [2001] USCADC 115; 253 F 3d 34, 63 (DC Cir, 2001). See below text accompanying n 23. In the European Union ‘scope of grant’ has been an evidentiary presumption not a substantive exemption although the strength of that presumption varies (cf Radio Telefis Eirean and Independent Television Publications v EC Commission and Magill (1995) 4 MLR 718 with Oscar Bronner v Mediaprint [1999] 4 CMLR 112. See also Phillips Electronics v Ingman Ltd [1999] FSR 112).

[14] (1980) ATPR 40-166.

[15] There is a third viewpoint which would construe the words of s 51(3) purely purposively so that they related only to the subject matter of the grant. As pointed out to the Ergas Committee by the Australian Government Solicitor’s ‘Memorandum of Advice’ (January 2000) this would make the exemption ineffectual since most such stipulations would not breach the TPA. (It might be added that this third way is rather copyright centric and not easily applied to forms of intellectual property where rights are not affirmatively stated in the relevant statute.)

[16] This is unproven. The boundaries of copyright are not obviously more tightly drawn than those of breach of confidence, for example, especially in relation to the limitations imposed by freedom of expression. In both cases the boundaries are largely judge drawn. A more cogent objection is the fact that (head starts apart) breach of confidence only protects information while it remains secret. Contractual limitations on the use of trade secrets on the other hand are not similarly constrained.

[17] Plant Breeders’ Rights Act 1994 (Cth).

[18] National Competition Council, Review of Sections 51(2) and 51(3) of the Trade Practices Act 1974 Final Report, Commonwealth of Australia, March 1999. This was something of a retreat from its interim view that s 51(3) should vanish from the statute book entirely; see also Draft Report, November 1988, 6, 96.

[19] Review of Intellectual Property Legislation under the Competition Principles Agreement Final Report, Commonwealth of Australia, (September 2000) 21.

<http://www.ipcr.gov.au/finalreport1dec/trade_marks_act4.htm> . The terms of reference for the Ergas Committee required it to have regard to the conclusions and recommendations in the National Competition Council’s Final Report, above n 18.

[20] As to the competing legal and economic theories which fuel this debate, see M A Carrier, ‘Unraveling the Patent -Antitrust Paradox’ (2002) 150 University of Pennsylvania Law Review 761 and Eagles, above n 3, 292.

[21] New Zealand provides a possible model here (if one is needed). There the statutory exemption for intellectual property dealings protects clauses in intellectual property licences which authorise ‘any act which would otherwise be prohibited’ by the right in question in s 45(1)(a) of the Commerce Act 1986. The New Zealand provision, however, suffers from the drawback that it does not include positive ‘best endeavours’ stipulations of the kind resorted to in Transfield. For more appropriate phrasing, see Eagles, above n 3, 328.

[22] [2001] USCADC 115; 253 F 3d 34 (DC Cir, 2001).

[23] Ibid 63. The DC Circuit’s treatment of the copyright issue, although brief, signals to right holders in the United States that the boundaries of intellectual property rights will not be allowed to determine the extent of antitrust scrutiny. Instead of asking ‘what does copyright allow its owner to do?’ and granting antitrust immunity to conduct within the four walls of that legislative authority, the Court instead engaged in a much more forensic analysis which identified those aspects of the intellectual property right most in need of protection through restrictive licensing and balanced the pro- and anticompetitive effects of such licensing in the normal case by case way. For discussion of Microsoft’s copyright arguments see I Eagles and L Longdin, ‘The Microsoft Appeal: Different Rules for Different Markets?’ (2001) 7 New Zealand Business Law Quarterly 296, 312-313.

[24] See above n 19, 20.

[25] In this they were surely right. The statutory divide between rule of reason and per se in Australia would have few defenders amongst economists these days. A statutory regime which bans third line forcing outright now looks like a survivor from an earlier age of American jurisprudence. Unfortunately the Australian statute leaves judges no room for the prudent retreat which their US brethren have been able to beat. See US v Jerrold Economics Corp 187 F Supp 545 (1960); Northwest Wholesale Stationers v Pacific Stationary and Printing Co [1985] USSC 154; 472 US 284 (1985). The rigidity of the per se rule forces Australian courts to either deny economic reality (see Radio 2UE Sydney Pty Ltd v Stereo FM Pty Ltd [1982] FCA 206; (1982) 62 FLR 437) or adopt unnatural interpretations of the statutory words, see Castlemaine Tooheys Ltd v Williams and Hodgson Transport Pty Ltd (1997) ATPR 70-003.

[26] Section 47 is a case in point here. It starts by way of banning exclusive dealing in fairly general terms and then proceeds to list various subcategories of such dealing some of which are explicitly made subject to tests of anti-competitive purpose or effect while others are left to languish in per se limbo. To an outsider’s eye all this seems rather odd. Why treat exclusive dealing separately when there is s 45(1)(b) to fall back on?

[27] It is now within the terms of reference of the committee chaired by Sir Daryl Dawson which was set up in May 2002 to review the competition and authorisation provisions of the TPA.

[28] See above n 7.

[29] Technology Transfer Block Exemption 1996. The block exemption proceeds by way of a white list of permitted practices, a black list of definitely non exempt (but not necessarily unlawful) practices and a grey list of practices whose presence in an agreement does not defeat its exemption on other grounds. The White List (Art 1) includes exclusive licences and territorial restrictions associated with technology transfer that are limited to the life of the intellectual property (or ten years in the case of pure know-how agreements). The Grey List (Art 2) includes obligations to keep know-how secret, not to grant sublicenses, to terminate agreements where licensees challenge the validity of the licensor’s intellectual property rights, and to use best endeavours to manufacture and market the licensed product. The Black List (Art 3) includes restrictions on the selling prices of licensed products (resale price maintenance), restrictions on the quantities to be made or sold, bans on competing technologies, customer restrictions between competing manufacturers, obligations to grant-back improvements, and territorial restrictions for a duration longer than as provided under the White List. The effect of all this is not as clear cut as it seems. The benefit of the exemption may be withdrawn if the activity in question is shown to be anti-competitive in fact (Art 7). The European approach is further complicated by the need to show that the licence does not impede the flow of goods between member states. It also needs to be remembered that the technology transfer exemption does not apply to copyright or trademarks unless they are ancillary to patented technology and know how. The United Kingdom regulator follows a similar methodology, see J Maitland-Walker, ‘Competition Act 1998: OFT’s Technical Guidelines on Application of Competition Rules to Intellectual Property Rights’ [2002] European Competition Law Review 311.

[30] The European Union white list offers some useful pointers here. The list is set out in R Whish, Competition Law (4th ed, 2001) 693.

[31] Ibid 694. The European Union black list is less useful being obviously more affected by free movement concerns.

[32] United States Department of Justice and Federal Trade Commission’s Antitrust Guidelines for the Licensing of Intellectual Property (1995).

[33] Canadian Competition Bureau Intellectual Property Enforcement Guidelines (2000) <http://competition.ic.ca> .

[34] This is a simple black letter test. There is no room in such cases for the holistic quasi moral rights arguments resorted to by the defendant in the Microsoft litigation and rejected by the court in that case. Judge Penfold Jackson’s difficulties with Microsoft’s scope of grant copyright arguments at first instance lay in the company’s inability or failure to pinpoint which of its exclusive rights as copyright owner (as laid down in the copyright statute) were supposedly being protected by the restrictive licensing provisions. Had Microsoft pleaded the right to make an adaptation (or derivative work, in United States copyright parlance) instead of relying on the existence of a penumbra of implied rights lurking somewhere behind the specific grant of power in the copyright law, it may have succeeded on this point at the trial (although not on appeal). See Eagles and Longdin, above n 23, 313.

[35] Eagles, above n 3, 329.

[36] Courts and regulators need to do more than reach for their crystal ball. The guidelines should only take account of developments which are both identifiable and reasonably imminent.

[37] Eagles, above n 3, 304; H Ergas, ‘Intellectual Property Rights and Competition.’ (Paper presented to the Federal Trade Commission/Department of Justice Hearings on Antitrust and Intellectual Property and Law in the Knowledge-Based Economy. Washington DC, 23 May 2002, para 122w).

[38] Market share is a negative not a positive test of market power in this context.

[39] Antitrust Guidelines for the Licensing of Intellectual Property, issued by the US Department of Justice and the Federal Trade Commission, 6 April 1995. The guidelines are set out in [1995] 7 EIPR Supp 3.

[40] Canadian Competition Bureau Intellectual Property Enforcement Guidelines (2000) para 5.2.1.

[41] In high technology markets arguments that today’s market power will be overcome by tomorrow’s discoveries is double edged. In fast moving markets delays in innovation may matter more, see Eagles and Longdin, above n 23, 304.

[42] As routinely required in merger cases, see the ACCC’s Merger Guidelines. Corones, above n 12, 55.

[43] Wattyl (Australia) Pty Ltd v Courtauld’s (Australia) Pty Ltd & Ors (1996) ATPR (Com) 50-232.

[44] Telstra Corporation v Australian Performing Rights Association Ltd (1998) ATPR (Com) 50-256.

[45] See, eg, A Murray and C Scott, ‘Controlling the New Media: Hybrid Responses to New Forms of Power’ (2002) 65 Modern Law Review 491, 493.

[46] H Ergas, ‘Intellectual Property Rights and Competition.’ (Paper presented to the Federal Trade Commission/Department of Justice Hearings on Antitrust and Intellectual Property and Law in the Knowledge-Based Economy, Washington DC, 23 May 2002) 22.

[47] Ibid.

[48] It is freely acknowledged nowadays that information and communication technologies based on connectedness are largely driven by such ‘network effects’. Underlying this analysis is the notion that networks become increasingly more compelling and valuable as more and more people use them. See M L Katz and C Shapiro, ‘Network Externalities, Competition and Compatibility’ (1985) 75 American Economics Review 424; and ‘Systems Competition and Network Effects’ (1994) 8 Journal of Economic Perspectives 93, 95. The theory emphasises that additional users confer positive externalities on existing users, leading to positive feedback effects for technology that is adopted and conversely negative feedback effects for that which is not adopted. Where markets for goods or services derive a relatively high portion of their value from being part of a network (rather than the value they would have were they to stand alone), these effects may play a significant role in establishing the structure of the market and the strategies pursued by firms in the market: see M A Lemley and D McGowan, ‘Legal Implications of Network Effects’ (1998) 86 California Law Review 479, 488.

[49] As the economic theory runs: in markets characterised by network effects, one product or standard ‘tips’ towards dominance because as mentioned above ‘the utility that a user derives from its consumption increases with the number of other agents consuming it’: see M Katz and C Shapiro, ‘Network Externalities, Competition and Compatibility’ (1985) 75 American Economics Review 424; and ‘Systems Competition and Network Effects’ (1994) 8 Journal of Economic Perspectives 93, 95. With software innovation, this can happen very quickly. Economists describe it as ‘instant scalability’. Losers do not remain in these markets, especially where the product is supported by (or consists of) intellectual property rights: see S J Liebowitz and S E Margolis, Winners, Losers and Microsoft: Competition and Antitrust in High Technology, Independent Institute (1999) 137.

[50] C Shapiro, ‘Competition Policy and Innovation’ (Working Paper Series of the OECD Directorate for Science, Technology and Industry, DSTI/DOC, 2002) 11, 25 <http://www.oecd.org/sti/working-papers> .

[51] C-3658 (May 20, 1996) Consent Order. As cited by W J Baer, ‘Antitrust Enforcement and High Technology Markets’ (1998) <http://www.ftc.gov/speeches/other/ipat6.htm> . The case depended on findings of anti-competitive intent as well as outcome. The former would play no part in the Ergas scheme.

[52] Canadian Competition Bureau Intellectual Property Enforcement Guidelines (2000) 22-23 <http://competition.ic.ca> .

[53] Under s 45, the conspiracy provision, in the Competition Act, RS, 1985, C-34.

[54] R P Merges, ‘As Many As Six Impossible Patents Before Breakfast: Property Rights For Business Concepts and Patent System Reform’ (2002) 14 Berkeley Technology Law Journal 577.

[55] Just how complicated this might become can be seen when one looks at the current investigation by the European Commission into Microsoft Corporation’s integration of Windows Media Player into its Windows operating system. Under the Government Response such bundling would be tested for pro and anti-competitive effects but not so necessarily should Microsoft back Pressplay (streaming media software produced by a music joint venture between Sony and Universal) against MusicNet (streaming media software produced by AOL/Time Warner and Realnetworks).

[56] See Softman v Adobe 171 F Supp 2d 1975 (C D Cal, 2001). Adobe had bundled four of its products including the well known Acrobat, PageMaker, and Photoshop into a software suite ‘Adobe Collections’ and sold the collection on CD-ROMs for less (US$1000) than the four programs if sold separately (US$1700). Adobe inserted a term into the end user licence agreement (EULA) that the end user may ‘transfer all [his] rights to the use of the software to another person or entity provided that [he] also transfer the EULA and all the software, hardware bundled or preinstalled with the software.’

[57] Introduced by the Copyright Amendment (Computer Programs) Act 1999 especially to deal with the copying of computer programs.

[58] It is safe, however, for software copyright licensees to stipulate in end user licence agreements that there is to be no sublicensing, reassignment, lending, renting, leasing, creation of adaptations of protected programs since these restrictions merely reaffirm the exclusive rights set out in s 31 of the Copyright Act 1968 (Cth).