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Patent Rights and the Trade Practices Act

Patents can be powerful private property rights

Some view patent rights to have emerged “as it were by accident, to rank side by side with the new ‘copyright’ which [had] grown out of the new State regulations for printing1). For an accidental right of the 17th century, it has certainly developed to be a powerful part of intellectual property law.

Patents provide an absolute monopoly. This is a powerful right when compared with other forms of intellectual property protection such as copyright2) which only provides protection against reproduction, publishing, performing, communicating, making an adaptation of and entering into a commercial rental arrangement for the work3).

The strength of the protection provided by patents is said to have deviated from the protection afforded by copyright because literary and artistic works were seen to be unique and there was no chance that two people could independently create the same work unless one had slavishly copied the work of another4). Therefore if a proprietary right was to be granted in relation to machines, the nature of invention meant that this would be an absolute right, which would necessarily be monopolistic as inventions were seen as the discovery of pre-existing common ideas5) and accordingly “copying” was not and never has been a prerequisite to a patent infringement suit.

However the duration of patent protection (up to 20 years in Australia6)) is much shorter than the protection afforded by copyright (at least 70 years in Australia7)). This difference has been justified by some because ‘patents [relate] to ‘the ordinary use of human life’ and so were sure to find success in fourteen years … [whereas] with regard to productions of the intellectual world … the human mind was slow to comprehend(( Above, n4, 141. ))'.

Patent law has developed greatly since its beginnings under Royal Charters, Royal Letters Patent of the Crown and the 1664 Statute of Monopolies. However, maintaining some limits to the scope of the rights conferred by patents has long been part of this development.

As far back as the Statute of Monopolies, a patent was void if harmful to trade or generally inconvenient and could also be revoked by the Privy Council if the grant was prejudicial or inconvenient to the King’s subjects8).

Patents are a monopoly right valid against all the world, unless successfully challenged. Therefore a patent is a powerful right granted to exploit an invention for economic gain for a limited period of time at the end of which the invention becomes available for use and exploitation by the public at large9).

Patents are seen as a contract between the inventor and the State with the consideration for the rights granted being the communication to the public of the knowledge of the art that had been discovered10). The justification for the surrender by the State of public rights, in its capacity of guardian of the public good, is that the patentee gives a new and useful invention as adequate compensation. Therefore an invention that is already in the public domain cannot be the subject of a valid patent11).

A patent is a monopoly right granted not to reward genius but to encourage the disclosure of information which is of value to the public, thereby advancing mankind’s knowledge pool12).

The Trade Practices Act 1974 (Cth) seeks to ameliorate anti-competitive behaviour in certain circumstances

The power of the Trade Practices Act 1974 (Cth) (“TPA”) to ameliorate anti-competitive behaviour comes largely from:

  1. Part IV - restrictive trade practices provisions; and
  2. Part IVA – unconscionable conduct provisions.

As outlined by Deane J13), the purpose and scope of Part IV TPA is to “control or proscribe the making of certain contracts or arrangements or the reaching of certain undertakings, the giving or extracting of certain covenants in relation to land, the engaging in conduct involving a secondary boycott, engaging in the practices of monopolisation, exclusive dealing or resale price maintenance, engaging in predatory price discrimination, and the increasing of market share by means of takeover or merger.

Part IVA is largely concerned with proscribing unconscionable conduct by a corporation, in trade or commerce, in connection with the supply or possible supply of goods or services to a person14).

These Parts of the TPA automatically applies to patentees, where the patentee is a corporation or the Crown.

Section 6(3) TPA seeks to extend the TPA to individuals based upon the post and telegraph power contained in the Constitution15) and as a result of the uniform Competition Policy Reform Acts passed by all States and Territories, Part IV TPA applies to individuals. Therefore anti-competitive behaviour of individuals who are patentees is regulated in much the same way as it is for corporations albeit through a combination of the TPA and State legislation.

Explain how the Trade Practices Act affects the exercise of patent rights

The monopolistic nature of patent rights seems at first blush to be inherently anti-competitive. By excluding others from the area of technology defined by the scope of the claims the patentee could theoretically charge higher prices than would be possible if all the ideas were freely available. It is said by some that a patent holder can rarely act as a pure monopoly, because of the availability of alternative and substitute products and processes, and also because some scope for imitation almost always exists16). This maxim does not apply equally to all industries. The information technology industry, for instance, by the nature of its goods and services, is one based on layered proprietary standards which do not easily accommodate substituted products or processes and hence is an industry populated by powerful monopolists.

Generally speaking, both competition policy and patent law share the common economic goal of maximising wealth by producing what consumers want at the lowest cost17). In this way, there is maximum allocative efficiency (making what consumers want)18) and productive efficiency (making the goods with the fewest scarce resources)19). It should be noted though that some commentators cast doubt on this analysis20), however a complex socioeconomic analysis of this issue is beyond the scope of this essay and as said earlier such theories do not apply equally to all industries.

In addition to market forces, the TPA imposes limits on the way in which a patentee can behave in an anti-competitive manner. For example, it contains provisions that prohibit parties with a monopoly over certain products or services to abuse its dominant position or market power21).

If a patentee were to obtain a series of patents, each for relatively small steps in the development of the same technology, the patentee may be able to use this series of patents to deter a would-be challenger by the fact that the competitor would have to prove the invalidity of one or more of the related patents. In this scenario, the patentee is relying on a deterrent effect that is above what patent protection is designed to provide 22). This type of behaviour could, in certain circumstances, fall foul of the TPA for being anti-competitive.

The TPA also restricts the way in which a number of parties can collude to achieve a dominating market position23). For example, it is open to strong argument that it would be a violation of the TPA for a number of companies who had market power to collude in the obtaining of one or more patents or to pool or cross licence the patents held by the respective companies, if their intention in doing so was to eliminate one or more competitors from the market.

Section 51 TPA provides general exemptions which apply in relation to the restrictive trade practices provisions of the Act in relation to things done or authorised or approved by federal legislation but expressly excludes from this exemption legislation relating to, amongst other things, patents.

The operation and possible implications of s51(3) TPA

The only exemption from some of the restrictive trade practices provisions24) of the Act that relate to patents is provided by s51(3) TPA25) in that a contravention of some TPA provisions shall not be taken to have been committed by reason of:

  1. the imposing of, or giving effect to, a condition of:
    1. a licence granted by the proprietor, licensee or owner of a patent or by a person who has applied for a patent; or
    2. an assignment of a patent or of the right to apply for a patent;

to the extent that the condition relates to the invention to which the patent or application for a patent relates or articles made by the use of that invention;

It would appear that this exemption allows the patentee to impose, for example conditions that:

  1. limit the territory in which a competitor may sell goods made under licence; or
  2. control the quality or specifications for the licensed products.

Regardless of the way the Court will interpret this section26), and in particular whether the condition ‘relates’ to the invention or the articles made by the invention, it is doubtful that the exemptions for patent-backed restraints will be interpreted widely as it is unlikely that the intention of the TPA was to widely sanction anticompetitive behaviour merely because such behaviour is backed by patent technology 27).

For instance, this exemption would not apply in a case where the patent owner sought to. use the licence to control prices. An example of this might be where the patentee imposes a restriction on the use or resale of a patented article such as attempting to control the resale price, which falls foul of s48 of the TPA28).

Section 51(3) TPA also does not provide an exemption for acts that fall under29):

1. s46 TPA, which proscribes misuse of market power by corporations which have a “substantial” degree of power in the market

This section prohibits corporations with a substantial degree of market power from using that power to:

  1. substantially damage or eliminate a competitor;
  2. substantially damage or eliminate competitors generally, a class of competitors or any particular competitor; or
  3. prevent or deter anyone from engaging in competitive conduct in any market30).

For example, a monopolist in the software industry may develop its products in such a way which has the effect of preventing competitors from entering the market by a variety of technical measures coupled with powerful intellectual property protection such as copyright31) and overlapping and inter-related patents.

This has been seen in particular over the past 10 years in various US and EU cases involving Microsoft, Inc in which Microsoft is found to have misused its market power by:

  1. developing and bundling various software programs in a way that did not allow or discouraged users of those programs from using competing products as a substitute for one or more of the Microsoft products32); and
  2. not making available information which would have allowed interoperability of third party server operating systems with PCs running Windows33). This is currently under appeal with Microsoft risking penalties of €2 million a day for each day whilst it disputes whether it has done so, in addition to the licences it has offered competitors of its copyrights and patents in order to permit interoperability34).

However, in many cases, despite the granting of patents restricting competition to some extent, research and development leading to a new patentable invention this will not, in itself contravene s46 TPA as the endeavour which leads to the grant is generally viewed as pro-competitive having regard to the fact that the aim of competition policy is to foster efficiency and innovation to the benefit of consumers and the system of patent protection works towards the same goals35).

If the body corporate for whatever reason is free to act in the market unrestrained by the competition therein, then it may be said to have a high degree of power in the market which does not have its origins in the competitive forces at play in the market. It is that power which s46(1) seeks to affect if it is used for any of the proscribed purposes36).

For example, if a patent was obtained for the purpose of excluding competitors from the market or if the patentee has no intention of exploiting the patent rights on the basis that this would, for example, prevent a person from engaging in competitive behaviour in the same market as the patentee or another market, this would contravene s46 of the TPA. In general, the use that is made of the patent rights must be consistent with the patentee’s obligations under the TPA.

2. s46A, which prohibits misuse of market power in any market in Australia, New Zealand or Australia and New Zealand

The prohibitions in this section are of the same nature as those in s4637).

3. s48, which imposes a ban on resale price maintenance regardless of its effect on competition to ensure that competition in the market is unfettered by price restraints imposed by suppliers on resuppliers of goods or services.

As summarised by Miller38) s51(3) recognises that conflict can arise between the protection and enjoyment of proprietary rights in intellectual property and the provisions of the TPA in that it removes the application of the restrictive trade practices provisions (subject to the above exemptions) in relation to certain provisions in licences and assignments of, amongst other things, patents.

The exemption is not absolute in that it only applies to patents to the extent that a condition of:

  • a licence granted by the proprietor, licensee or owner of a patent; or
  • an assignment of a patent or the right to apply for a patent

relates to the patented / patentable invention.

In Miller’s39) view, as the term “relates to” is quite vague, the way in which a Court is likely to interpret this term would be to narrow the meaning to imply a requirement that the relevant condition should relate to the invention in the sense of protecting the inventor’s legitimate rights to the invention.

Anti-Competitive Behaviour Regulation under the Patents Act

In line with the requirements of International Treaties, the Patents Act also has provisions that seek to prevent anti-competitive behaviour.

Section 133 provides that a person may apply to the Court for an order requiring the patentee to grant the applicant a licence to work the patented invention in circumstances including, but not limited to:

  • the reasonable requirements of the public with respect to the patented invention have not been satisfied; and
  • the patentee has given no satisfactory reason for failing to exploit the patent.

For example if a patentee were to take advantage of their monopoly to offer the product on the market on exorbitant terms or fail to manufacture the patented product at all, the Court may order a compulsory licence to a third party.

Again, however, this concept breaks down when looking at interoperable products in which the monopoly is fully exploited, with moderate pricing where other competitors are unable to develop and sell interoperable products for risk of patent or copyright suit in addition to technical problems. It may well be difficult, for instance, to argue that the public interest is satisfied by a having a multitude of products which do the same thing. However, where you do not have a multitude of products which do the same thing, this encourages monopolies to develop and monopolists are ordinarily keen to extend their monopoly into new areas. For instance, Microsoft was subject to suit by its competitors over Microsoft’s implementation of its internet browser, media player software and Java implementation in its operating system which was detrimental its competitor’s products in those areas.

A compulsory licence may also be ordered where a later patentee is refused a licence by an earlier patentee in circumstances where the licence is required to work the later invention. In this circumstance, the patentee is abusing its monopoly because it is preventing the continuing innovation that the granting of the patent is supposed to foster40).

Anti-competitive behaviour that is regulated by the Patents Act will, in general, also fall under s46 of the TPA and therefore compulsory licensing may be, in more limited circumstances, an alternative remedy to those provided for under the TPA.

Section 144 of the Patents Act further attempts to limit the monopoly granted, with limited exemptions, by rendering void a condition in a contract relating to the sale or lease of, or a licence to exploit, a patented invention if the effect of the condition would be:

  • to prohibit or restrict the buyer, lessee or licensee from using a product or process (whether patented or not) supplied or owned by a person other than the seller, lessor or licensor, or a nominee of the seller, lessor or licensor; or
  • to require the buyer, lessee or licensee to acquire a product not protected by the patent from the seller, lessor or licensor, or a nominee of the seller, lessor or licensor.

Similarly, in the case of a condition in a contract relating to the sale or lease of, or a licence to exploit an invention the subject of an innovation patent, such a condition is void if the effect of the condition would be to:

  • prohibit the buyer, lessee or licensee from applying for examination of the patent; or
  • impose restrictions on the circumstances in which the buyer, lessee or licensee may apply for examination of the patent.

Conclusion

The Trade Practices Act does limit the extent of the rights granted by a patent, but does so in conjunction with the provisions in the Patent Act.

These two Acts in conjunction restrict the principal forms of abuse of the monopoly granted by patents, that is the extension of the monopoly of the patented article to other goods and cartel style practices.

The interplay in relation to intellectual property and competition policy continues to unfold before our eyes, possibly more on a world stage than in Australia, but one never knows.

STEVE WHITE
WHITE SW COMPUTER LAW
MAY 2006

www.computerlaw.com.au © White SW Computer Law 2006 This paper is a guide only and should not be used as a substitute for legal advice, readers should make their own enquiries and seek appropriate legal advice.

1) JG Starke, Assignments of Choses in Action in Australia (1972) v.
2) Warren Pengilley, “Patents and trade Practices – Competition Policies in Conflict” 1977 Australian Business Law Review 172, 175.
3) Copyright Act 1968 (Cth), s1.
4) Brad Sherman and Lionel Bently, The Making of Modern Intellectual Property Law. The British Experience, 1760-1911 (1999)155
5) Ibid 155-156.
6) Patents Act 1990 (Cth), s67.
7) Above, n3, s33.
8) William Aldous et al, Terrell on the Law of Patents (13th ed, 1982) 287.
9) Barry Fox, Patents - A Guide (2003) 45-46.
10) Above, n4, 156.
14) Trade Practices Act 1974 (Cth), s51AB.
15) Commonwealth of Australia Constitution Act 1900 (Cth), s51(v).
16) Jill McKeough, Kathy Bowrey and Philip Griffith, Intellectual Property - Commentary and Materials (3rd ed, 2002) 413
17) Ward Bowman, Patent and Antitrust Law – A Legal and Economic Appraisal (1973) 1
18) Ibid 2
19) Ibid 3
20) Above, n2, 175
21) Above, n15, s46
22) G Bloxam, Licensing Rights in Technology – A Legal Guide for Managers in Negotiation (1972) 107-108
23) For example, s45 TPA
24) s 46, 46A and 48 TPA are sections for which having an intellectual property right does not provide any exemption at all
25) Above, n15, s51(3)
26) Above, n2, 180-185.
27) Above, n2, 185.
28) Interestingly enough, s47 (the third line force provision) is covered by s51(3) where as ss46, 46A and 48 are expressly excluded and hence prohibited regardless of whether a patent or copyright is involved. Section 47 is also of note in that it contains provisions which do not require market power namely s47(6) and s47(7) which ipso facto make it a contravention to acquire/sell goods and services subject to amongst other things an obligation to acquire or not acquire goods and services from a third party.
29) Russell Miller, Miller’s Annotated Trade Practices Act (27th ed, 2006)
30) Ibid 360
31) Limited interoperability is provided pursuant to s47D of the Copyright Act 1968 (Cth), however, no protection is provided in the Copyright Act from patent infringement claims and the Patents Act 1990 (Cth) does not have a provision which is similar to s47D of the Copyright Act.
35) Anne Hurley, Restrictive Trade Practices – Commentary and Materials (2nd ed, 1995) 280
37) Above, n30, 388
38) Above, n30,457
39) Above, n30, 458
40) Above, n23, 134

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