Competition Policy (Harper Review)

The 313 page draft Competition Policy report [PDF] by the Harper Committee states

The Panel has been tasked with examining whether Australia’s competition policies, laws and institutions remain ‘fit for purpose’, especially in light of the changing circumstances of the Australian economy that are expected to unfold over the next decade or so.

This Draft Report identifies three major forces affecting the Australian economy that will influence whether our competition policies, laws and institutions are fit for purpose.

The rise of Asia and other emerging economies provides significant opportunities for Australian businesses and consumers, but also poses some challenges. A heightened capacity for agility and innovation will be needed to match changing tastes and preferences in emerging economies with our capacity to deliver commodities, goods, services and capital. We need policies, laws and institutions that enable us to take full advantage of the opportunities offered.

Our ageing population will give rise to a wider array of needs and preferences among older Australians and their families. Extending competition in government provision of human services will help people meet their individual health and aged care needs by allowing them to choose among a diversity of providers. New technologies are ‘digitally disrupting’ the way many markets operate, the way business is done and the way consumers engage with markets. The challenge for policymakers and regulators is to capture the benefits of digital disruption by ensuring that competition policies, laws and institutions do not unduly obstruct its impact yet still preserve traditional safeguards for consumers.

Competition policy

Competition policy is aimed at improving the economic welfare of Australians. It is about making markets work properly to meet their needs and preferences.

In the Panel’s view, competition policy should:

• make markets work in the long-term interests of consumers;

• foster diversity, choice and responsiveness in government services;

• encourage innovation, entrepreneurship and the entry of new players;

• promote efficient investment in and use of infrastructure and natural resources;

• establish competition laws and regulations that are clear, predictable and reliable; and

• secure necessary standards of access and equity.

Important unfinished business remains from the original National Competition Policy (NCP) agenda, and new areas have arisen where competition policy ought to apply.

Ageing of Australia’s population will impose greater demands on health and aged care services.

Establishing choice and competition principles in government provision of human services can improve services for those who most need them. If managed well, this can both empower consumers and improve productivity at the same time.

In the area of human services, the Panel recommends that:

• user choice be placed at the heart of service delivery;

• funding, regulation and service delivery be separate;

• a diversity of providers be encouraged, while not crowding out community and voluntary services; and

• innovation in service provision be stimulated, while ensuring access to high-quality human services.

In the area of infrastructure, the Panel recommends introducing cost-reflective road pricing linked to road construction, maintenance and safety to make road investment decisions more responsive to the needs and preferences of road users.

Reforms begun in electricity, gas and water need to be finalised.

Anti-competitive regulations remain in place despite significant progress made under NCP. The Panel recommends that regulations restricting competition be reviewed by each jurisdiction, with particular priority given to regulations covering planning and zoning, retail trading hours, taxis, pharmacy and parallel imports. Australia’s intellectual property regime is also a priority for review. We recommend that the current exception for intellectual property licences in the Competition and Consumer Act 2010 (Cth) be repealed.

Competitive neutrality remains a matter of concern for many stakeholders, including small businesses. We recommend that competitive neutrality policies be reviewed and updated against best practice, and that complaints-handling processes and monitoring be improved.

Competition laws

In guiding our consideration of whether Australia’s competition laws are fit for purpose, the Panel asked a number of questions:

• Does the law focus on enhancing consumer wellbeing over the long term?

• Does the law protect competition rather than protecting competitors?

• Does the law strike the right balance between prohibiting anti-competitive conduct and not interfering with efficiency, innovation and entrepreneurship?

• Is the law as clear, simple and predictable as it can be?

While the Panel considers that our competition laws have served Australia well, we recommend specific reforms to enhance their effectiveness.

These include changes to section 46 governing the misuse of market power to bring it into line with other prohibitions by focusing on protecting competition and not competitors. While the threshold test of ‘substantial degree of market power’ is well understood, the central element of ‘taking advantage of market power’ is difficult to interpret and apply in practice. We recommend that the provision be reformulated so that it targets anti-competitive conduct that has the purpose, effect or likely effect of substantially lessening competition.

The Panel also recommends a number of changes to simplify and clarify the operation of the law, to bring to the forefront the competition policy objectives of the law and to reduce business compliance costs. The cartel provisions should be simplified, and the price signalling provisions removed and replaced by extending section 45 to concerted practices that have the purpose, effect or likely effect of substantially lessening competition. Merger approval processes should be streamlined. We recommend changes to other approval processes, both authorisation and notifications, in order to reduce costs for business, particularly small business. We also recommend that collective bargaining arrangements be made more flexible and easier for small business to use, and we invite views on whether there should be a specific dispute resolution scheme for small business for matters covered by the CCA.

Competition institutions

The Panel has assessed Australia’s competition institutions — their current performance and preparedness for the future — and identified a gap in Australia’s competition framework. Australia needs an institution whose remit encompasses advocating for competition policy reform and overseeing its implementation. This includes reforms agreed following this Review and future reforms.

We recommend replacing the National Competition Council (NCC) with a new national competition body, the Australian Council for Competition Policy (ACCP). This should be an independent entity and truly ‘national’ in scope, established and funded under a co-operative legislative scheme involving the Commonwealth, States and Territories.

Where competition reforms result in disproportionate effects across jurisdictions, competition policy payments should be made to ensure that revenue gains flowing from reform accrue to the jurisdictions undertaking the reform. The ACCP would be responsible for administering payments, based on actual implementation of reforms. This new body would be an advocate and educator in competition policy. It would have the power to undertake market studies at the request of any government, and could consider requests from market participants, making recommendations to relevant governments on changes to anti-competitive regulations or to the ACCC for investigation of breaches of the law.

The Panel recommends that the ACCC retain both competition and consumer functions. We also recommend a separate access and pricing regulator be established with responsibility for existing regulatory functions undertaken by the NCC and the ACCC, including the Australian Energy Regulator, but with relevant consumer protection and competition matters remaining with the ACCC.

The Panel considers that the ACCC is a well-regarded and effective body but that its governance would be strengthened with input from individuals free of responsibility for its day-to-day operations. This would bring an ‘outsider’s view’ and, in particular, allow business, consumer and academic perspectives to bear directly on ACCC decision-making. Accordingly, we have suggested enhancing the governance structure of the ACCC by adding a Board. The Draft Report canvasses two options for how this Board might be configured.

Next steps

This is a draft report but still presents specific recommendations for the purpose of stimulating debate. In a number of areas the Panel seeks further input from stakeholders as well as feedback on the Draft Recommendations. We look forward to continuing our engagement with stakeholders on the issues before the Review.

Report structure

In Part 1 of this Draft Report the Panel spells out the context for the Review, including the key challenges and opportunities facing Australia. In Part 2 the Panel offers its Draft Recommendations for reform of competition policies, laws and institutions. Since this is a draft report, the Panel seeks feedback from stakeholders on its conclusions and proposed reforms. These will inform the Panel’s Final Report to the Australian Government. On some questions, the Panel is yet to reach a specific view, and presents options rather than draft proposals. Further stakeholder input is especially welcome on these points. 

Part 3 explores the competition policy landscape in more detail, beginning with the principles underpinning the original NCP framework and asking whether revisions or extensions are needed in light of the different forces now bearing on the Australian economy. Discussion then turns to a suite of specific issues related to competition policy, including unfinished business from the original NCP reform agenda and new horizons for competition policy.

Part 4 explores our competition laws in detail, examines areas where some observers claim they are deficient, and considers whether the laws remain fit for purpose in a changing business environment.

Finally, Part 5 assesses Australia’s competition institutions, including the competition regulators, examining their current capabilities and preparedness for the future.

In discussing intellectual property Harper comments

Disruptive technologies, especially digital technologies, are a pervasive force for change in the Australian economy. New technologies foster innovation which in turn drives growth in living standards. Access to and creation of intellectual property (IP) will become increasingly important as Australia moves further into the digital age.

Australians are enthusiastic adopters and adapters of new technology. We stand to benefit greatly by exploiting technology to its full extent in our business production processes and as end-consumers. Our IP policy settings should encourage us to do so. Nevertheless, there is an appropriate balance to be struck between fostering ideas and innovation on the one hand, and encouraging widespread adoption of new productivity-enhancing techniques, processes and systems on the other. Excessive IP protection can not only reduce the adoption of new technologies but also stifle innovation.

Given the influence that Australia’s IP rights can have on facilitating (or inhibiting) innovation, competition and trade, the Panel believes it is crucial that the IP system be designed to operate in the best interests of Australians.

The Panel therefore considers that Australia’s IP rights regime is a priority area for review.

Determining the appropriate extent of IP protection is complex. IP rights can help to break down barriers to entry but can also, when applied inappropriately, reduce exposure to competition and erect long-lasting barriers to entry that fail to serve Australia’s interests over the longer term. This risk is especially prevalent in commitments entered into as part of international trade agreements. The Panel is concerned that there is no overarching IP policy framework or objectives guiding changes to IP protection or approaches to IP rights in the context of negotiations for international trade agreements.

The draft report unpacks those comments -

As discussed in Part 1, disruptive technologies are changing, and will continue to change, Australia’s competitive landscape. Technology is expanding the geographic boundaries of markets, digital delivery of content is becoming more common and there is increasing integration of connected technologies as global communication networks mature.

Disruptive technologies have also put intellectual property (IP) rights in the spotlight. While IP rights can create incentives for innovation and the dissemination of ideas, they also have the potential to restrict market entry by preventing access to technologies.

In light of technological changes and more general changes to the regulatory environment in which investment in creative effort takes place, it is appropriate to re-examine Australia’s IP arrangements. As the Chairman of the PC, Peter Harris, recently argued:

[T]he nature of internet-driven change and related global dependence on software-based systems suggests each nation should consider closely how well it is served by current IP systems, as these trends take hold.

IP rights are a form of intangible property right granted to a creator for something new or original. Like other legal property rights, IP rights exclude others from freely using IP (but the exclusive rights can be traded or licensed to others). IP rights exist in many forms including:

• patents (inventions and new processes);

• copyright (over literary, musical and artistic works) and registered designs (designs applied to articles such as clothing);

• trademarks (which distinguish the origin of products); and

• plant breeder rights.

There is no single IP Act; rather IP rights are secured by separate, specific statutory regimes. For example, there is the Patents Act 1990 for inventions, and the Copyright Act 1968 for literary and artistic creations.

The underlying rationale for IP rights is the promotion of new ideas and creations. Competitive markets can fail to support an efficient level of innovation because creations and ideas, once known, can be copied at little cost.

Knowledge has ‘public good’ characteristics — that is, it is difficult to exclude others from using new ideas and use by one person has little or no effect on the extent to which it is available to others. Thomas Jefferson said knowledge is like a candle: when one candle lights another it does not diminish the light of the first candle.

That is, it is more efficient to disseminate knowledge freely than to restrict its use by charging for it. But the public good characteristics of knowledge typically lead to under-investment in research and development — the returns to creators will be insufficient to provide incentives for efficient investment in IP material. IP regulations attempt to address this ‘free rider’ problem by legally granting exclusive use of the protected right to the creator for a specified period. By allowing firms to derive financial benefits from their inventions and creations (which provides an incentive to innovate) and allowing other firms and individuals to use disclosed information about new inventions (rather than it remaining secret), IP rights are important for competition and follow-on inventions. There are benefits to the community from reducing wasteful duplication of research effort and allowing others to build on existing ideas. As the PC notes:

The issuing of patents may improve efficiency and community welfare by increasing the incentives for firms to innovate, which can in turn lead to new, improved or less expensive products. (page 7)

However, IP rights can deter competition and limit choice for consumers. IP rights can be used to facilitate monopolistic or anticompetitive behaviour. This could, for example, manifest in owners of IP rights extracting excessive royalties from IP licences or placing unnecessary restrictions on knowledge dissemination. This would have adverse knock-on effects for innovation. As The Australia Institute says:

While strong IP rights may increase the incentive to put into the [knowledge] pool (thereby generating positive externalities) they hamper the ability to take previously generated knowledge out of the pool (giving rise to negative externalities). The design of the rules is therefore important. (pages 19-20)

The ACCC claims that in the vast majority of cases the granting of an IP right will not raise significant competition concerns:

[R]ights holders are entitled to legitimately acquire market power by developing a superior product to their rivals, and pursuant to the policy purpose of IP regulation, the temporary market power from an IP right provides the very incentive to invest in the production of new IP. Such innovation is also a key goal of competition law. In this respect, IP and the competition law are for the most part complementary, both being directed towards improving economic welfare. (ACCC Submission 1, page 59)

However, conflicts between the two policies might occur ‘where IP owners are in a position to exert substantial market power or engage in anti-competitive conduct to seek to extend the scope of the right beyond that intended by the IP statute’. (ACCC Submission 1, page 59)

The PC submits that the patent system (where not warranted to encourage innovation) can impose costs on the community by impeding competition, including via:

• the accrual of ‘patent portfolios’ — in some cases, firms that accrue patents conduct no business other than asserting their patents against other firms — effectively ‘taxing’ other firms’ innovations via court cases; and

• ‘cumulative innovation’ — where innovation requires access to multiple patents, there are higher costs to innovate because of the need to purchase those patents. The need to access multiple patents can lead to ‘hold out’, whereby the owner of a patent holds out for a better deal from a potential innovator, which can also discourage innovation. (page 29)

So it is a balancing act. As the ACCC puts it:

The extent of any IP rights should balance: (i) on the one hand, the incentives for innovation in the creation of IP; and (ii) on the other, the incentives that access to IP material provides for efficient use of that IP and for innovation from such use. (ACCC Submission 1, page 58)

There is also the challenge of keeping the balance right in light of technology and market changes. For example, the widespread dissemination of material via the internet raises issues around copyright and related rights in the global context. 3D printing — the ability to translate a digital file into a physical object — will also pose challenges.

As noted by the Big Innovation Centre, an important change brought about by 3D printing is the low cost and ease of reproducing physical objects. A single 3D printer will be able to copy different products from existing designs that are easily and quickly shared over the internet. This means that IP is likely to become the main method through which some manufacturing businesses can fund the research, development and design of physical products. The Big Innovation Centre has said:

The disruption caused by 3D printing will put significant strains on government policy. By removing barriers between the internet and the physical world, 3D printing will throw up significant questions for intellectual property laws, for regulators and for competition authorities.

Is the ‘balance’ right?

CHOICE, like some other submitters, suggests that Australia has not got the ‘balance’ right between the granting of IP rights and the promotion of competition. CHOICE suggests that the balance currently favours rights holders rather than consumers:

[M]onopolies give rise [to] obvious and well-known problems that ultimately end up impacting consumers. For this reason, limitations and exceptions apply to the monopoly of intellectual property. CHOICE believes that currently, Australia has not achieved the right balance in this regard.

Many companies operating in the entertainment industry (which obviously depends very heavily on copyright) have leveraged the considerable advantage of monopoly rights to insulate themselves against the disruptive effects of technological change, in particular from the internet. The persistence of territorial licensing arrangements (limiting the distribution of content based on geographical regions) is testament to the ability of industry to resist change. (page 20)

It is important that IP arrangements are technology-neutral, given the importance of innovation for economic growth. A number of submissions argue that IP arrangements do not support innovation because they are too technology-specific.

Mark Summerfield says:

The current provisions in the Patents Act and the CCA, intended to ensure that patents do not unduly deter competition, or limit consumer choice, were not drafted with arrangements such as patent pools, or the evolution of global technology standards, in mind. (page 8)

The Australia Institute recommends a critical examination of patents on items such as software and business methods (page 20). The ACCC also notes that ‘IP regulation can become quickly obsolete as the manner in which IP material is used changes’, citing the abandonment of the Optus TV Now service as a casualty of Australia’s current copyright laws. (ACCC Submission 1, page 65)

However, determining the appropriate ‘extent’ of IP protection is complex (and potentially ever changing). If IP rights provide higher rewards than needed to induce an invention, this will reduce the invention’s net benefit to the community as a whole and result in a higher share of the benefits going to the holder of the IP rights. In the case where there are no substitutes for the idea or invention, the owner of the rights could also engage in monopolistic behaviour. At issue is how closely tests for allocating IP rights are linked to ‘public benefits’. Innovation could occur without IP protection. There is also the issue of the period over which it is appropriate to reward original creators of innovations.

A recent review of the literature undertaken by the PC found that incentives for innovation from the IP system appeared to apply only in a few sectors. One study by Hall and Harhoff, for example, surveyed 210 recent studies and found that patents were effective in encouraging innovation in only a few sectors — pharmaceuticals, biotechnology, medical instruments and specialty chemicals.

It is important that the extent of IP rights provided by IP regulations are reviewed regularly as part of the legislation review mechanism. The extent of IP protection should be based on what is in the best interest of Australians.

The interaction between IP rights and competition law

Currently, subsection 51(3) of the CCA provides a limited exception from most of the competition law prohibitions for certain types of transactions involving IP. The exception covers certain conditions in licences or assignments of IP rights in patents, registered designs, copyright, trademarks and circuit layouts. The exception does not extend to the prohibitions relating to misuse of market power and resale price maintenance.

Some submitters, including the PC (page 28) and the ACCC, argue that it is hard to justify the IP exception. The ACCC says:

On the use of intellectual property rights, the CCA should apply in the ordinary way. The ACCC recommends that section 51(3) of the CCA should be repealed and that, in general, there is no reason to treat intellectual property any differently to other services in relation to access. (ACCC Submission 1, page 58)

In a recent submission to the Australian Law Reform Commission (ALRC) Inquiry into Copyright and Digital Economy, the ACCC also argued that it is important that the rights created through IP laws should be subject to competition laws to ensure they are pro-competitive rather than anti-competitive in effect or purpose. The ACCC pointed to the digital environment providing new ways of creating, using and distributing copyright materials with commensurate opportunities to improve efficiency and welfare. However, copyright materials are increasingly used as intermediate inputs and this increases the potential for copyright to have anti-competitive effects. Solutions that are capable of addressing new market failures in digital environments (including potentially new forms of collective licensing or copyright exchanges) may also raise competition concerns.

The ACCC also noted that in other jurisdictions, such as the US, IP rights are subject to the same competition laws as all other property rights. And in these jurisdictions there has not been an erosion of IP rights for creators, nor any apparent impact on the incentives for the production of copyright material.

The Australian Recording Industry Association Ltd, however, has a contrary view:

The idea that there is no need for the s 51(3) exemption because IP should be treated like any other form of property is simplistic and misleading. The exemptions under s 51(3) serve partly as a safety net where broadly defined prohibitions under the Competition and Consumer Act would otherwise be too far-reaching. The cartel prohibitions, the prohibition against anticompetitive agreements under s 45 and the prohibition against exclusive dealing under s 47 are all broadly defined and can easily catch conduct that is efficiency enhancing (there is no rule of reason defence in Australia). The exemptions under s 51(3) are important because they avoid liability where IP licensing conditions are efficiency enhancing. (page 4)

Regulatory restrictions

The interaction between IP rights and competition law has been reviewed numerous times, including by Hilmer, the NCC and by the Intellectual Property and Competition Review Committee (known as the Ergas Committee). Each of these reviews recommended amendments to the exception for IP licenses and assignments (Box 8.4). The Ergas Committee considered that IP rights were sufficiently different from other property rights and assets to warrant special treatment under the (then) Trade Practices Act 1974 (TPA). However, the existing IP exceptions under subsection 51(3) were ‘seriously flawed, as the extent and breadth of the exemptions are unclear, and may well be over-broad’ (page 11). The Committee was of the view that the:

[E]xemptions do not provide an appropriate balance between the needs of the intellectual property system and the wider goals of competition policy. (page 11)

The then Government accepted the Committee’s recommendation to rewrite subsection 51(3) to allow the application of anti-competitive provisions of the TPA to IP arrangements that result in a substantial lessening of competition. However, no change has been made to the legislation. A recent House of Representatives Standing Committee on Infrastructure and Communications report into pricing of information technology recommended the repeal of subsection 51(3) of the CCA. The ALRC’s Copyright and Digital Economy Final Report also stated that the repeal of subsection 51(3) of the CCA should be considered.

Box 8.4 Reviews of IP and competition law

Hilmer reviewed the exceptions for IP rights under the then Trade Practices Act 1974. Hilmer stated that it was not apparent that the exception met the relevant policy goal, nor had the Committee been presented with any persuasive arguments as to why IP licensing and assignments should receive protection beyond the authorisation process. The report concluded that it: [S]aw force in arguments to reform the current arrangements, including the possible removal of the current exemption and allowing all such matters to be scrutinised through the authorisation process. Nevertheless, it was not in a position to make expert recommendations on the matter and recommends that the current exemption be examined by relevant officials, in consultation with interested groups. In 1999 the NCC reviewed subsection 51(3) of the TPA as part of the Commonwealth’s review of legislation that restricted competition under the Competition Principles Agreement.

The NCC concluded that only in rare cases do producers using IP have sufficient market power to enable them to substantially lessen competition in the markets in which they compete. It recommended that: • the exemption in subsection 51(3) be retained, but amended so that it no longer exempted horizontal arrangements or price and quantity restrictions; and • the ACCC formulate guidelines on the scope of the exemption, and the application of Part IV to dealings in intellectual property rights.

The interaction between IP rights and competition policy was also reviewed by the Intellectual Property and Competition Review Committee (known as the Ergas Committee) in 2000. On subsection 51(3) of the TPA, the Ergas Committee recommended that IP rights continue to be accorded distinctive treatment under the TPA and this should be achieved by: • amending subparagraph 51(1)(a)(i) of the TPA to list all the relevant intellectual property statutes, that is ‘an Act relating to patents, trademarks, designs, copyright, circuit layouts and plant breeder’s rights’ • repealing subsection 51(3) and related provisions in the TPA; • inserting an amended subsection 51(3) and related provisions into the TPA to ensure that conditions in a contract, arrangement or understanding related to the subject matter of intellectual property statute did not contravene Part IV or section 4D of the Act — unless those conditions were likely to result in a substantial lessening of competition; and • the ACCC issue guidelines to provide sufficient direction to IP right owners, clarifying the types of behaviour likely to result in a breach of the then TPA’s provisions. Provisions should exist within the guidelines for parties to seek a written clearance from the ACCC.

IP rights, like all property rights, can potentially be used in a manner that harms competition. The Panel considers that it is appropriate that commercial transactions involving IP rights, including the transfer and licensing of such rights, be subject to the CCA, in the same manner as transaction involving other property and assets.

Accordingly, the Panel considers that the IP licensing exception in subsection 51(3) of the CCA should be repealed. As is the case with other vertical supply arrangements, however, IP licences should be exempt from the cartel provisions of the CCA. This means that IP licenses and assignments will only contravene the competition law if they have the purpose, or would have or be likely to have the effect, of substantially lessening competition. As noted by the ACCC, IP licensing or assignment arrangements that are at risk of breaching Part IV of the CCA, but which are likely to produce offsetting public benefits, can be granted an exemption from the CCA through the usual notification or authorisation processes.

The draft report notes concerns regarding the TPPA and other international agreements. It states

For individual countries, the optimal design and level of IP rights depends on the extent to which they are net importers or exporters of different forms of IP. Australia is a net importer of IP. With trade and commerce-related aspects of IP crossing national borders, IP has been the subject of international treaties. Frameworks influencing Australian IP law and trade and commerce in IP both within Australia and internationally, include:

• the Agreement on Trade-Related Aspects of Intellectual Property Rights;

• treaties administered by the World Intellectual Property Organization;

• other dedicated IP agreements falling outside the World Intellectual Property Organization’s framework; and

• IP provisions included as part of bilateral and regional trade agreements.

As a net importer of IP, and likely to remain so, our ability to access IP protected by rights granted in other countries will be important to ensure that Australia can reap the benefits of the digital economy. That said, it is also important that commitments regarding the extent of IP protection in Australia are based on the best interests of Australians and these should be established through an independent cost-benefit analysis.

The ACCC (ACCC Submission 1, page 65), the PC (page 28) and The Australia Institute (page 20) argue that caution should be exercised when entering international treaties or agreements that include IP provisions. As the PC notes, the proposed Trans-Pacific Partnership Agreement between Australia and various other countries including the US, as well as other proposed international agreements such as the Transatlantic Trade and Investment Partnership are specifically considering intellectual property issues. (page 28)

The PC suggests that Australia has likely incurred net costs from the inclusion of some IP provisions in trade agreements, pointing to analysis of extensions in the duration of copyright protection required by the Australia-United States Free Trade Agreement which imposed net costs on Australia through increased royalty payments. As Australia is, and will continue to be, a net importer of IP, these costs are potentially significant.

It is important that trade negotiations be based on an understanding of the costs and benefits to Australia of proposed IP provisions. This should be undertaken in an independent and transparent way and prior to negotiations being concluded.

The Panel’s view

Given the influence that Australia’s IP rights can have on facilitating (or inhibiting) innovation, competition and trade, the Panel considers that the IP system should be designed to operate in the best interests of Australians. Determining the appropriate extent of IP protection is complex. Given the complexity of the issues, there is a case for conducting an independent framework-style review of IP. The review should look at competition policy issues, new developments in technology and markets and international trade agreements. In the majority of cases the granting of an IP right is unlikely to raise significant competition concerns. That said, IP rights, like all property rights can be used in a manner that harms competition. It is therefore appropriate that the use of IP rights be subject to the CCA. Independent and transparent analysis of the costs and benefits to Australia of any proposed IP provisions in trade negotiations should be undertaken to inform international trade negotiations.

In discussing parallel imports the draft report states

An overseas manufacturer of goods can supply goods to different distributors in different countries, license the manufacture of goods to different manufacturers in different countries, or do both. The effect of the supply or licensing arrangements may be that the goods, all of which are genuine, are available for purchase in different countries (including Australia) at different prices. Parallel importing refers to the importation into Australia of genuine goods by someone other than the licensed or authorised distributor or manufacturer in Australia.

Parallel imports provide an alternative source of supply which promotes competition and can provide consumers with products at lower prices. As such, parallel import restrictions are similar to other import restrictions (such as tariffs) in that they benefit local suppliers by shielding them from international competition. Parallel imports of goods that are protected by certain forms of IP are currently restricted by legislation. For example, parallel importation of some copyright products, including books, is restricted under the Copyright Act 1968. This can be to the detriment of Australian consumers: Such restrictions effectively provide an import monopoly to the domestic distributor and protect owners of the local IP rights from competition. The restrictions may also enable copyright owners to practice international price discrimination to the detriment of Australian consumers. (ACCC Submission 1, page 60) The ACCC also notes that, under the Trade Marks Act 1995, it appears that trade mark owners are able to prevent parallel imports of trade marked goods into Australia by limiting trade mark licences to specific territories.

Australia’s parallel import restrictions have been reviewed many times over the past few decades (Box 8.5). Most reviews recommend that parallel import restrictions be removed. General prohibitions regarding parallel imports were removed for sound recordings in 1998 and computer software in 2003. The general prohibition against parallel importing continues to apply to literary works (other than books), dramatic, musical and artistic works, broadcasts and cinematographic films. There is a separate regime for books that allows limited parallel importation.

The ACCC states that it has ‘consistently held the view that parallel importation restrictions (via legislation) extend rights to copyright owners beyond what is necessary to address ‘free riding’ on the creation of IP’ and considers that there is no further economic reason to justify a blanket legislative restriction on parallel imports. (ACCC Submission 1, page 62)

The International Bar Association says: The dramatic changes to Australian consumers’ retail shopping practices over the past few years, especially through their on-line purchases, has called into question, among other things, existing parallel trade policies, both with respect to copyright and trade mark legal regimes. (page 10)

The Australian National Retailers Association argues that the restrictions are another example of ‘outdated regulations that distort competition amongst retailers’ (page 18), particularly the remaining restrictions on books and some clothing items that feature images. The Co-Op also said parallel importation restrictions ‘are effectively an anachronism of a pre digital age’. (page 2)

Using the example of books, the Australian National Retailers Association says that the increased use of technology and shifting book purchase practices mean that the parallel import restriction is easily circumvented by international competitors, making it difficult for domestic bookstores to compete. According to the Australian National Retailers Association e-books are largely imported from overseas distributors (such as Amazon) and not covered by this restriction. Online stores that directly ship books from overseas warehouses to customers, such as Fishpond, can circumvent the restriction because the sale occurs overseas and not in Australia, even though the customer is located here (page 19).

There is some support in submissions for moving to the New Zealand position where all restrictions on parallel imports caused by statute have been abolished.

Box 8.5: Examples of recent reviews of Australia’s parallel import restrictions A PC inquiry into provisions of the Copyright Act 1968 that restrict the parallel importation of books found that the restrictions impose a private implicit tax on Australian consumers which is used largely to subsidise foreign copyright holders. • Price comparisons found that, in 2007-08, a selection of around 350 trade books sold in Australia were on average 35 per cent more expensive than editions sold in the US (after accounting for the effects of GST). In many cases, the price difference was greater than 50 per cent. The PC also found that parallel import restrictions poorly target cultural externalities and much of the assistance provided by the restrictions does not promote Australian-authored work. PC estimates suggest that the additional income flowing overseas is around 1.5 times that retained by local copyright holders. The PC recommended that Australia’s parallel import restrictions on books be repealed and (because of the significant adjustment costs for book producers) that the repeal take effect three years after the announcement of the policy change. A PC inquiry into the Australian Retail Industry found that international price discrimination is being practised against some Australian retailers, to the detriment of Australian consumers. The PC stated that some Australian retailers have the option of altering their supply arrangements — either by putting pressure on existing international suppliers and distributors or else changing their supply channels. The PC recommended a review of the parallel import restrictions which prevent retailers from importing and selling clothing or other goods which embody decorative graphic images sold with the copyright owner’s permission in another market. The House of Representatives Standing Committee on Infrastructure and Communications Inquiry into IT Pricing recommended that the parallel importation restrictions still found in the Copyright Act 1968 be lifted, and that the parallel importation defence in the Trade Marks Act 1995 be reviewed and broadened to ensure that it is effective in allowing the importation of genuine goods. The PC’s report on Australia’s Automotive Manufacturing Industry recommends progressively relaxing the restrictions on the importation of second-hand passenger and light commercial vehicles (not to commence before 2018) and that the new arrangements be preceded by a regulatory compliance framework that includes measures to provide appropriate levels of community safety, environmental performance and consumer protection.

Other submitters do not support removing the remaining restrictions on parallel importation, noting that business models for copyright industries are generally focused on digital rather than hard copy goods, and there are few remaining restrictions on parallel importation in Australian copyright law. It is argued that, where restrictions remain, they serve sound policy objectives. Concerns are raised in submissions about parallel imports on health and safety grounds and the impact on the environment. For example:

• the Australian Motor Industry Federation raises concerns about lifting restrictions on the large scale importation of second-hand passenger vehicles into Australia — ‘it is surely acknowledged that the risk to consumers can be much higher through potentially sub-standard machinery entering the country than the likely risk of harm for a book, a DVD, or a computer game’ (page 10);

• the Federal Chamber of Automotive Industries states that ‘the importation of second-hand vehicles is inconsistent with government policy objectives in other areas such as road safety and the environment’. The Federal Chamber of Automotive Industries also has ‘serious reservations about the government’s resourcing capacity to adequately police, at the time of importation and subsequently, the safety of used vehicles including compliance with the standards that applied when the vehicle was built and the continued compliance with such standards following any modifications or repair’. (page 3)

Other concerns include: • counterfeits being mixed with parallel imports; • consumer protection concerns where the packaging of the local and imported goods are similar but there is a difference in quality or performance; and • impacts on local distributors (such as warranty issues and recalled products). For example, consumers of parallel imports may seek a repair or replacement under warranty from the licensed distributor in Australia.

Some stakeholders note that they service or repair products they did not sell because they do not want to risk compromising the reputation of their product or brand. Consumer education and information disclosure are important in ensuring that consumers are aware of the product they are buying, their warranty rights and their ability to seek a refund when purchasing products from overseas traders. Consumers, when they purchase products online from an offshore supplier, are weighing up the risks associated with not being subject to the same warranties and rights to refund their purchase against the higher priced domestic product (with the warranty and servicing features). As argued by the PC: In effect, by purchasing the lower priced product online from an offshore supplier, consumers have opted to ‘self insure’ against the potential risk of product failure or defects.

The Panel expects that the market will respond to concerns around parallel imports, including through making consumers aware of what products they are buying (so consumers are not being misled and/or brands damaged if consumers buy goods without realising that they are parallel imports). The threat of consumers becoming dissatisfied with particular products and/or brands is also likely to motivate international suppliers to rethink their regional arrangements. Box 8.6 describes a dispute between ALDI and Nestle Australia relating to parallel imports.

Box 8.6: ALDI’s imports of Nescafe coffee In a 2005 notification to the ACCC, Nestle Australia raised the issue of ALDI selling Nescafe branded instant coffee in its stores sourced from overseas suppliers. ALDI had previously supplied the locally sourced Nescafe ‘Blend 43’, which was its highest selling instant coffee, but submitted that it resorted to import sourcing as a result of uncompetitive local prices and supply difficulties. The imported coffee did not have the same formulation and taste as instant coffee supplied by Nestle Australia. Nestle Australia submitted that consumers may be misled and/or may form negative views about Nestle Australia’s products as a result of drinking the imported coffee. ALDI had taken steps, including in-store posters, shelf labels, and stickers on the coffee jars, to alert customers to the fact that the imported Nestle ‘Matinal’ or ‘Classic’ blends were different to the locally sourced Nescafe ‘Blend 43’ product. ALDI also provided a satisfaction guarantee. However, Nestle Australia submitted that this disclosure was inadequate to address its concerns and it proposed to cease supply of all of its products to ALDI unless ALDI made further disclosures as prescribed by Nestle Australia and published corrective advertisements. The ACCC concluded that ALDI’s disclosure was adequate, noting that ALDI was selling genuine Nescafe products manufactured by a Nestle subsidiary. Having regard to internal Nestle Australia documents it obtained, the ACCC concluded that a substantial purpose of Nestle Australia’s conduct was to lessen competition generated by ALDI’s supply of imported Nescafe products, and lessen the likelihood of other supermarkets importing Nescafe products, both of which would place downward pressure on prices.

A number of submissions suggest there is a need to review the remaining restrictions on parallel imports.

• The BCA lists regulation requiring imported cars to be modified to meet Australian-specific car design standards as well as restrictions on the parallel importation of commercial quantities of books by booksellers as warranting review in any future Legislative Review Program. (BCA Main Report, page 21)

• The Intellectual Property Committee of the Law Council of Australia submits that, in light of several significant decisions by the courts, it has become difficult to advise clients on what is, or is not, a legitimate parallel import. It argues that a comprehensive examination of the parallel importation of trade marked goods should be undertaken to determine the costs and benefits of permitting (or not permitting) parallel imports into Australia. (page 2)

• The Australian Chamber of Commerce and Industry recommends a review of the enforcement requirements associated with parallel importing, noting the relative simplicity of parallel importation of products such as books compared with the nuances in formulation that occur across the global market for processed food and formulated chemical-base products. (pages 20-21)

The Panel’s view

Parallel import restrictions are similar to other import restrictions (such as tariffs) in that they benefit local producers by shielding them from international competition. They are effectively an implicit tax on Australian consumers and businesses. The Panel notes that the impact of changing technology means that these restrictions are more easily circumvented. The removal of parallel importation restrictions would promote competition and potentially lower prices of many consumer goods, while the concerns raised about parallel imports (such as consumer safety, counterfeit products and inadequate enforcement) could be addressed directly through regulatory and compliance frameworks and consumer education campaigns.