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Intellectual property and competition. Speech to Protecting Intellectual Property or Protecting Consumers: is there a trade off? Conference, 6 December 2002



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06-2981 J

AustralianCompetition &ConsumerCommission

Intellectual property and Competition

Speech to

Protecting Intellectual Property or Protecting Consumers: Is there a trade-off? Conference Melbourne Business School 6 December 2002

Professor Allan Fels Chairman

Australian Competition and Consumer Commission

I Introduction

Today I would like to address the interaction of intellectual property rights with competition

policy.

I frame my discussion in this way.

First, I would like to canvass some of the conceptual thinking that underpins the notion of

intellectual property rights and competition law.

Then, I would like to discuss the response of the Government to the report of the Intellectual

Property and Competition Review Committee. I take it as a given that you are aware, in the

broad, of the establishment of this committee in 1999, and of the recommendations contained

in the final report. In particular I will canvass aspects of the Government's decision that affect

section 51(3) of the Trade Practices Act, and the operation of copyright collecting societies.

As a final issue I would like to make some remarks on parallel imports, which has been a

matter of policy discussion for some twenty years. The key issues from the Commission's

perspective are the impact of the removal of parallel importation restrictions on sound

recordings in 1998. You may be aware of the recent court case involving illegal conduct by

two major record companies to prevent parallel imports of CDs despite the lifting of legislative

bans on such imports in 1998. I will talk more about that later.

The Commission is also keenly interested in the current parliamentary debate about the

parallel importation restrictions that apply to books and computer software; the Government

has introduced legislation to remove these restrictions. To assist this debate, we have updated

our earlier price surveys. I would like to talk about the findings of those surveys later.

We have also been keeping a close eye on a couple of other recent developments that may

impact on parallel imports; namely, Regional coding of DVDs and Sony Playstations. I would

also like to give a little attention to these matters today.

Underpinning my comments throughout this speech is an understanding that the issues about

the appropriate interface between intellectual property and competition laws are complex, and

that a fine balance needs to be struck between important and sometimes competing principles.

Nevertheless, I want to leave you with the key message that the laws can be improved to Fels Melbourne Business School Intellectual Property 6.12.2

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provide enhanced public benefit particularly as there has been some history of producer

interests driving the law at the expense of the public interest in certain areas of intellectual

property law. Such improvement is therefore worthy of your detailed consideration and your

strong support.

2. Intellectual property rights and competition law

I want now to briefly discuss the conceptual issues associated with intellectual property. As a

starting point, intellectual property laws encourage innovation by granting statutory exclusive

property rights. Without intellectual property laws, third parties might copy the goods

produced through the application of intellectual property without paying appropriate

remuneration, thus reducing the incentives to create further intellectual property.

The possibility of success in the market place, attributable to superior performance, provides

the incentives on which the proper functioning of our competitive economy rests. If a firm

that has engaged in the risks and expenses of research and development were required in all

circumstances to share with its rivals the benefits of those endeavours, these incentives would

be much diminished.

Accordingly, intellectual property laws can contribute to a more competitive economy.

It was once thought that intellectual property laws gave the owners of intellectual property a

legal or economic monopoly over a particular piece of intellectual property. This led to

concern that the unrestrained application of competition law to intellectual property may

undermine the intellectual property rights.

It is now accepted that, because they do not necessarily, or even very often, create legal or

economic monopolies, intellectual property laws do not necessarily clash with competition

laws because the goods and services produced using intellectual property compete in the

marketplace with other closely-substitutable goods and services.

In most instances, competition and intellectual property laws can be seen as complementary,

seeking to promote innovation to the benefit of consumers and the economy. Only in

particular cases will there be an apparent conflict between the two underlying policies. This

might occur where intellectual property owners are in a position to exert substantial market

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power or to engage in anticompetitive conduct. In these instances, holders of intellectual

property rights may seek to extend the scope of the right beyond that intended by the

intellectual property statute.

The key issue, therefore, is fmding an appropriate balance between intellectual property and

competition laws. This raises a crucial question about the types of incentives that are needed

to encourage innovation.

There are two unresolved aspects to this question: the first is whether providing greater

proprietary rewards to the innovator or increasing competition is the best way to spur

innovation efforts to the level that is `best' for society. The second is whether society benefits

most if it rewards initial innovation through broad intellectual property protection, or if it

fosters successive innovations by requiring access to the intellectual property of the initial

innovator.

People often talk about how important patents are to promote innovation, because without

patents, people do not appropriate the returns to their innovation activity. On the other hand,

some people jump from that to the conclusion that the broader the patent rights are, the better

it is for innovation.

This is not always correct because we have an innovation system in which one innovation

builds on another. If monopoly rights exist down at the bottom, this may stifle competition

and innovation in markets that use those patents later on In these instances, the breadth and

utilisation of patent rights can be used not only to stifle competition, but also have adverse

effects in the long run on innovation.

Much of this comment arises in the context of antitrust enforcement to prevent anti-competitive combinations of research and development. It also involves newer kinds of

intellectual output such as computer software and biotechnology. Intellectual property

advocates have asked whether antitrust enforcers can make sound judgements without more

information about how much competition is necessary to maintain innovation.' Future

For an interesting discussion of the dynamic issues associated with this debate see Michael E Porter, "Competition and Antitrust: towards a Productivity Based Approach to Evaluating Mergers and Joint Ventures", Antitrust Bulletin, Winter 2001.

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customers, by contrast, have stressed the importance of maintaining at least a few innovation

efforts to ensure timely, high quality, and competitively priced new products.

Strong enforcement of intellectual property rights might be appropriate where a patent or

copyright has the proper scope. The point has been made, however, that innovators in

biotechnology and software often receive very broad intellectual property rights that, when

combined with strong enforcement, allow intellectual property rights to become tools for anti-competitive conduct.

Finally, some debate has also arisen in the context of networks and the standards that networks

require for inter-operability. Here, some argue that the initial innovation that built a network

or standard to which access is desired would be deterred if access were required. Others

counter that successive innovation will be deterred if access is not required.

In total, the information currently available supports anti-trust enforcement that is assertive in

maintaining competition as a spur to innovation, yet cautious to avoid unwarranted

interference with intellectual property incentives for innovation.

2.1 Licensing of Intellectual Property

I think it is useful at this point to consider briefly how and when the exploitation of intellectual

property rights might conflict with the Australian trade practices legislation. The

Commission's views will be set out fully in the forthcoming draft Intellectual Property

Guidelines that I will discuss later on. The views expressed in my paper today are only

preliminary.

In general, the Trade Practices Act will not require an intellectual property owner to licence

the intellectual property. However, if certain intellectual property rights limit competition in a

market, the refusal to license such rights might have an anti-competitive effect in certain

circumstances. Similarly, a refusal to disclose confidential information relating to a product

may also inhibit competition. Many businesses are engaged solely in servicing another's

product or in providing additional products or facilities to be used in conjunction that primary

product. If the manufacturer refuses to disclose information enabling competitors to supply,

say, spare parts, or in the case of computer equipment, to interface components that provide

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additional facilities, competition in these dependent or subsidiary industries may be restricted.

As such, refusal to license may infringe s.46 (which deals with the misuse of market power).

Section 46 proscribes a business that has a substantial degree of power in a market from taking

advantage of that power for the purpose of eliminating, damaging or restricting existing or

potential competitors. Intellectual property rights have the potential to provide their holders

with the means to achieve one or other of these ends. However, in all cases, conduct would

only be prohibited by s. 46 if it was engaged in by an owner taking took advantage of its

substantial market power for one of the proscribed purposes.

Aside from a blanket refusal to license, licence terms and conditions may be applied to anti-competitive effect. A licence or assignment of intellectual property rights may make it

possible for an owner to restrict the extent to which a licensee is able to compete with the

owner or other right-holders. It is also possible for the owner to restrict competitive supply by

third parties to the licensee. Provisions that substantially lessen competition may infringe

sections 45 (unless exempted). Those that are imposed for the purpose of deterring or

preventing an agent from engaging in competitive conduct may infringe s. 46.

The forms of such restrictions can be varied, and could include: exclusive licensing;

territorial restraints; price or quota restrictions; quality or minimum royalty/quantity

requirements; sub-licensing restrictions; no challenge and non . competition clauses; and

leveraging. The competitive impact of these restrictions depends on the characteristics of the

market in which the licensing occurs and/or has effect.

Sometimes, owners of intellectual property rights may wish to pool their rights with those of

other owners, maybe even their competitors and sell collectively the pooled intellectual

property rights for a single price. Alternatively, intellectual property owners may wish to

cross- license their intellectual property with that of another owner. In many, if not most

instances, these pooling and cross-licensing arrangements facilitate access to, and the

exploitation of, the intellectual property. Thus, in the main, they are pro-competitive.

However, competition concerns may arise if the arrangements are used to exclude competitors

in a market, or to raise prices in the direct or related markets.

3. Australian Intellectual Property Policy Issues

Fels Melbourne Business School Intellectual Property 6.12.2

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One general outcome of the Australian policy debate about intellectual property is that a great

deal of interest has developed in the economic justification for intellectual property laws, an

area previously neglected by economists and general policy makers. There has been focus

particularly on the justification for statutory restrictions on parallel imports of copyright

products.

Given the rapid and unparalleled integration of national economies, there is, not surprisingly,

an international dimension to these issues.

In my view, the balance of intellectual property law both globally and in Australia has been

biased towards international producer interests. Nearly everywhere intellectual property law

making has been captured by the interests of producers at the expense of users and consumers.

We need to take this into account in reviewing intellectual property laws and contributions to

global forums where intellectual property laws is made.

In my view, the TRIPS (Trade Related Intellectual Property Rights) policy making has been

unduly tilted in favour of United States interests. A clear example is the extension of patent

law rights in the last global trade round.

Australia was not the only loser.

Other losers included most developing countries.

I also believe that Europe, on balance, is a net loser from parallel import restrictions. Broadly,

Europe allows parallel import within its borders but prohibits parallel imports from non-EU

countries. This issue is becoming more important in Europe with pressure mounting on the

EU, for instance, to review the Trade Mark Directive.

An important policy discussion in Australia, and of great interest to the Commission, is the

treatment of intellectual property under the Trade Practices Act and how the generally

complementary goals of intellectual property law and competition policy should be balanced.

The Trade Practices Act already takes specific account of intellectual property rights and

establishes an interface between those rights, and conduct prohibited under the Act. In

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particular, s.51(1) makes it clear that anti-competitive conduct permitted under IP legislation is

not exempt from the Trade Practices Act.

But this is qualified by s.51(3).

Section 51(3) of the Trade Practices Act exempts conditions of licences and assignments from

ss. 45 (agreements that substantially lessen competition), 47 (exclusive dealing) and 50

(mergers that substantially lessen competition) to the extent that they relate to the subject

matter of the relevant intellectual property, or, in the case of trade marks, only to the extent

that they relate to the kinds, qualities and standards of goods bearing the trade mark.

Part IIIA of the Trade Practices Act establishes an access regime in relation to essential

services. However, intellectual property is exempted by s.44B of the TPA from this regime.2

This means that the access regime embodied in Part IRA can not be used to address situations

where an owner or holder of an intellectual property right refuses to licence the intellectual

property for an anti-competitive purpose.

3.1 Review of Intellectual Property and Competition Law

I now turn to the work of the Intellectual Property and Competition Review Committee.

In June 1999, the Commonwealth Government established the Intellectual Property and

Competition Review Committee to review the competition aspects of intellectual property

legislation.

The Committee issued its final report in September 2000, and made a series of

recommendations to change Australia's intellectual property laws, thereby improving the

balance between those laws and competition policy.

The Committee also made some recommendations for changing the way that the Trade

Practices Act applies to intellectual property licensing and assignment, and suggested a role

for the Commission in be negotiation of terms and conditions of copyright licensing by

copyright collecting societies.

2 In s.44B, the use of intellectual property is excluded from the definition of `service' for the purposes of Part IIIA of the Trade Practices Act.

Fels Melbourne Business School Intellectual Property 6.12.2

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In August 2001, the Government announced its response to the fmal report.

In the main, the Government accepted most recommendations.

You will appreciate that there are too many decisions for me to talk about at this forum so I

intend to focus on s51(3) of the Trade Practices Act and the Commission's role in the activities

of copyright collecting societies as these are of particular relevance and interest to us.

In passing, though, I would note that the Government also decided to:

? add a competition test to the existing tests as an additional ground on which a compulsory

licence for a patent can be obtained3;

? amend the Copyright Act to allow decompilation of computer software for the purposes of

interoperability;

? retain the existing term of copyright protection; and

? amend the assignment provisions of the Trade Mark Act to prevent an assignment being

used to prevent parallel importation of legitimately trademarked goods.

3.1.1 Section 51(3) of the Trade Practices Act

The Government accepted the IPCRC's view that intellectual property rights should continue

to be accorded distinctive treatment under the Trade Practices Act. Section 51(3) will be

amended so that intellectual property licensing would be subject to the provisions of Part IV,

but a contravention of the per se prohibitions of ss. 45, 45A and 47, or of s. 4D would instead

be subject to a substantial lessening of competition test. This largely reflects the Committee's

recommendation.4

3 The IPCRC recommended that the Australian Competition Tribunal consider an application for compulsory licence in the first instance. The Government considered that all applications for compulsory licences should be considered by the Federal Court in the first instance.

4 The IPCRC recommended that an IP licensing or assignment condition should not breach Part IV of the Trade Practices Act unless it substantially lessens competition.

Fels Melbourne Business School Intellectual Property 6.12.2

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The Commission believes that this decision is a large step forward as the amendments will

expose intellectual property licensing and assignment to the strictures of the Trade Practices

Act to a greater extent than is currently the case. However, the Commission remains of the

view that intellectual property should be fully subject to Part IV of the Trade Practices Act, as

are other forms of property.

There may be quite a degree of uncertainty among intellectual property holders and their

advisers as to how the Commission will enforce the new provisions. In an attempt to reduce

this uncertainty, it has been decided that the Commission would issue guidelines outlining its

enforcement approach to Part IV as it applies to intellectual property.

The guidelines would define:

? when intellectual property licensing and assignment conditions might be exempted under s.

51(3);

? when intellectual property licences and assignments might breach Part IV; and

? when conduct that is likely to breach the Act might be authorised.

The Government expects the Commission to consult with interested parties in the preparation

of these Intellectual Property Guidelines. We will also consider overseas approaches to

antitrust enforcement of intellectual property, including intellectual property guidelines issued

by the US, UK and Canadian authorities.5

I expect that we will release the draft Intellectual Property Guidelines and call for public

comment before finalising the Guidelines.

While I expect that the Guidelines will help to reduce uncertainty about the Commission's

enforcement approach in relation to intellectual property licensing and assignments, I would

like to stress two points.

First, the Guidelines will outline the Commission's enforcement approach and provide

guidance as to when the Commission is likely to take action against a potential breach of Part

See Appendix A.

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IV. However, as with all actions taken under the Act, it will ultimately be for the courts to

determine whether a breach has occurred.

Secondly, the Guidelines will not provide any assurance that intellectual property holders will

not be subject to private action for licensing and assignment conditions that may appear

unlikely to breach the TPA on the basis of our intellectual property Guidelines.

3.1.2 Copyright Collecting Societies

Copyright collecting societies are an administratively efficient way for copyright owners to

enforce their intellectual property rights and to collect and distribute copyright licence fees.

However, as monopolies, their existence gives rise to potential competition concerns including

the potential abuse of market power to extract high licence fees from users.

While there is currently uncertainty about the scope of the s.51(3) exemptions, the

Commission nevertheless has some experience in assessing the potentially conflicting

competitive and efficiency effects of copyright collecting societies. In 1997, the Australasian

Performing Rights Association (APRA) applied for authorisation of its input and output

arrangements, involving exclusive licensing of copyright works by composers to APRA ( the

input arrangements) and the provision of blanket licences by APRA to users which enable

users to broadcast the entire APRA repertoire (the output arrangements), its distribution

arrangements and overseas arrangements. The Commission took the view that there were both

costs and benefits associated with the collective licensing of musical works. The Commission

considered that a better balance could be struck between the costs and berefits of the scheme if

it allowed for direct dealing and blanket licence fees were appropriately adjusted. APRA

would not agree to amend their licensing arrangements to meet the Commission's

requirements, hence authorisation was denied for all but the overseas arrangements.

This decision was referred to the Australian Competition Tribunal for review. After reviewing

the evidence, the Tribunal considered that if APRA's input arrangements were modified to

allow for the introduction of a nonexclusive licence-back scheme and a simplified dispute

resolution scheme was introduced, authorisation should be granted for the applications which

were not authorised by the Commission. The matter was adjourned to allow APRA an

opportunity to devise a non-exclusive licence-back scheme and a simplified dispute resolution

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scheme, On 20 July 2000, the Competition Tribunal made a determination granting

authorisation to APRA, endorsing the agreed dispute resolution procedure and non-exclusive

license-back scheme. The Tribunal also set aside the Commission's notice under s. 93(3) to

revoke the authorisation. Further details of the APRA matter are contained in Appendix B.

Returning to the review of intellectual property laws, the Government accepted the IPCRC

recommendation that the existing powers of the Copyright Tribunal to review output

arrangements of declared collecting societies, which are licensing arrangements between the

Society and users or potential users of the copyright material so administered, be extended to

cover the output arrangements of voluntary collecting societies not administered under a

statutory licence. The Government also outlined a role for the Commission in relation to the

extension of the Copyright Tribunal's powers.

The Commission will be required by statute to issue guidelines on what matters it considers to

be relevant to the determination of reasonable remuneration for copyright holders in

negotiations between societies and users of copyright material.

The main purpose of the guidelines would be to facilitate licence negotiations and minimise

recourse to the Copyright Tribunal for a determination. In the event that negotiations failed

and one or other party applied to the Tribunal for a determination, recourse to the Tribunal

would not be restricted in any way. The Commission's guidelines would be advisory, not

determinative.

The Copyright Act 1968 will be amended so that the Copyright Tribunal has the discretion to

take account of the guidelines and to admit the Commission as a party to Tribunal

proceedings.

The Commission welcomes the Government's decision as a means of improving the balance

between the costs and benefits associated with collective licensing and thus reducing the

potential for such licensing to have anticompetitive effects.

4. Parallel Imports

I now turn to the issue of parallel imports, which in Australia, has been a long and involved

debate.

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As background, the Copyright Act originally prohibited parallel imports except for personal

use. In 1983 the question of whether the importation provisions of the Copyright Act should

be reformed was referred to the Copyright Law Review Committee. It reported in 1988 but

felt itself unable to evaluate the conflicting claims about the likely consequences of reform for

prices. It was, however, concerned about problems in the availability of some copyright

product, in terms of delayed release and range of products.

The report of the Copyright Law Reform Committee was followed by work by the Prices

Surveillance Authority (PSA), which most notably investigated the prices of books, recorded

music and computer software.

While availability was still an issue, particularly in relation to books and to a lesser extent

sound recordings, the PSA's main focus was on international price discrimination. It found

that Australia was paying higher prices for all these products than consumers overseas,

particularly in North America and that this was the result of the parallel import restrictions.

4.1 Changes to the law

In 1991, the Copyright Act was amended to allow limited parallel importation of books.

Parliament then repealed the restrictions on parallel importing of sound recordings in 1998. It

also amended the Copyright Act to prevent copyright in labels and packaging being used to

control parallel importing of products with such labels and packaging.

Last year, the Government introduced legislation to remove parallel import restrictions on

books and computer software and to close the loophole which may allow copyright holders of

sound recordings to restrict parallel imports by attaching `accessories' to CDs. That

legislation lapsed with the calling of the Federal election late last year. However, earlier this

year the Government introduced a new bill that is effectively the same as the lapsed bill.6

4.2 Parallel Importing of Sound Recordings

The removal of the restrictions on parallel imports of sound recordings in July 1998 has been

the most well known recent development in Australian copyright law. Since there has been so

6 The Copyright Amendment (Parallel importation) Bill 2002.

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much heat and noise generated over this issue, it is appropriate to review what has happened

since the passage of the legislation.

Court cases

You may be aware that the Commission has just won a very significant case in the Federal

Court on the parallel importation of CDs. It was found that certain record companies engaged

in anti-competitive conduct in order to discourage or prevent Australian businesses from

selling parallel imported compact discs.

This is an important case, so it is worthwhile spending a little time canvassing the issues.

In September 1999, the Commission instituted proceedings against Universal Music, Sony

Music and Warner Music (and the Australian Record Industry Association and Music Industry

Piracy Investigation Pty Ltd) alleging breaches of ss. 45 (contracts, arrangements or

understandings that restrict dealings or affect competition), 46 (misuse of market power) and

47 (exclusive dealing) of the Act.

The ACCC's investigation began after reports that the major record companies had threatened

to withdraw significant trading benefits from retailers who stocked parallel imports. In several

cases record companies had allegedly cut off supply to retailers who stocked parallel imports.

The ACCC alleged that by virtue of the action that Universal, Sony and Warner took to

prevent retailers from stocking parallel imports they had breached both ss.46 and 47 of the

TPA. The ACCC also alleged that Universal, Sony and Warner had each colluded with Asian

record companies to try to prevent Asian wholesalers from supplying compact discs to

Australian businesses. It was alleged that ARIA and MIPI assisted Sony Music to cut off

these trading opportunities. These arrangements were alleged to be in breach of s.45 of the

TPA.

In March 2001, the ACCC settled its action with MIPI, Michael Speck and Sony's individual

respondents. There was no admission of liability and no penalties imposed.

In April 2001, the ACCC settled its action against Sony. As a result, Sony Music

Entertainment (Australia) Limited and Sony Music Entertainment Holdings (Australia) Pty

Limited, without admitting liability, gave the following undertakings to the Federal Court:

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? Sony will, for a period of two years, not withdraw trading benefits from Australian

retailers parallel import copies of recorded music contained in Sony's Australian

catalogue;

? Sony will implement a Trade Practices Compliance Program in respect of Part IV;

? Sony will, for a period of two years, not take any action to hinder of prevent independent

foreign distributors from exporting parallel products to Australia.

To date, it appears that Sony is meeting the undertakings.

In December 2001, the Federal Court (Justice Hill) found that Warner Music and Universal

Music had breached ss46 and 47 of the TPA. Senior executives of those companies were held

to be knowingly concerned in the contravention of their employers. Justice Hill did not find

that either Warner or Universal had breached s.45.

Both Universal and Warner were concerned that competition from cheaper, imported CDs

would affect their profits. Justice Hill found that Universal and Warner tried to stop

alternative, imported supplies of non- infringing recordings of titles in the companies'

catalogues. Justice Hill found that neither Warner nor Universal could establish that it had a

separate aim of preventing `free-riding' and rejected `any attempt on the part of Universal to

suggest that the action taken by it was taken to prevent piracy'.

In March 2002, Justice Hill penalised Universal, Warner and their senior executives and

ordered both Universal and Warner to pay penalties of $450,000 each. Individual penalties of

$45,000 or $50,000 were ordered against four senior executives (two from each company).

Injunctions were granted to permanently prevent Warner and Universal from refusing or

threatening to refuse supply to retailers who had, or proposed to, parallel import copies of

music within Warner's or Universal's catalogue.

Justice Hill's findings are an important win for Australian consumers. They mean that

retailers will be able to access freely cheaper, legal, imported CDs without fear that they will

lose supply of other stock. This was the precise intention of the Australian Parliament when it

amended the Copyright Act in 1998 to allow parallel imports of sound recordings.

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Justice Hill's findings also set an important precedent in relation to s.46 of the Trade Practices

Act. In particular, they challenge the view that market share is the major determinant of

market power. Justice Hill held that Universal and Warner had a substantial degree of market

power in the wholesale recorded music market with market shares of 15-17% and 17-18%

respectively. In most industries, market shares of this size would not be indicative of market

power, a fact acknowledged by Justice Hill. Nevertheless, Justice Hill considered that in the

sound recording industry, the question of market power should not be determined solely by

market share. Justice Hill explained:

`It is relevant to consider not merely the fact that there are differentiated products, albeit

with sometimes a short life time in the charts, but also the commercial need for retailers,

big and small, to be able to access for sale to customers the whole catalogue of a record

company, chart or non-chart, depending on the retailer's degree of specialisation and

the music genre the retailers sells. '7

Justice Hill accepted the ACCC's expert witness' view that even if a company's price is

constrained by its competitors, its non-price conduct may not be. In other words, the

commercial need for retailers to access the entire catalogue, and the commercial difficulties

associated with importing and distributing this catalogue themselves, meant that Universal and

Warner's threats and actions to cease supply of its catalogue to retailers were sufficient to

deter some retailers from engaging in parallel importation of chart music. Under these

circumstances, a supplier can exert market power even if its individual share of the market is

not at a level traditionally required to establish the existence of market power

The importance of barriers to entry in determining market power has also been challenged by

Justice Hill's findings. Historically, the existence of structural barriers to entry have been

crucial to a finding of market power, but there has been little attention given to, or importance

placed on, strategic entry barriers. Justice Hill found that there were really no significant

structural barriers to entry to the record industry generally. However, he found that the ability

of the major record companies to prevent retailers from selling imported CDs is a barrier to

entry into the market of sellers of imported CDs. There is also a distinction to be drawn

7 Australian Competition and Consumer Commission v Universal Music Australia Pty Ltd & Ors [2001] FCA 1800 @382.

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between entry at the fringe, ,which in this matter Justice Hill found can be done easily, and

entry or expansion to the core, which is more difficult8

In March 2002, the ACCC appealed against the corporate penalties.

Both Warner and Universal have appealed the findings or ss46 and 47, the accessorial liability

and the relief granted.

The appeal before the Full Federal Court took place on 25-27 November 2002. The presiding

judges were Wilcox, French and Gyles. Their decision has been reserved.

This case illustrates the point, I think, that Commission has a strong bias, not towards imports,

but towards increased competition. In the sound recordings market, this means allowing

music product legally produced and marketed overseas to be available to Australian

consumers. This has already improved the supply side of the market with tangible benefits to

music consumers, and few, if any, negative effects elsewhere.

Price Surveys

The Commission conducts periodic surveys of CD prices in specialist and non-specialist music

stores in Australia. These surveys are not intended to give a comprehensive indication of

actual prices, price movements or comparisons with overseas prices. They are, however, a

useful guide to how the music industry is coping with deregulation.

The latest survey, for the September 2002 quarter, indicates that the average UST-inclusive

Australian price of a Top 40 CD at specialist music stores in September 2002 was $26.41.

This is the price that you or I would actually pay for the CD. This is a useful `headline' price

for consumers but it is not particularly helpful for the purposes of policy analysis. This is

because the retail price includes taxes which do not impact directly on the decision whether to

parallel import or not. Furthermore, as the Australian tax system changed in 2000, it is not

sensible to compare the airrent `headline' retail price with the corresponding price that

prevailed prior to deregulation. To make these types of comparisons, the Commission takes

taxes out of all prices. When taxes are excluded, the average retail price in September 2002

8 Ibid @ 422. Fels Melbourne Business School Intellectual Property 6.12.2

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was $2.02, or 7.9%, less than the tax-exclusive price that prevailed immediately prior to

deregulation.9 The ACCC's surveys indicate that average nominal tax-exclusive Top 40 prices

have been lower at all times post- deregulation than the price prevailing immediately prior to

deregulation.

The average GST-inclusive Australian price of a Top 40 CD in September 2002 at non-specialist stores such as Target and Grace Brothers was $21.98. The Commission has only

just started to collect this type of price information so I can not comment on how tax-exclusive

prices in these outlets, or availability of product, have changed since 1998. However, what is

apparent, is that these non-specialist outlets are a source of price competition to the specialist

stores, for the chart CDs at least.

The surveyed average tax-adjusted Australian price for September 2002 was 17.2 per cent

lower than the surveyed tax-adjusted US price and 28.1 per cent lower than the surveyed tax-adjusted UK price, but 12.9 per cent higher than New Zealand's tax-adjusted surveyed price.10

Over time, CD prices might be expected to rise because of general inflationary pressures.

Recent exchange rate depreciations have also put upward pressure on imported CD prices. In

the absence of potential competition from parallel imports, therefore, it is likely that tax-exclusive CD prices would, on average, be higher than prices that prevailed in August 1998.

However, the ACCC's surveys confirm that Australian nominal tax-adjusted prices (excluding

the impact of the switch to the New Tax System which was expected to cause a fall in retail

prices of CDs) have, in fact, fallen since deregulation despite the upward pressures exerted by

general inflation and the exchange rate. In September 2002, average Australian tax free retail

prices were $5.72 or 19.3 per cent lower than would be expected if CD prices had risen in line

with inflation of 14.2 per cent since August 1998.

Apart from price effects, we have also seen attempts by Australian suppliers to differentiate

their product from imported supplies. Australian-made product is now often enhanced by the

9 Taxes are excluded because in August 1998, sound recordings were subject to a wholesale sales tax whereas current prices are subject to a GST. Hence, tax-inclusive prices from August 1998 to the present are not directly comparable. Furthermore, the retail price of CDs was expected to fall as a result of the New Tax System (NTS). Removing taxes from the historic price comparison removes the price effect of the NTS.

10 Using three month average exchange rates.

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inclusion of a CD ROM feature, foldout booklets, bonus tracks or bonus CDs. This is good,

but the Commission is still interested in seeing head-to-head competition - it may be that

consumers want the standard music product at reduced prices instead of the enhanced product

at higher prices.

Only market competition can resolve this.

Retailers report that advertising and promotional spending is continuing and the indent

services provided by producers has improved. Very little has been heard about damage to

artists' incomes from parallel imports. Few Australian artists sell their music overseas, so it

was no surprise that this did not become an issue. While the industry predicted rampant

piracy, the available reports are that the incidence of piracy is low and arises mainly from

Australian and electronic sources. This latter point even seems to be conceded by the industry.

I note that Mr Michael Speck, manager of Music Industry Piracy Investigations, has been

reported as saying that in the past 18 months there has been a shift in music piracy away from

industrialised techniques to using PCs. I I

The situation is obviously fluid, but these are all important developments.

4.3 Parallel imports of books and computer software

I want now to turn to the issue of parallel imports and books and computer software.

In December 1998 the Government asked the Commission to report on the potential consumer

benefits of repealing the importation provisions of the Copyright Act as they apply to books

and computer software.

The intention was to provide the Government with up-to-date and rigorous comparisons

between book prices and computer software prices in Australia and those prevailing overseas.

In addition, the Commission also considered the likely impact of an open market on producers,

distributors and retailers of books and computer software.

1 1 Kirsty Needham, "Escapologist Williams Ducks CD Pirates", Sydney Morning Herald, 16 November 2002, p.3.

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The Commission identified that the likely benefits of repeal included lower prices and

improved availability of these products. We noted that the importation provisions grant an

import monopoly to the local copyright holder, which cut out competitive supply channels.

4.3.1 Books

In 1989, the PSA found that the lack of international competition in the book trade had

resulted in price discrimination, poor availability, and high costs.

Following the release of this report, amendments were made to the Copyright Act in 1991

which enabled copyright holders to retain exclusive distribution rights provided they can

guarantee supply within a specified time frame.

The PSA was asked by the Government to monitor and report on the effects of the 1991

reforms on the price and availability of books.

In 1995 the PSA held a full public inquiry.

It concluded that, while the 1991 amendments had resulted in an improvement in distribution

efficiencies and improved the speed with which most new releases became available in

Australia, prices of some books continued to be high relative to overseas, particularly in the

technical and professional and mass market paperback areas.

Furthermore, booksellers had also found the 1991 amendments difficult and costly to

implement.

The PSA considered that only an open market, with no restrictions on parallel imports could

deliver competitive prices over the long term and overcome the administrative difficulties

inherent in the 1991 reforms. The PSA recommended that the importation provisions be

repealed in full, or as a fallback position that the 1991 reforms be simplified and streamlined.

As mentioned, the Government has introduced a bill to amend the Copyright Act to allow for

parallel importation of books and computer software. The Commission has updated its books

price comparisons in anticipation of the parliamentary and public debate associated with the

Bill. The best seller books price comparisons are updated to the end of June 2002. The

technical and professional book price comparison has been updated to May 2002. These are

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directly comparable with all previous price surveys undertaken by the ACCC (and PSA). The

full survey findings are shown in Appendix C. They can be summarised as:

Latest Books Survey Findings

The key findings of the updated books survey are:

? For the 14 years from 1988-89 to June 2002, Australians have been paying, on average,

41.9 per cent more for best selling paperback fiction than US readers, and 7.3 per cent

more than UK readers; 12

? For the period 1994-95 until June 2002, Australians have paid on average, around 16,5 per

cent more for all best sellers than US readers. 13

? Australians paid, on average, 8.5 per cent, or $27 more than US readers in May 2002 for

certain medical titles and 9.1 per cent more , or $31, than readers in the UK.

The latest findings indicate that there are still substantial differences in the sectors that have

consistently been highly priced in Australia, namely best selling paperback fiction relative to

the US, and technical and professional. This suggests that there would be immediate gains

from parallel importing for consumers in those areas. Some books in Australia are currently

priced competitively with their overseas counterparts. For those books, repeal of the

importation provisions would ensure that that situation continued.

The ACCC's price surveys focus primarily on price, rather than availability. The data

underlying the surveys suggest, however, that availability of some books remains of concern.

In particular, it appears that some titles are only made available in Australia in the large format

paperback version whereas there is a hardback version available overseas. Other titles may

not be available at all.

12 For the twelve months to June 2002, the Australian price for best selling paperback fiction exceeded the US price, on average, by 16%, higher than the differential for 2000-01 of 11.1%. In relation to the UK, prices in Australia for best selling paperback fiction were, on average 8.6% below prices in the UK. In 2000-01, Australian prices were, on average 6.2% less than in the UK.

I3 For the twelve months to June 2002, the Australian price for all best sellers were broadly the same (0.7% below) prices in the US and 13.1% less than comparable prices in the UK. For the period 2000-01, Australian prices were, on average 3.3% higher than in the US and 8.3% lower than in the UK.

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4.3.2 Computer software

The Commission has also updated its spot price comparisons of leading business software and

PC computer games with the USA, the UK and NZ.

The key findings of our survey, conducted in May-June 2002,are:

? Advertised prices of 50 popular business software packages on a selection of Australian

websites were higher, on average, than comparable products advertised on US, UK and

New Zealand web sites. This general finding is consistent with the ACCC's earlier spot

price comparisons of business software packages. Specifically, in May-June 2002,

Australian prices were 20.7% higher than prices advertised on US websites; 1.4% higher

than in the UK and 3.9% higher than in New Zealand;14

? Advertised prices of 25 popular PC games on a selection of Australian websites were, on

average, 12.5 per cent lower in Australia than the US, 2.7% lower than in the UK and 8.7%

higher than in New Zealand. These results are broadly consistent with previous ACCC

surveys. 15

The findings in relation to business software are significant because such software is used as a

business productivity tool. Hence the savings to be made from allowing parallel imports are

greater than the direct reduction in price arising from greater competition. Lower prices would

also encourage greater usage of business software which should boost the productivity of both

households and businesses that use the product.

Earlier time series data indicate that prices of business computer software in Australia has

been persistently high compared with the USA since at least 1988-89.

These latest figures are a `snap shot' of prices on a particular day and are not exactly

comparable with the earlier time series. I do not claim that. Taken together, however, the

14 In February- March 2001, advertised prices of business software on Australian web sites were, on average 11.5% higher than in the US.

15 In February-March 2001, advertised prices of PC software games in Australia were, on average 3.6% lower than in the US.

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surveys suggest that one consequence of parallel import restrictions is that prices of some

computer software in Australia are too high.

The Commission's work has shown that parallel import restrictions have harmed Australia by

raising prices over many years and restricting supplies. They have no justification. The

Commission welcomes the Government's introduction of legislation to remove parallel import

restrictions on books and computer software.

The ACCC's surveys help to inform the Australian debate about the anti-competitive

consequences of bans on parallel imports. It is also useful to look at the New Zealand

experience, another small net-importer of copyright products.

Parallel imports of all copyright works and subject matter have been allowed in New Zealand

since 199 6 8.1

The newly elected New Zealand Government undertook in 2000 to review the parallel

importation arrangements with a particular focus on the impact of parallel imports on New

Zealand's creative industries. The review, which involved public consultation, did not find

substantial evidence that reintroducing bans on parallel imports would stimulate investment in,

and overseas promotion of, New Zealand's creative talent.

In December 2001, the New Zealand Government announced its response to the review. It

decided that parallel import bans would not be reintroduced for sound recordings, books or

computer software. However, the Government will continue to review the impact of parallel

imports on those copyright products for the next three years.

Legislation would be introduced in early 2002, however, to ban parallel imports of films,

videos and DVDs for 9 months from a title's first international release. This would allow for

the orderly international release of such titles. The legislation will also change the onus of

proof in piracy proceedings to make it easier for actions to be taken against pirates.

16 Copyright (Removal ofParallel Importation) Amendment Act 1998 (NZ)

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4.4 Other Parallel Importation Issues

Manufacturers of DVD players are required by the DVD Copy Control Association in

California (USA) to incorporate the Regional Playback Control (RPC) system. The RPC

effectively divides the world into six regions for the purposes of DVD distribution. It employs

digital encryption to prevent a DVD produced for one region from being played on a DVD

player manufactured for another region. It is justified by the industry as an anti-piracy device.

The ACCC is investigating two aspects of this arrangement. First, the ACCC is concerned

that Australian consumers who purchase DVDs from other regions may be unaware that these

authorised copies may not be playable on DVD players purchased in Australia. Secondly, the

ACCC is concerned that the RPC system may enable copyright owners to practice

international price discrimination by artificially creating regional barriers. The RPC system

may be used to prevent cheap imports in countries where domestic price competition is

limited, such as Australia.

4.4.1 Court Case

In a related matter, Sony Computer Entertainment produces and distributes its PlayStation

console incorporating region coding. The effect of this coding is to create three mutually

exclusive geographic regions for the purposes of distribution. As with the RPC system, region

coding means that Australian consumers who buy legitimate PlayStation games overseas may

not be able to play those games on consoles distributed in Australia. The PlayStation region

coding means that while you can make a copy of a PlayStation game, you can not play it on

the PlayStation console. However, the RPC restrictions in PlayStations can be overcome by

installing a mod chip in a PlayStation console. The ACCC is concerned that the main purpose

of the RPC restrictions is to prevent parallel imports, not to prevent infringement of copyright

as alleged by Sony. 17

17 RPC in DVD players can also be chipped to overcome zoning arrangements. The Commission is not aware of any action taken by movie studios or equipment manufacturers to prevent such chipping. However, there is a new form of technology, known as Region Code Enhancement, being applied to some DVD movies which prevents a movie from being played if it detects that the DVD player has been modified.

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Under the new anti-circumvention provisions of the Copyright Act the manufacture and supply

of devices, or the provision of services which over-ride copy control measures is outlawed if

the copyright protection measures have no commercially significant purpose other than to

prevent infringement. Sony Computer Entertainment sought in the Federal Court to have these

provisions of the Copyright Act applied in such a manner as to prevent consumers from having

a mod chip installed in their PlayStation console, thus preventing them from playing legitimate

games purchased overseas, as well as copies made for legitimate backup purposes under the

Copyright Act.

In September 2001, the ACCC was granted leave to be heard as amicus curiae in Sony's action

in relation to whether modifying PlayStation consoles infringes the Copyright Act.

The ACCC submitted to the court that RPC does not exist to protect against copyright

infringement. It prevents the use of imported games and backup copies authorised by statute.

Under the current legislation it is not illegal to play either imported or copied games although

the act of importation or of copying may constitute an infringement in some circumstances.

The act of simply playing a disc does not constitute a breach of copyright.

In July 2002, the Federal Court ruled that Sony PlayStation owners have the right to have their

consoles `chipped'. In doing so, the Court agreed with the ACCC's submission that the RPC

system goes beyond having the single purpose of preventing copyright infringement. The

Court accepted that the effect of RPC is to restrict the playback of certain games, noting that

the Copyright Act does not make it illegal for consumers to play computer games, only to

copy them illegally. The Court further noted that RPC does not serve the purpose of

preventing or inhibiting the copying of games and was therefore not worthy of protection

under Australian copyright laws.

Sony has appealed the Court findings. The ACCC will seek leave of the Court to be heard as

amicus curiae in this appeal. A date for hearing of appeals has not been set.

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5. CONCLUSIONS

The specific reports of the Commission's predecessor, the PSA, triggered some of the

Australian debate about the relationship between intellectual property and competition laws,

especially in relation to the impact of parallel import restrictions. That debate continues.

The Intellectual Property and Competition Review Committee also raised a wide range of

important issues. The Government's response to their final report will change the existing

interface between the intellectual property laws and the Trade Practices Act. It will also

greatly enhance the Commission's role in ensuring that the underlying complementary policies

of both sets of legislation are realised; that of enhancing innovation to the benefits of

consumers and the economy.

Technological developments also continue to raise new and complex trade practices issues.

However, I am confident that both the Trade Practices Act and the Commission are well

placed to face these all of these new challenges.

Fels Melbourne Business School Intellectual Property 6.12.2

Appendix A: International Guidelines on Intellectual

Property Licensing

United States

In 1995 the United States Department of Justice (DOJ) and the Federal Trade Commission

(FTC) issued joint `Antitrust Guidelines for the Licensing of Intellectual Property', setting out

their approach when assessing whether intellectual property rights may infringe competition

law.

The guidelines embody three general principles, namely:

? for the purpose of antitrust analysis, the DOJ and FTC regard intellectual property as

being essentially comparable to any other form of property;

? the DOJ and FTC do not presume that intellectual property creates market power in the

antitrust context; and

? the agencies recognise that intellectual property licensing allows firms to combine

complementary factors of production and is generally procompetitive.'a

The US Agencies are particularly concerned about horizontal arrangements (where owners of

competing technologies agree to pool the technologies or research efforts, or where one firm

buys the rival's competing technology). They are also concerned where licence conditions

restrict output, create or consolidate market power, increase the risk of coordinated pricing, or

shut competitors out of markets or raise their costs (for example, by lifting the price of vital

inputs).

The US agencies have also created a `safety zone' in the guidelines to assist the DOJ and FTC

to determine whether a particular intellectual property licensing agreement may need to be

examined, he guidelines indicate that the DOJ and FTC will not challenge a licensing

arrangement when:

? the restraint is not facially anti-competitive; and

18 The United States Department of Justice (DOJ) and the Federal Trade Commission (FTC), Antitrust guidelines for the Licensing of Intellectual Property', April 1995, p.3.

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? the licensor and licensee collectively account for no more than 20 per cent of each

relevant market significantly affected by the restraint.

Furthermore, the US agencies will not challenge a restraint when four or more corporations (in

addition to the parties subject to the licensing arrangement) possess assets, characteristics and

incentives to engage in research and development that is a close substitute for that in the

licensing arrangement.

Canada

In 2000 the Competition Bureau Industry of Canada ('the Bureau') issued `Intellectual

Property Enforcement Guidelines', setting out their approach when assessing whether

intellectual property rights may raise concerns under the Canadian Competition Act.

The Bureau considers intellectual property licensing to be procompetitive as it encourages

firms to conduct research and development, which creates new markets for new technologies

or products. However, the Bureau does acknowledge that in some instances intellectual

property licensing can have an adverse impact on competition. The guidelines have identified

two broad categories in relation to conduct involving intellectual property or intellectual

property rights:

? those involving something more than the mere exercise of the intellectual property

right; and

? those involving the mere exercise of the intellectual property right and nothing else.

The Bureau will administer the general provision of the Competition Act to address the former

conduct and the special remedies provision of the Competition Act to address the latter

conduct.

The Bureau considers that `market conditions and the differential advantages (that) intellectual

property provides should largely determine commercial rewards flowing from the exploitation

of an intellectual property right in the market in which it relates'. ' 9 However, if the intellectual

19 The Competition Bureau Industry of Canada, `Intellectual Property Enforcement Guidelines', 2000, p.15.

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property holder misuses its market power the Bureau may intervene. The Bureau may

intervene in court cases when it forms the opinion that it is important to address a competition

issues in court proceedings if the other parties will not address competition issues.20

United Kingdom

In 2001 the Office of Fair Trading (OFT) issued `Intellectual Property Rights', a draft

guideline explaining how the OFT will assess business arrangements involving intellectual

property rights in relation to competition law. The OFT recognises the importance of

intellectual property rights as they encourage innovation and in turn increase consumer

benefits. However, there may be some instances in which intellectual property rights raise

concerns under the Competition Act.

Restrictive agreements which include intellectual property right provisions will be assessed on

a case-by-case basis by taking account of the market conditions, the duration of the conduct,

and the licensor and the licensee in the relevant market/s.

The OFT have created a safety zone' in the guidelines. The OFT will not challenge a

licensing arrangement when the combined market share of the relevant market does not exceed

25 per cent. Furthermore, the OFT will generally regard any agreement which:

? directly or indirectly fixes prices or shares markets; or

? imposes minimum resale prices; or

? is one of a network of similar agreements which have a cumulative affect on the market

in question as being capable of having an appreciable effect even when the combined

market share falls below the 25 per cent threshold'.21

European Union

20 Ibid. 2L Office of Fair Trading, Intellectual Property Rights: A draft Competition Act 1998 Guideline', November 2001, p.9.

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The European Union ('EU') has taken a different approach when assessing whether

intellectual property rights may result in anti-competitive conduct. Intellectual property

licensing arrangements are subject to Article 85(3) of the Treaty of Rome, which permits

agreements to be exempted from Article 85(1) of the Treaty of Rome as they are assist in

`improving the production and distribution of goods or to promoting technical and economic

progress'. However, these agreements must provide consumers `with a fair share' of their

resulting advantages and only impose restrictions that are `indispensable' to the agreement.

Furthermore, the agreement cannot create the `possibility of eliminating competition in respect

of a substantial part of the products in question'.

The application of Article 85(3) to intellectual property licensing agreements is complicated

by other articles in the Treaty of Rome in relation to the free movement of goods and to the

production of national intellectual property rights. The Court of Justice has considered the

interface between competition and national intellectual property rights by finding that the

`existence of a right was preserved under the treaty but the exercise' of the right could still be

regulated. Hence, the interface between Article 85(3) and the other articles in relation to

intellectual property rights is discussed on a number of decisions by the Court of Justice and

the EC Commission.

Japan

In 1999 the Japanese Fair Trade Commission ('FTC') released `Guidelines for Patent and

Know-how Licensing Agreements' for the treatment of intellectual property rights under the

Antimonopoly Act. The FTC considers intellectual property licensing to be procompetitive as

it encourages firms to conduct research and development, which creates new markets for new

technologies or products. However, the FTC does acknowledge that in some instances

intellectual property licensing restrictions can have an adverse impact on competition. The

guidelines identify three categories of restrictions:

? `the restrictions that in principle fall within the category of unfair trade practices and

are in violation;

? the restrictions that in certain circumstances fall within the category of unfair trade

practices and are in violation; and

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? the restrictions that do no, in principle, fall within the category of unfair trade

practices'.22

The FTC indicates that matters which may raise concerns which may fall within the category

of unfair trade practices will be examined on a case-by-case basis following an assessment

which will take into account of the market conditions, the duration of the conduct, and the

licensor and the licensee in the relevant market/s. In relation to restrictions that are highly

likely to fall within the category of unfair trade practices and are in violation, the FTC will

form the opinion that the agreement is unfair unless the parties can present a specific

justification for the restriction.

22 Japanese Fair Trade Commission, Guidelines for Patent and Know-how Licensing Agreements' 1999, p.4.

Fels Melbourne Business School Intellectual Property 6.12.2

Appendix B: Australasian Performing Rights Association

On 15 October 1997 the Australasian Performing Rights Association (APRA), a voluntary

collecting society, lodged eight applications for authorisation and one notification in relation

to its standard arrangements for the acquisition and licensing of the performing rights in it

music repertoire. APRA submitted that the conduct was exempted from the Trade Practices

Act by virtue of s.51(3). However, the Federation of Commercial Television Stations

(FACTS) had eballenged the conduct in a private action (which began in the Copyright

Tribunal and spilled over into the Federal Court) and prompted the authorisation application.

The arrangements fall into four categories:

? Input arrangements --- the assignment of performing rights by members to APRA and

the terms upon which membership is granted;

? Output arrangements — the licensing arrangements between APRA and users of

musical works;

? Distribution arrangements — the arrangements under which APRA distributes to

members the fees it has collected from licences (with a rule that composers receive at

least 50% of the royalties collected for their work); and

? Overseas arrangements — the reciprocal, exclusive arrangements between APRA and

overseas collecting societies under which each grants the other the right to license

works in their repertoire.

The Commission took the view that there were both costs and benefits associated with the

collective licensing of musical works. On the benefit side there were considerable efficiencies

to be gained in the administration and enforcement of copyrights for both owners and users

and the "blanket licence" offered by APRA provided a new product which was particularly

useful for users with spontaneous and unpredictable requirements, e.g. shops and restaurants.

On the cost side, APRA essentially enjoyed a monopoly over performing rights, since

members had to assign the performing rights in all current and future works exclusively to

APRA, replacing potential competition between composers. This has the effect of inflating

prices and restricting access to works while encouraging arguably excessive production of new

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works (due to APRA's use of a flat fee for unlimited access to any individual work but which

was unrelated to the number of works accessed). Some users, particularly those with planned

and predictable requirements for musical works, e.g broadcasters and cinemas, would benefit

from direct dealing with composers. The Commission considered that a better balance could

be struck between the costs and benefits of the scheme if it allowed for such direct dealing and

blanket licence fees were appropriately adjusted. APRA would not agree to amend their

licensing arrangements to meet the Commission's requirements.

The Commission concluded that the overseas arrangements were likely to give rise to a

balance of public benefits and anticompetitive detriments such that authorisation could be

granted, provided that the standard agreement was altered to entitle parties to terminate an

agreement by giving the other six months notice in writing. This change came into effect on

31 December 1998.

In January 1998, the Commission issued a determination denying authorisation in respect of

APRA's proposed input, output and distribution arrangements, granting conditional

authorisation in respect of APRA's proposed overseas arrangements until 31 December 2002

and revoking the notification relating to APRA's proposed input arrangements.

On 4 February 1998, APRA applied to the Australian Competition Tribunal for a review of the

Commission's determination denying authorisation of the proposed input, output and

distribution arrangements and revoking the notification relating to the proposed input

arrangements.

After reviewing the evidence, the Tribunal saw merit in opening up the market for musical

works to some degree of competitive licensing, through the introduction of a non-exclusive

licence back arrangement as proposed by the Comrnission, whereby artists could licence

individual works from APRA (who would retain ownership of the work's copyright) for use in

dealings with parties who do not hold a blanket licence. This would allow competitive

licensing of musical works by individual composers where users know their requirements in

advance, including for commissioned works. It would then be up to the Copyright Tribunal to

adjudicate on the appropriate adjustment of blanket licence fees for residual needs. It also saw

merit in the development of an alternative dispute resolution system for those small users with

spontaneous use (such as fitness centres, shops and restaurants) for whom direct licensing was

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not an option and the Copyright Tribunal was not a practical forum for the resolution of

licensing disputes with APRA. The matter was adjourned to allow APRA an opportunity to

devise a non-exclusive licence-back scheme and a simplified dispute resolution scheme. After

consultation with the Commission and FACTS on these schemes the matter returned to the

Tribunal. On 20 July 2000, the Competition Tribunal made a determination granting

authorisation to APRA, endorsing the agreed dispute resolution procedure and non-exclusive

license-back scheme. The Tribunal also set aside the Commission's notice under s. 93(3) to

revoke the authorisation.

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Appendix C — Commission's Survey of Book and Computer Software Prices

This appendix presents the results of books and software price surveys undertaken by the

Commission in May-June 2002. It updates the April 2001 Summary of the Commission's

March 1999 Repo rt on The Potential Consumer Benefits of Repealing the Importation

Provisions of the Copyright Act 1968 as they apply to Books and Computer Software.

Update of Book Prices

The results of the Commission's June 2002 update of its book price comparison are presented

below. This includes mass-market paperbacks, hardback fiction, hardback nor-fiction,

paperback nor-fiction and children's books between Australia and the US and Australia and

the UK. The methodology used is the same as contained in previous updates and is outlined in

Appendix 2 of the Co mmission's March 1999 Report. The comparison of technical and

professional books has also been updated to May 2002.

Paperback Fiction

Table 1 shows that for the 14 year period from 1988-89 to June 2002, Australians have been

paying on average 41.9 per cent more for best selling paperback fiction than US readers and

7.3 per cent more for best selling paperback fiction than UK readers. The April 2001 Report

found that for the 12 1 /z year period between 1988-89 and December 2000, Australians paid on

average around 44 per cent more for bestselling fiction paperbacks than US readers, and on

average around 9 per cent more than UK readers.

The differentials for the US are positive throughout the period surveyed, and recently have

risen despite depreciation of the Australian dollar. The price differentials between Australia

and the UK have been quite volatile during the entire survey period.

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Table 1: Average Price Differentials for Best Selling Paperback Fiction: Australia, the US and UK, 1988-89 to 2001- 02

Australia and the US Australia and the UK ^ Year Extent to. which, Australian

price exceeds US (%)

Extent to which Australian price exceeds UK (%)

1988-89 77.8 26.3

1989-90 50.0 27.5

1990-91 54.5 6.2

1991-92 51.6 2.3

1992-93 41.8 6.7

1993-94 35.2 16.6

1994-95 47.3 10.4

1995-96 53.4 21.6

1996-97 50.2 6.5

1997-98 35.9 -2.8

1998-99 30.6 -5.1

1999-00 30.6 0.8

2000-01 11.1 -6.2

2001-02 16.0 -8.6

Extent to which Australian price exceeds overseas. Average for 1988-89 to 2001-02 (%)

41.9 7.3

Source: 19286-2i9 to 1993- 94 trom }'SA (199). t'or the UK, 1994-Y to LUU1-UL oerivea Dy HULU rrom Bookseller and Publisher (Australia) and The Bookseller (UK). For the US, 1994-95 to 2001-02 derived by

ACCC from Bookseller and Publisher (Australia) and Publishers Weekly (US).

All Best Sellers

Table 2 below provides a comparison of the p rice differentials for all best seller books, which

includes the categories of fiction paperback, non-fiction paperback and hardback and

chit rens. 23 For the pe riod 1994-95 until June 2002, Australians have paid on average around

16.5 per cent more for best sellers than US readers, and 1.4 per cent less for best sellers than

their UK counterparts. The April 2001 Report had indicated that between 1994-95 and

December 2000, Australians paid on average around 18 per cent more than US readers and 0.2

per cent on average more than UK readers for all best sellers. The fall in differentials is pa rt ly

explained by the depreciation of the Australian dollar which raises the Australian dollar price

of products in overseas countries and thereby reduces the positive differences between

Australian and overseas prices.

23 From 1994-95 onwards fiction hardback are not included in the analysis.

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Table 2: Average Price Differentials for All Best Sellers: Australia, the US and UK, 1988-89 to 1993-94; 1994-95 to 2001-02b

US' UK

Yeara Extent to which Australian

price exceeds US (%J Extent to which Australian price exceeds UK (%)

1988-89 40.8 17.9

1989-90 29.3 18.6

1990-91 32.3 -0.9

1991-92 24.7 -3.5

1992-93 12.8 -1.2

1993-94 5.6 3.3

1994-95 24.6 3.8

1995-96 33.3 12.2

1996-97 39.3 4.5

1997-98 24.2 4.9

1998-99 -4.6 -11.3

1999-00 12.8 -3.8

2000-01 3.3 -8.3

2001-02 -0.7 -13.1

Extent to which Australian price exceeds overseas Average for 1994-95 to 2001-02'

16.5 -1.4

Notes: a: Figures for 1988-89 to 1993-94 include fiction paperback and hardback, trade and children's. b: Figures for 1994-95 to 2001-02 include fiction paperback, trade and children's but exclude fiction hardback. Source: 1988-89 to 1993-94 from PSA (1995). For the UK, 1994-95 to 2001-02 derived by ACCC from

Bookseller and Publisher (Australia) and The Bookseller (UK). For the US, 1994-95 to 2001-02 derived by ACCC from Bookseller and Publisher (Australia) and Publishers Weekly (US).

Reference Books

Table 3 summarises the survey of technical and professional book prices for May 2002. Since

the last update in March 2001, the price differentials between Australia and the US and UK

have fallen. Australians paid on average 8.5 per cent, or $A27 more than US readers in May

2002 for certain medical titles compared with 23.2 per cent or $A53 in March 2001.

Compared with the UK, Australian readers paid on average 9.1 per cent, or $A31 more in May

2002, compared with 18.4 per cent, or SA51 in March 2001. This is partly due to the

weakening of the Australian dollar. The nominal prices of the surveyed books have risen only

marginally in all three countries between 2001 and 2002. It should be noted that the

availability of the reference books in Australia was very limited. In fact, most of the nineteen

books surveyed were not currently in stock in Australia, but more readily available in the US

and the UK.

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Table 3: International Price Comparisons for Technical and Professional Books, Australia, the US and UK, March 2001 and May 2002

Averages, 2001° 20.02

Australia and the US

Price Difference s (Australian Price— US Price) ($A)

$53 $27

Percentage Difference a (Price Difference as % of US Price)

23.2% 8.5%

Australia and the UK .

Price Difference s (Australian Price—UK Price) ($A)

$51 $31

Percentage Difference' (Price Difference as % of UK Price)

18.4% 9.1%

Notes: a: Price difference is calculated using the Australian RRP less GST.

Source: Prices were sourced from the following websites: Australia — www.coon-bookshop.com.au:

UK - www.ainazon.com.uk: and US — www.textbook.com and www.medbookstore.com .

Update of Computer Software Prices

Prices for personal computer (PC) software for business and games in Australia were

compared with the US, the UK and New Zealand at various dates over May and June 200224.

The update for May-June 2002 follows earlier ones by the PSA 25 , the Commission in

December 1998 (March 1999 report), June 2000, and Feb-March 2001. The software prices

have been obtained since June 2000 from internet websites originating in the four countries

surveyed. The composition of the samples in each survey has changed and reflects changes in

sales, availability and the introduction of new products. These changes are particularly rapid

for software compared with most other goods, and affect the comparability as a time series.

The wider sample used in the survey of business software this time includes some upgrades of

previously surveyed software. It captures the range of software for various purposes which is

regularly in the bestseller lists of Amazon and other websites offering software for sale. These

surveys do not attempt to adjust for volume effects because the Commission does not have

access to reliable data on sales volume. Products that undergo substantial modification to suit

Australian conditions, such as accounting packages, are excluded because of lack of

24 Prices for the range of sampled software remained stable through the two month period.

25 PSA (1992), Inouir y into Computer Software Prices, Reports No. 44 and 46. Fels Melbourne Business School Intellectual Property 6.12.2

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comparability. The full list of software products sampled for the most recent survey are listed

in Table 4 at the end of this appendix.

Key findings

The key findings of the May-June 2002 surveys are that advertised prices of 50 popular

business software products on a selection of Australian websites were, on average, 20.7 per

cent higher than prices advertised on US websites. Australian prices were on average 1.4 per

cent above the surveyed UK prices and on average 3.9 per cent above surveyed NZ prices.

The range of price differences was wide for business software. Forty-five of the total of 50

business software items surveyed (90 per cent) were priced higher on average in Australia than

the US. Twenty- four (48 per cent) of the 50 business software items were more than 20 per

cent higher in price in Australia than the US.

In the May-June 2002 survey the advertised prices of 25 popular PC games on a selection of

Australian websites were, on average 12.5 per cent per cent lower in Australia than the key

market of the US, and on average 2.7 per cent lower than the UK. They were on average 8.7

per cent higher than NZ. As with business software, there was considerable variation in the

differentials for individual products, with seven items (28 per cent) having higher prices in

Australia than the US. Australian prices ranged up to almost 30 per cent above US prices.

The cross country price comparisons for business and games software show a divergence

between games software prices and business software prices. There is also a large range of

cross country price differences within each of the two software segments. The sample sizes

for business and games software have increased significantly since previous surveys.

Fels Melbourne Business School Intellectual Property 6.12.2

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Table 4: Software Products sampled by the ACCC in May-June 2002

Business Software Products Game. Software Products

Filemaker Pro v5.5 Win Neverwinter nights

Filemaker Pro v5.5 Win Upgrade Warcraft 3 Reign of Chaos Norton Antivirus V8.0 2002 Grand Theft Auto 3

Norton Antivirus V8.0 2002 pro Medal of Honor: Allied Assault Norton Ghost 98/nt4/w2k/wmelxp Dungeon Siege Norton SystemWorks 2002 Unreal Tournament 2003

pcAnywhere 10.5 Host and Remote Star Wars Jedi Knight 2: Jedi Outcast Winfax Pro 10.02 Star Wars: Galactic Battlegrounds

Corel Wordperfect Office 2002 Standard Star Wars Galactic Battlegrounds: Clone Campaigns

Corel Wordperfect Office 2002 St Upgrade Microsoft Flight Simulator 2002 Professional Corel Wordperfect Office 2002 Pro Microsoft Train Simulator Corel Wordperfect Office 2002 Pro Upgrade Zoo Tycoon CorelDraw 10.0 w2k/98/nt Zoo Tycoon: Dinosaur Digs Expansion Pack CorelDraw 10.0 w2k/98/nt upgrade Roller Coaster Tycoon MS Windows 98 2nd Edn Soldier of Fortune 2: Double Helix

MS Windows 98 2nd Edn Upgrade The Sims MS Windows 2000 Professional w2k The Sims Vacation Expansion Pack MS Windows 2000 Professional w2k Upgrade Pup

The Sims Livin' Large Expansion Pack

MS Windows XP Home Ed The Sims Hot Date Expansion Pack

MS Windows XP Home Ed Upgrade Sid Meier's Civilization 3 MS Windows XP Professional Hoyle Card Games 2002 MS Windows XP Professional Upgrade Heroes of Might and Magic 4 MS Frontpage 2002 98/wme/nt/w2k Age of Wonders II: the wizard's throne

MS Frontpage 2002 98/wme/ntlw2k Upgrade The Elder Scrolls III: Morrowind St Ed MS Works 6.0: Win9X/ME/2k/nt3 Diablo 11 MS Works suite 2002: Win9X/ME/2k/nt3 MS Office XP 98/wmelntlw2k MS Office XP 98/wme/nt/w2k Upgrade MS Office XP Pro: Win98/ME/NT4/2K

MS Office XP Pro 981wmelntiw2k Upgrade

Microsoft Outlook 2002

Word 2002 98/wmelntlw2k

Word 2002 98/wme/nt/w2k Upgrade

Excel 2002 98/wme/nt/w2k

Excel 2002 98/wme/nt/w2k Upgrade

Powerpoint 2002 98/wme/nt/w2k

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Powerpoint 2002 98/wmelnt/w2k Upgrade

Adobe Photoshop 7.098/wme/ndw2k/xp

Adobe Acrobat 5.0: Win9x/me/nt4/2k

Adobe Acrobat 5.0 Upgrade

Adobe Illustrator 10.0 nt4/98/wme/w2k/wxp

McAfee Virusscan 6.0: Win9x/me/2k/nt4/xp

McAfee Virusscan Pro 6.0: Win9x/me/2k/nt4/xp

Nero Burning Rom 5.5

Easy CD Creator 5.0 Platinum

Flash MX Win

Flash MX Win Upgrade

Dreamweaver 4.0: Win9X/ME/NT/2K

Jasc Paint Shop Pro 7.0: Win9xl2k/nt4

DVD MovieFactory

Fels Melbourne Business School Intellectual Property 6.12.2

Appendix D: ACCC survey of CD prices

The Commission regularly conducts quarterly surveys of CD prices to assess the

movements in prices over time, both in Australia and internationally. The aim is to

provide quantitative information to help to assess the impact on the Australian market of

the removal of the ban on parallel imports of sound recordings in August 1998.

Australian Results

The prices at non-specialist stores are compared with those offered at the specialist

stores (ie music stores). Non-specialist stores have been in the Commission's survey

since September 2000. The average nominal GST-inclusive price of surveyed CDs in

specialist stores in Australia was $26.41 in September 2002, up 54 cents or 2.1 per cent

from $25.87 in June 2002.

In order to compare the current surveyed nominal average price to that of August 1998

prior to the change in legislation, the effect of changes in sales tax on CD prices with

the introduction of the GST must be taken into account. The tax exclusive price is

$24.01 from this survey. After adjusting for taxes, average nominal CD prices are 7.8

per cent lower in September 2J02 than they were immediately prior to deregulation

(August 1998 tax-exclusive price ($26.03)).

Chart 1 below tracks movements in the average nominal and real tax-exclusive CD

prices from June 1989 to June 2002.

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Chart 1: Average Tax-Exclusive Retail Prices of Chart CDs, Nominal and Rea1,

Australia, June 1989 to September 2002

9 S g ^' S $ of q 'a g

Period

t —R I tax free rice 1989-90=1 D

Non-Specialist stores

Prices have been surveyed at selected non-specialist stores of Myer/Grace Brothers,

Target/K Mart, and Woolworths/Big W (where located) since September 2000. The

average tax-inclusive price was $21.98 in September 2002. The September 2002 non-specialist average price of $21.98 was $4.43 below the specialist average price of

$26.41. The surveys consistently show that non specialist retail outlets are offering

consumers lower-priced options for purchasing top selling CDs compared with

specialist music stores.

Interna ti onal Results

The international price comparisons were achieved by removing where necessary the

percentage of foreign tax from the foreign price and converting into Australian currency

by a three month average exchange rate. The Australian tax percentage was then added.

The Australian price was subtracted from the foreign price in $A and the difference was

taken as a percentage of the foreign price.

Internationally, comparing Australian CD prices with those of other countries, the

September 2002 survey found that Australian prices were lower than the UK (by

$A 10.34 or 28.1 per cent) and the US (by $A5.50 or 17.2 per cent) but higher than New

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Zealand (by $A3.02 or 12.9 per cent). In the previous quarter June 2002, the Australian

price was $A6.03 or 18.9 per cent less than the US price, $10.03 or 27.9 per cent lower

than the UK, and $A4.79 or 22.7 per cent higher than NZ.

Impact of Inflation and Exchange rate movements since August 1998

The effect of CPI increases and depreciation cannot readily be taken together to

discover what individual price movements would have been in the absence of import

policy changes, because CPI and depreciation influence each other over time. If CD

prices had risen in line with inflation since August 1998, CD prices in September 2002

would have been $29.73. The current CD price of $24.01 is $5.72 (or 19.3 per cent)

lower than this estimate.

Fels Melbourne Business School Intellectual Property 6.12.2