Australia

5

Australia

BOB BAXT AND HENRY ERGAS

I. Introduction to Intersection and Concerns

The setting of an appropriate policy or policies in law in Australia has always involved a tortuous process. This is particularly true for changes that are made from time to time in our competition law. In the two parts of this chapter we explore the failure of successive Australian governments to reach an appropriate balance between the regulation of anti-competitive practices and the encouragement of intellectual enterprise and expertise, and the encouragement of joint ventures whether in that field or in other important areas of our economy.

In the first part of this chapter (written by Henry Ergas), the regulation of intellectual property rights (IPRs) in Australia and the nature of constraints imposed upon those rights, including anti-trust prohibitions in the Trade Practices Act 1974 (Cth) (TPA)[1] and those specific to copyright and patent laws are discussed. It will argue that protection of creative endeavours through IPRs does not necessarily lessen competition. It is the ambiguity and inconsistencies between the two legislative regimes that limit innovation and distort competition.

The second part of this chapter, prepared by Bob Baxt, explores similar issues in a discussion of the specific provisions of the TPA and the relevant policy considerations in the ‘regulation’ of joint ventures. As noted earlier, joint ventures play an important role in Australia’s economy. This is particularly so in relation to mining and related activities, but also in encouraging the development of new ideas that are protected by IPRs. The recent introduction of criminal cartel offences in the TPA threatens the continued use of joint ventures and illustrates confusion on the part of the Government. Its approach is too draconian when compared to the more balanced and appropriate rule of a reason approach to such activities in the United States and elsewhere.

II. Interaction of IP and Competition Laws

A. Introduction

IPRs, Professor Cornish reminds us, ‘are essentially negative: they are rights to stop others doing certain things’[2]—those things being primarily the use of the ideas (or more properly, the output of creative endeavour, which may be the expression or material embodiment of an idea, rather than the idea itself) covered in the grant made to a right-owner. As rights to exclude, IPRs sit uneasily with the conventional notion of competition, which centres on the ability of several, possibly many, parties to act as rivals in striving for economic rewards. The uneasy nature of the relationship should not suggest that there is contradiction between IPRs and competition: rather, it is a truism that IPRs, by allowing creators to secure a greater share of the social gain from their creation than they would otherwise, can promote rivalrous investment in creative effort; and that it is this investment that underpins the development of new processes and products which not only contributes directly to increased wellbeing but also, in Schumpeter’s famous phrase, is a form of competition ‘as much more effective than [conventional price competition] as a bombardment is in comparison with forcing a door’.[3]

This is clearly a gain to society; but it is bought at a cost. Once made, ideas are relatively readily transmitted and used; they are, in economic terms, non-rivalrous.[4] From an economic point of view, therefore, they ought to be used as widely as possible—which implies a price of or close to zero (for the idea itself, though not for its material form). The exclusionary right granted by the IPR, however, enables the right-owner to set a positive price for the protected material, thereby reducing the flow of and output from ideas. To the extent to which ideas themselves serve as the basis for generating further ideas, the social cost of the reduced flow can take the form not only of less income today but also of less growth in income in periods to come. If owners of IPRs could use their exclusionary rights to extend their control even further than the original grant contemplated, securing an income stream in excess of the social gain arising from their creation, the costs to society could be greater yet.

The fact there is consequently a balancing to be sought is nothing new. Arguments that ‘public utility requires that production of the mind should be diffused as widely as possible’[5] were common in the English literary property debate of the eighteenth century; so too was the hostility to patents embodied in Blackstone’s view that ‘mechanical inventions tend to the improvement of arts and manufactures, which employ the bulk of people; therefore they ought to be cheap and numerous’.[6] Although copyright eventually gained widespread acceptance, criticism of the ‘monopoly’ granted by patents has periodically resurfaced, with even the intellectual grand-father of Chicago economics, Frank Knight, viewing them as an ‘exceedingly crude way of rewarding invention’.[7] From this he concluded that ‘it would seem to be a matter of political intelligence and administrative capability to replace artificial monopoly with some direct method of stimulating and rewarding research’[8]—a view the Nobel laureate in economics, Kenneth Arrow, echoed, some 40 years later, in his classic article of the economics of research and development (R&D).[9]

These arguments, compelling though they may be in the abstract, rest on the assumption that governments, in implementing Knights’ ‘direct method’ of stimulation, will make fewer or less costly errors in allocating resources to creative effort than are caused by the market-oriented mechanism of IPRs. This assumption has merit when applied to pure research, but must surely fail at the more applied end of the spectrum. To begin with, it requires a greater degree of omniscience (and perhaps of omni-benevolence) from public decision-makers than it is safe to assume. Additionally, it underestimates the incentives even owners of monopoly rights have to expand output, say through price discrimination, and hence likely overstates the costs of the alleged monopoly. Finally, it wrongly assumes that IPRs serve only to fund investment in creative effort; in practice, they also act to promote the disclosure of new ideas (particularly in areas where secrecy is a viable alternative) and, by allowing well-defined rights to be traded, to facilitate the allocation of the ownership of creative works to those who can put them to their most highly valued use. As no ‘direct method’ of stimulation has yet been found that even comes close to matching these effects, calls for a wholesale retreat from IPRs are not likely to command much support.

What can and should command support is the continued investigation of whether the right balance has been struck between vesting ownership rights in creators and promoting the widest use of the results of creative effort. Faced with changes in technology, and more generally in the economic and regulatory environment in which investment in creative effort occurs, the balance that has been struck, and the particular mechanisms that give it effect, need to be open to re-examination.

In reviewing this balance, it is important to note that it is effected at two levels: first, in the conditions attached to the grant of an IPR, and in privileges and obligations the legislation directly governing that right[10] vests in the right-owner; and second, in the constraints on the exercise of that right that may be imposed by other legislation—with the TPA being most directly relevant.[11] In practice, it is the two together that define the bundle of rights available to those who invest in creative effort; and concerns about promoting the widest use of knowledge, and enhancing competition both in its production and in its exploitation, have been reflected in both of these layers. Indeed, a difficult issue, and one which has commanded far greater attention in North America and Europe than in Australia, is that of the appropriate division of labour as between these levels.

The approach taken here will consequently be to first examine some of the issues that currently arise in respect of the balance struck within two of the main statutory instruments that define IPRs (the copyright and patent statutes respectively); then consider aspects of the treatment of those rights under the TPA; and finally, to examine some of the open questions that arise from the interaction between these.

The overall hypothesis being advanced is a simple one: that in Australia, considerations as to the appropriate balance to be struck in the definition and enforcement of IPRs have very largely, if not entirely, been given effect by embodying specific provisions, aimed at achieving that balance, in the intellectual property system; the bundle of rights thus defined has then been given a relatively wide-ranging, though ambiguous and poorly worded, exemption from the more general statutes aimed at protecting and promoting competition. There has, in other words, been a marked preference for relying on the definition of the rights, rather than on ex post constraints on the exercise of those rights, as the primary means of striking a balance between incentives to creative effort and the public interest in wide access to ideas.

Before examining this proposition in more detail, it is useful to consider why that may be the case. At the highest level of abstraction, three factors seem relevant.

The first is the legal tradition, which despite some significant differences relative to the United Kingdom, is probably closer to the formalism Atiyah and Summers, in their classic comparison of the English and American legal traditions, ascribe to the United Kingdom, than to the more instrumentalist approach common in American law.[12] In the intellectual property area especially, this translates into a tendency to interpret rights fairly narrowly and hence to hew closely to the precise definition of the extent of the rights as given in legislation.[13]

A second factor is the economic context. Australia has long relied heavily on imported technology, and well-defined IPRs may have been valuable in facilitating the transactions required. Moreover, a substantial share of the R&D undertaken domestically is publicly funded. Traditionally, this publicly funded R&D was carried out largely in government agencies, notably the Commonwealth Scientific and Industrial Research Organisation (CSIRO); much of this research involved projects where individual end users, for example pastoralists, were price-takers in world markets, and hence did not perceive each other as rivals. As a result, these agencies tended to distribute the results of their research widely, especially within Australia, with IPRs placing little restriction on end users’ access to research results. More recently, the Government has placed considerable emphasis on cooperative research (involving both public and private sector participants) in emerging technologies, particularly through the Cooperative Research Centre (CRC) Program,[14] and clear IPRs may have been viewed as useful in facilitating both the initial investments and the commercialisation of any results.

Last but not least, competition policy—both in the sense of ‘antitrust’ and in the sense of policy aimed at removing statutory obstacles to competition—is a relatively recent arrival on the Australian scene (dating, in the case of the first form, to the early 1970s and of the second, to the early 1990s). In contrast, intellectual property law has roots that stretch back to well before Federation in 1901, reflected in a long legacy of both statute and case law. Concerns about preserving the integrity and clarity of that precedent have weighed on policy-makers whenever questions have arisen of whether and how competition issues relating to the intellectual property laws should be addressed.

Individually and combined, these factors have lead to a marked preference for dealing with any balancing between the competing claims of exclusivity and access through the intellectual property laws themselves, rather than through ex post controls on the exercise of the rights once granted. This is a response the intellectual property laws lend themselves to, as they are rich in instruments that can be used to ‘fence in’ or more generally ‘fine tune’ the exclusivity provided, including through changes to coverage, originality requirements, duration, the precise content of the reserved rights and the mechanisms for the exhaustion of those rights, statutory exemptions and exceptions, the allocation of burdens in the context of infringement proceedings and the nature and extent of remedies. This multiplicity of defining variables offers (or at least has been thought to offer) the scope to deal in a targeted, well-defined way with the competing considerations of exclusivity and access, without introducing the uncertainties that would arise were an approach based on general concepts and principles—as is largely a characteristic of competition law—superimposed on, and allowed to over-ride or redefine, the rights granted in the intellectual property statutes.

Although this architecture is not per se inefficient, its implementation lacks consistency and has in some instances resulted in rules that are at times seriously under- or over-inclusive. A consideration first of copyright and then of patents helps highlight the nature of the resulting issues.

B. Copyright

Copyright is often described as an ownership right that is easily acquired and durable but extremely narrow—easily acquired, because of the absence of registration requirements and because the threshold of creativity required to attract protection is low; durable, because the right persists for far longer than other IPRs; but narrow, because of the limited scope of protection the right offers.[15] The rise of new technologies, which convert an ever-greater part of the stock of copyrightable material into digital form, along with the emergence of copyright as the prime (although by no means sole) form of protection of software in all of its many manifestations, have brought ever greater pressures to bear on this most flexible of rights.

To understand the form these pressures take, it is important to note a distinctive feature of the Australian copyright regime. In the United States, the desirability of providing scope for limiting the reach of the right-owner’s power to exclude is reflected in relatively general provisions relating to ‘fair use’. These are set out in section 107 of the Copyright Act (CA) (Title 17 of the United States Code), which exemplifies instances of fair use (by referring to ‘purposes such as criticism, comment, news reporting, teaching, … scholarship, or research’ (emphasis added)) and then lists factors which must be taken into account (although others may also be considered) in determining whether a particular use falls within the provision.[16] A specific provision then allows libraries to provide copies to users, upon request, within limits set out essentially in qualitative terms.[17] A similar, although not identical, approach is adopted in the United Kingdom.[18]

In contrast, the Australian approach is prescriptive. The purposes encompassed by the fair dealing provisions are set out exhaustively, mainly in sections 40–43 of the CA,[19] rather than by example. Additionally, the deeming provision of section 40(3), together with the inclusive definition of a ‘reasonable portion’ in section 10(2), creates a ‘safe harbour’ from the operation of the factors identified in section 40(2).[20] The relations between rights-owners and users are then further regulated by the statutory licensing requirements imposed upon rights-owners, along with the jurisdiction vested in the Copyright Tribunal to fix royalties or equitable remuneration in respect of compulsory licenses and to arbitrate disputes in relation to the terms of the licenses or of proposed licensing schemes.[21]

The Copyright Law Review Committee, in its first report on its Simplification reference, recommended a move to a less prescriptive approach to fair dealing.[22] In considering this recommendation, it is important to consider the rationale underpinning the current arrangements. In essence, these arrangements serve to reduce the transaction costs that could arise were the relevant provisions were less clearly specified. By their nature, ownership of the relevant rights is dispersed; so too is the use of the works in which the rights are embodied. At the cost of some arbitrariness, the provisions reduce the uncertainty that bears on the process of determining the scope of the right, be it through contracting, litigation or both, and hence likely make for greater use than would otherwise occur.[23] The presumptive rights granted to educational institutions and to libraries are also an important way of recognising the externalities associated with these points of access to the various forms of copyrighted material. Moves away from the current scheme, towards one that is more open-ended, therefore need to be viewed with caution.

Having said that, the Australian approach has imposed some costs in terms of the ability of the copyright system to adapt to change. It is especially in the software area that the consequences for competition of a degree of inflexibility in the system have been apparent. The central element of contention in this respect is the permissible scope of various forms of ‘reverse engineering’. Some economic background is needed to make sense of the relevant debate.

Competitive conditions in the supply of software are affected to a greater or lesser degree by what economists refer to as network effects.[24] A network effect exists when, other things being equal, consumers would rather join a larger than a smaller network. The most direct way in which a network effect arises is when consumers obtain value as other users adopt the same service, or compatible ones. The classic example of a network effect is that telephone users benefit from being connected to the same network as others: there is little point having a telephone if one is unable to reach, or be reached, by others. Similarly, computer users value the fact that others use the same computer operating system (such as Windows) since this makes the sharing of files possible. As a result, consumers will, all other things being equal, place a greater value on joining whichever network is larger—for example, choosing Windows over other competing programs because of the greater base of other users with whom Windows allows them to interact. One consequence of this is that where network effects are significant, and are appropriable by individual producers (for example, through ownership of IPRs), competition can become ‘tippy’, with a supplier gaining dominance not because of the inherent merit of its goods or services but because it attains a critical mass at which consumers—who would otherwise have purchased from a competitor—shift towards it in large numbers.[25] The resulting equilibrium can be difficult to shift if challengers to the dominant standard, so as to attract customers, need to compensate users for foregoing the network effects the incumbent product enjoys.[26]

When this set of circumstances holds, IPRs, by precluding competitors from offering users products compatible with those supplied by the incumbent, could impose significant efficiency costs. To begin with, the standard allocative efficiency loss will be greater than is conventionally the case, because the higher price the incumbent (sheltering under the protection of the IPR) can charge imposes welfare losses not only on marginal users but, through foregone network effects, on inframarginal consumers as well. Additionally, there may be dynamic efficiency losses as products that are superior on the merits may take longer to displace less meritorious products, if they can displace them at all. From these observations flows an argument, with obvious implications for copyright protection of software, that intellectual property protection should be weaker for products in which network effects predominate.[27] The counter-argument is, of course, that the prospect of the greater gains associated with benefiting from network externalities itself induces added investment in innovation, so that here too, a balancing needs to be effected.

In the United States, these considerations have been reflected in the courts’ interpretation of the permissible scope of copyright protection. Both the merger doctrine, which restricts the protection accorded to copyright work in which the idea and the expression have merged, and more importantly the fair use provisions have been interpreted[28] as protecting various forms of reverse engineering when these are used to provide inter-operability and even when the purpose of the reverse engineering is to allow one supplier to substitute for the products of another.[29]

The more limited nature of the Australian fair dealing provisions, and the lower standard of creativity required to attract copyright, have largely ruled out this approach in Australia. The resulting tensions between the copyright provisions and the protection of competition have been addressed by specific amendments to the copyright laws that allow decompilation of computer programs for the purpose of securing inter-operability.

It is too early to judge the effects or effectiveness of section 47D of the amended CA. There remains, at least at this time, some uncertainty as to the meaning of inter-operability, and the scope of the defence it creates.

Moreover, while the overall objective of the inter-operability provisions is a reasonable one, it clearly rests on competition concerns—that is, on the possibility that, at least in certain cases, competition in the supply of software can be materially harmed by the refusal of third party access to the code required to develop inter-operable products. However, the provisions, rather than embodying a competition test or threshold (such as those set out in section 44G(2) of the TPA), apply generally to the relevant class of copyrightable material. They thereby create a default entitlement. Whether such a default entitlement is economically efficient, when compared to a more case-by-case approach, depends on how the costs of the error involved in some possible ‘over-inclusiveness’ of the default entitlement compare to the costs that would arise in some more case-by-case mechanism (such as might occur under a competition test). To date, no careful analysis has been done of how these costs compare, particularly in the light of the High Court’s recent decision in IceTV Pty Ltd v Nine Network Australia Pty Ltd.[30]

C. Patents

As with copyright, the Australian patent system has reflected a mix of competition concerns, which it deals with at varying levels of generality and with varying degrees of success. Two areas (which are far from exhausting the field) are worth considering here: the scope of patentable subject matter; and the restrictions imposed on the exercise of a valid patent.

It has long been accepted that granting patents on ‘mere discoveries’ would over-extend the scope of the patent right.[31] The costs of granting such patents in terms of restricted access to the raw material of technical progress could be high; the practical difficulties involved in defining and implementing the scope of such patents might impose additional transaction costs that exceeded the benefit resulting from the stimulus they would provide to discovery; and to these costs must also be added the social waste resulting from any ‘patent races’ the availability of protection for discoveries would create.[32] Moreover, as this is the area where Knight’s ‘direct method of stimulating and rewarding research’ is most likely to be effective in coping with market failure, the case for relying on the patent system seems weak. The resulting exclusion of discoveries from the scope of patentability has been one of the factors cited at times as limiting the degree of monopoly the patent system entails.

This long standing exclusion has recently come under pressure as a result of several factors. Technological change, most notably in biotechnology, but also in some areas of material science and of computing, is blurring the distinction between discoveries and inventions.[33] At the same time, reductions in public interest research funding, and the search for greater market-testing even of public sector research outlays, are pushing an ever greater portion of research into the private domain. Pressures to grant IPRs over forms of knowledge traditionally regarded as not capable of patenting have consequently increased.[34]

In the European Union, restrictions on the scope of patentability are embodied in article 52(2) of the European Patent Convention 1973 which inter alia excludes from being regarded as inventions ‘mere discoveries of things already in nature; scientific theories; mathematical methods’.[35] A specific exclusion is also made in Canada by section 27(8) of the Patent Act, which states that ‘No patent shall be granted for any mere scientific principle or abstract theorem.’ In contrast, in the United States and Australia, the exclusion has been read into the relevant legislation by the courts. In the United States, while the relatively open-ended nature of the statutory formulation[36] has resulted in considerable expansiveness in the scope of patentability, the inclusion in the patent examination process of a test of utility filters out applications which lack a specified use. In Australia, it is well established that mere discoveries are not proper patentable subject matter;[37] however, the lack of a substantial utility criterion in the examination stage, the presumption in favour of the applicant that is to be given in examination, and the uncertain meaning of the ‘artificially created state of affairs’ test (that would at least potentially seem to encompass many mathematical algorithms[38]) has the potential to expand the scope of patentable subject matter. Given the relevant case law, this would seem to be capable of being dealt with by changes in the administration of the legislation, and most notably through the inclusion in the examination process of rules specifically aimed at establishing that a credible useful application had been identified. Such a change could better target the patent system to those areas where its benefits are most likely to exceed its costs.[39]

Given greater clarity as to the conditions on which a valid patent can be obtained, the question then turns to the bundle of rights that holders of a patent can exercise. The Australian patent legislation imposes constraints on these rights, both through specific (but seemingly little enforced) restrictions on practices such as tying,[40] and through the provisions allowing for compulsory licensing.[41]

It is apparent from the substance of these provisions that they are to be read as embodying a generic concern about competition and the possible abuse of any market power that obtains to a rights-owner. However, it is equally clear that the specific content of the provisions bears little or no relation to contemporary conceptions of competition policy. The close to per se prohibition on tying, for example, is inconsistent with many years of recognition of the efficiency-enhancing impacts tying can have.[42] An even greater gap between the statutory formulation and a concern with competition as a means to securing greater efficiency is apparent in the compulsory licensing provisions, which rather than embodying a test of competitive effect, speak of whether ‘an existing trade or industry in Australia, or the establishment of a new trade or industry in Australia is unfairly prejudiced’ by a patent right.[43]

Whether these provisions have much practical effect is not known. While there is virtually no case law,[44] it has been said that Australian licensees benefit by bargaining in these provisions’ shadow. Be that as it may, it seems reasonable to suppose that efficient outcomes would be advanced by repealing those provisions (such as Patent Act section 144) that seem obsolete and at least reforming those (notably Patent Act ss 133–35) whose formulation is inconsistent with accepted principles of the current competition law. These could be replaced with a more narrowly defined test for compulsory licensing, based on public interest considerations.[45]

D. The Interaction with the TPA

In short, in both copyright and patent law, competition concerns have largely (if not always well) been addressed through the substantive provisions in the intellectual property statutes. Similar adaptations can be found in other areas of intellectual property, with the ‘must fit, must match’ exemption in section 72 of the Designs Act 2003 for complex parts used to repair motor vehicles being a case in point: a case that is all the more telling as it reflects a concern to ensure that registered design rights could not be used to increase smash repair costs, while at the same time not undermining the rights of suppliers in other ‘after markets’ (for instance, for toner or cartridges) to use charges for those parts as a means of price discrimination.

At the same time, the exercise of the rights granted by these statutes has enjoyed exemptions from the reach of the main competition statute, the TPA. The principal instrument granting an exemption is section 51(3) of the TPA, which exempts some aspects of the exercise of IPRs from part IV of the TPA, with the exception of sections 46, 46A and 48. Additionally, section 44B of the TPA exempts ‘the use of intellectual property’ from the operation of the national third party access regime that is set out part IIIA of the TPA, so long as that ‘use of intellectual property’ is not ‘an integral but subsidiary part’ of a service that is otherwise capable of declaration.[46] Finally, section 152AL(6) of the TPA grants an exemption, more limited than that applying under part IIIA, from declaration of a ‘use of intellectual property’ under part XIC of the TPA (the telecommunications access regime), with that exemption applying only if the intellectual property is not ‘an integral but subsidiary part’ of a service and the service is not a listed carriage service but merely ‘a service that facilitates the supply of a listed carriage service’ (defined at section 152AL(1)(b) of the TPA).

There is controversy about the precise reach of these exemptions, and notably of those made under section 51(3) of the TPA. The wording of section 51(3), particularly the requirement that the conditions being protected from the TPA must ‘relate to’ the variously defined subject matter of the right, lends itself to a number of conflicting interpretations. However, what is uncontroversial is that these provisions provide an exemption which has no counterpart in either the European Union or the United States. This naturally raises the question of whether such exemptions can be justified.

From an analytical point of view, it may be assumed that in the absence of section 51(3),[47] the provisions of section 51(1) of the TPA would apply to the intellectual property statutes. As a result, any consideration of, for example, the competitive effects of conduct made in the exercise of an IPR (say, in terms of seeking to impose a particular condition in an intellectual property license) would have to consider as its counter-factual a world in which the rights-owner could simply refuse to license,[48] and secure by its own means as large a share of the differential efficiency contributed by its creative effort as the IPR allows it to do. As a result, the exercise of IPRs would only lessen competition where it served to go beyond the scope of the right granted under the intellectual property statute. If this is accepted, section 51(3) would seem redundant, as the socially desired behaviour (the exercise of the rights within the confines of their grant) would in any event not breach the competition provisions of the TPA.

This line of argument abstracts, however, from important features of the TPA. More specifically, the TPA contains a range of provisions which prohibit certain conduct independently of its assessed effect on competition and subjects other conduct to administrative authorisation, again regardless of its effect of competition. It must be assumed that the logic underpinning these provisions is that the conduct at issue will, in the great majority of cases, be harmful, so that precluding or severely discouraging it will yield net social benefits.[49]

However much merit this argument may have at a general level, it seems open to some question in respect of IPRs. This is mainly because of the great importance that licenses and assignments have to the efficient use of intellectual property. Three factors are at work. The first is that the initial owners of IPRs are often not the parties best placed to exploit the output of their creative efforts. This is most plainly the case with specialised inventors, who remain responsible for some of the most important innovations in industrial use;[50] it also applies to small, research-intensive firms[51] and to public sector research entities. In these circumstances, licenses and assignments are needed to ensure that control over the rights is allocated to the parties that can exploit them most effectively.

Second, in many if not most areas of technology, rights do not map simply into products. Commercial products will often embody technology covered by claims in tens or even hundreds of patents.[52] Also, the inter-dependence between rights is even greater in the innovation process itself, which frequently involves combining technological inputs owned by multiple rights-owners.[53] Complex webs of cross-licenses are required if these accumulated technical capabilities are to be put to productive use. While this can create important issues associated with ‘anti-commons’ and ‘patent thickets’, reducing the clarity of rights is unlikely to assist in resolving those issues.[54]

Third, even independent of the factors set out above, the costs of impeding efficient licensing can be high. As has been noted above, knowledge is non-rivalrous: increased access to it by one party does not reduce the stock available to others. As a result, when parties are forced to ‘invent around’ existing knowledge, there is a risk that the resources consumed in the process will, in social terms, be largely wasted. Even when the result of ‘inventing around’ is greater immediate competition, and hence a lower allocative efficiency loss, the benefits can readily be swamped by the productive inefficiency the duplication of outlays entails.[55]

Any assessment of repealing section 51(3) must therefore take account of the effect repeal would have on licensing and assignment decisions. More specifically, it seems reasonable to suppose that the per se prohibitions embodied in the TPA, and the potentially burdensome requirements for administrative review, would catch many license conditions that are usually socially beneficial—for example, tying and exclusive dealing arrangements in patent licenses.[56] Over the longer term, this could both reduce innovation and distort competition as between those (typically smaller and more specialised) firms that depended on licenses and assignments and those which did not.[57]