President's Report

Dear Fellow Members and Friends,

This is my first annual report as President LES Singapore and I thank the membership for entrusting me with the responsibilities involved. It is a privilege for me to help contribute to the continuing achievements of LES Singapore, building on the foundation laid by the past presidents. I would also like to thank the other office-bearers and executive committee members for their support in developing and organizing programs/activities for our members. I hope that you will enjoy reading the material in this newsletter. At this juncture, I wish to highlight some of the more important issues relating to your membership in LES.
 

Membership

The current membership of LES Singapore stands at 80. The membership comprises a good mix of members from the law profession, and practitioners from companies, research institutions and universities. This is a favorable mix of professionals from different sectors offering unique networking opportunities compared to some of the other LES chapters which consist of mainly lawyers and patent attorneys in private practice. Our executive committee also comprises members from law firms, universities and research institutions, and industry and thus has the strength to identify seminars and other activities that will appeal to our members. I encourage members to provide me or the other executive committee members with suggestions and feedback on the kind of activities and/or programs that you would like to have in the future, or ways to improve interaction within our members.

Basic Licensing Course

The Basic Licensing Course was held for the 4^th time since its inception back in 2003. Over two days in March this year, the course was attended by 12 participants.

We have received suggestions that the course might be useful for members in other organizations that are interested in inventions and/or entrepreneurship such as IDEA. Our Committee will be looking into working with other organizations to explore further the opportunity to promote the Basic Licensing Course to a wider audience. We propose to conduct this Basic Licensing Course at least once a year.

I would like to thank all the tutors who gave their valuable time to conduct the Course.
 

LES Delegates and General Meeting

In April this year, Daniel Koh and I had attended the LES Delegates Meeting and the LES General Meeting in Seoul, Korea. These annual meetings provided the opportunities for our local chapter to interact and collaborate with LES International and other LES societies. In particular, LES Philippines and LES Malaysia are interested to work more closely with LES Singapore in promoting technology transfer and licensing in the region. We have discussed the possibility of co-organising or participating in a regional conference. We shall release more details concerning this project at an appropriate time in the near future.
 

Collaborations with other organizations

In February this year, LES Singapore co-hosted a Southeast Asia IP Networking Meeting with LES Korea and the organizing committee for the LES 2006 Seoul Conference. More than 40 participants attended the meeting. Apart from 15 Koreans, 10 participants came from 8 different countries (China, Cambodia, Laos, India, Indonesia, Philippines, Thailand, and Sri Lanka). This meeting provided an opportunity for our members to network with colleagues from the different regions.

Annual General Meeting

At the Annual General Meeting held on 18 May 2006, the new Executive Committee elected for the term 2006-2007 comprised: -

During the second term of my Presidency, I would like to ensure LES Singapore continues to play a major role in the development of core competencies in technology transfer and licensing through our educational and other programs in Singapore. We are currently in the midst of developing an exciting new Intermediate Licensing Course which builds on the foundation developed in the Basic Licensing Course. I encourage members who have attended the Basic Licensing Course to attend this Intermediate Licensing Course when it is launched, as this will help to further develop competency in using the different tools of licensing.

It is one of our objectives to provide different platforms for our members to learn more about LES, and to be able to leverage on the LES networks. We will be organising seminars and networking gatherings for our members. I invite all members to come and participate in these activities as they will help foster greater interaction amongst members and provide a forum for the exchange of ideas.

Dr Alex Yu
President, LES Singapore 2006/2007
 

Introduction

The Competition Act 2004 (‘Act’) was first introduced into Singapore as a Bill on 12 April 2004.  It was passed into law in October 2004. The Act came into force in three stages, with the provisions introducing the Competition Commission kicking into force on 1 January 2005. The substantive provisions dealing with anti-competitive agreements and the abuse of dominance came into force from 1 January 2006. Finally, the provisions on mergers and acquisitions are to come into force in January 2007 at the earliest.  The Act is substantially similar to the UK Competition Act 1998 and EC Treat Competition Rules. 

In addition to the Act, there have been various Regulations and Guidelines that have been issued as well. The Guidelines do not have the force of law, but provide guidance on how the key provisions of the Act will be implemented.

The Competition Commission of Singapore (‘CCS’) is the primary enforcer of the Act in Singapore. The CCS is a regulatory body which has, amongst others, the power to maintain and enhance efficient market conduct and to promote the overall productivity, innovation and competitiveness in the markets in Singapore.

This update provides an overview of the scope of the Act in Singapore.

Transitionals

Although the Act came into effect on 1 January 2006, recognising that undertakings might need time to understand the Act and comply with its provisions, the CCS granted an extended period of time for undertakings to comply with the law. This additional time, the ‘Transitional Period’, ended on 30 June 2006. The Transitional Period allowed undertakings:

• to review their agreements and where necessary, re-negotiate or amend their agreements or otherwise comply with the requirements of the Section 34 prohibition; and
   
• in the event they were not in a position to comply with the Act on or before 30 June 2006, apply to the CCS to get an extension in time of the Transitional Period.
   

With the conclusion of the Transition Period, undertakings must comply with the Act, unless they are excluded or exempted.

Relevance Of The New Laws

What does this new law and the new Act have to do with all business organisations, regardless of what form they take, in Singapore? What is it about the new laws that directors and officers of corporations, management of partnerships and other non-corporate organisations and even the general employee need to be alert to?

The Act is essentially intended to regulate how business undertakings (henceforth referred to only as ‘undertaking’) conduct their affairs vis-à-vis their customers, suppliers and competitors. The primary aim is to ensure that there is fair competition in the market, and that there are no anti-competitive agreements or arrangements entered into or any abuse of any dominance by undertakings.  [For clarity, the Act is not aimed at protection of the customer. That comes within the ambit of the Consumer Fair Trading Act.]

What the introduction of this new law requires directors, officers, management and employees to do is ensure that their undertaking knows what the changes are and work together to ensure that there is no violation. Directors, officers and management (collectively ‘Officers’) are personnel at a senior level of the undertaking who dictate the policies for the undertaking, including ensuring compliance with the law.  In this regard, they must lead any initiative to study the impact of the Act on their business and make appropriate changes, if necessary. This would also involve implementing an appropriate compliance programme, including ensuring adequate induction programmes for employees, a comprehensive understanding of important corporate ‘dos and don’ts’, and regular training programmes within and without the undertaking.

Whilst there is no direct legal liability pinned on the Officers for a violation of the anti-competitive and abuse of dominance provisions, a lack of understanding of the laws, and a failure to ensure compliance, for instance, could end up being a costly affair for the company. Additionally, Officers do face personal penal liability when, amongst other matters, the CCS has requested for documents and / or other information, and the relevant Officer fails to provide the same.

What Does The Law Prohibit And Relevance Of Market Definition

The Section 34 prohibition disallows agreements between undertakings, including decisions by associations, which aim to, or have an appreciable effect of, preventing, restricting, or distorting competition in Singapore. Guidelines which have been introduced to explain Section 34 provide that an agreement will generally not have an appreciable effect on competition if a threshold of between 20% and 25% is not crossed.  Hence, such agreements are unlikely to be regarded as anti-competitive.

 The Section 47 prohibition does not necessarily involve agreements, but rather an abuse of a dominant market position by an undertaking in Singapore.  An undertaking will not be considered dominant unless it has substantial market power. To show market power, the undertaking must have pricing power or there should be high entry barriers in the market. Generally, if an undertaking has 60% of the market share, market power is more likely to be found.

The Section 54 prohibition, which has not come into force as yet, will seek to regulate mergers, with the primary aim of ensuring that there is no substantial lessening of competition in Singapore.  Joint ventures, which are typically agreements between undertakings to jointly undertake certain ventures, could be regulated under this Section 54 or even under Section 34.  Section 54 will not be discussed further in this article.

Note that the prohibitions discussed contemplate anti-competitiveness or an abuse within a specified market.  Hence, it is important to determine the market sphere of a particular undertaking.  The relevant Guidelines provide that ‘the relevant market is in practice no more than an appropriate frame of reference for competition analysis … in practice, defining a market requires an assessment of the various types of evidence and the exercise of judgment.’  In conducting this assessment, it is important to review the product market and the geographical market in relation to the specific activity being assessed. This is always an exercise that will precede the analysis of whether there has been a violation of the Act.

Notwithstanding the threshold and other parameters set for the Sections 34 and 47 prohibitions, there are certain activities which will be viewed as almost automatic prohibitions, and will always be deemed to have an appreciable adverse effect on competition or an abuse of dominance. These activities include agreements that directly or indirectly fix prices, rig bids (collusive tendering), share markets and limits or controls production or investment.

The prohibitions discussed will not apply if the activity falls within an exemption under the Act or can be justified on economic basis. 

Exemptions & Justifications

There are a number of exemptions and justifications that can be used against arguing a violation of the Act.  What is perhaps most useful is the ability to argue economic justifications that permit certain activities which may seem anti-competitive or an abuse of dominance. 

In the case of Section 34, the relevant Guidelines provide that an agreement which is found to have a net economic benefit will be exempted from the provisions of the Act.  Net economic benefits will be found if there is contribution to improved production or distribution, or there is promotion of technical or economic progress; and the restrictions imposed are not indispensable to the attainment of those objectives.

In the Case of Section 47, the relevant Guidelines state that the CCS will adopt an approach known as objective justification. What this means is that the CCS will take into account both the anti-competitive effects and any countervailing benefits when assessing the effects of a particular conduct.  Where the dominant undertaking can show that the conduct leads to improvements in economic efficiency and that the benefits could not be achieved without producing such anti-competitive effects, the CCS will not find abuse. In providing for this, the CCS states that any restriction of competition must nevertheless be proportionate to the benefits produced. 

Penalties

If there is violation, the CCS can impose a financial penalty of up to 10% of the turnover of the business of the offending undertaking in Singapore up to three years.  It can also modify the agreements or even impose criminal sanctions in some cases. Prohibited provisions of agreements will be void and so not enforceable.  Any infringement can also result in private civil actions by aggrieved parties claiming losses suffered.

Specific Measures Companies Must Take To Be In Compliance

Health-Check

An essential process that should be undertaken is to conduct a health check to ensure that the activities of and agreements entered into by the undertaking will not be struck down as being anti-competitive or an abuse of dominance.   This is a tedious, but necessary process, as the law does not seek to protect activities put in place prior to its coming into force. What this means is that an anti-competitive or abusive activity today, will be viewed as illegal and in violation of the Act with effect from 1 January, unless that particular activity comes within the extended timeline for compliance that the CCS has granted.

The exercise would involve, amongst various activities, at least an identification of the key business practices and way of doing things, as well as drawing up a list of all essential agreements.  Once this is done, the practices and agreements must be reviewed to red-flag potentially problematic practices and clauses. Next, it would be necessary to study these and to decide if indeed a modification is necessary.  It is not every alleged anti-competitive activity or abusive conduct that will require a change.

Compliance Programme Including Training

It is advisable to put in place a compliance programme.  A compliance programme includes putting in place a Compliance Manual AND ensuring requisite training is conducted.

The Compliance Manual should be prepared in a simple to use format, tailored for operational and business people rather than be legalistic.  The Manual must at the very least do the following:

 

• discuss the laws briefly to set the framework,
   
• provide a checklist of business practices which are obviously illegal, those that are legal and those that are questionable and so should be reviewed by legal,
   
• define the appropriate lines of authority and clearance for avoidance of non-compliance with the Act, and
   
• contain the company’s procedures for compliance with the Act,
   
• guidance on how the company should manage its relationships vis-à-vis third parties, and
   
• how to handle an investigation by the CCS.

Once a Compliance Manual has been put together, it is absolutely essential to ensure that there is proper communication of its contents through workshops, dialogue sessions and other communication methodologies.  It is tragic to have a Compliance Manual that no one understands and a greater tragedy if the background to the Compliance Manual, including the implications of non-compliance with the Act has not been effectively communicated.

The existence of a compliance programme is highly recommended given that the relevant Guidelines provide that the CCS will view an undertaking’s compliance programme as a mitigating factor when determining the amount of penalties to be imposed on the undertaking in the event of a violation. However, it is important to note that the mere presence of a compliance programme, in itself, will not be a mitigating factor, if it can be shown that the company did not comply with the Manual. Indeed, the effects could be counter-productive for such non-compliance.

Conclusion

This short article provides only a quick overview of the Competition Act and the Guidelines appended thereto. Each business practice and agreement must be analysed in detail to understand how the provisions of the Act will impact its continuity.

The way of doing business in Singapore is changing and officers must take the lead. The one comfort that has come through in studying businesses in the last year is that many already take a competitive approach in how they conduct their businesses. There are nevertheless pockets of improvements that can be made.  We do feel that with the improvements made and the gradually changing manner of doing business, undertakings will find the economic environment, contrary to their concerns, becoming more competitive and an easier place to do business in. 

Kala Anandarajah
Partner, Rajah & Tann

Traditionally, it has been the widely held view that the owner of intellectual property has the right to exclude others from its use. It is the view of this writer that this right is not an unfettered right, particularly when viewed in the light of the recent enactment of the Competition Act 2004.

Recent legislative developments are broadly favourable to competitive markets. The Competition Act 2004 (“the Act”), which came into force on 1 January 2005, echoed the emphasis on the prohibition of anti-competitive activities that would unduly prevent, restrict or distort competition as follows:

• Anti-competitive agreements, decisions and practices (the “section 34 prohibition”);
   
• Abuse of a dominant position (the “section 47 prohibition”); and
   
• Mergers and acquisitions that substantially lessen competition (the “section 54 prohibition”)

This article deals mainly with the sections 34 and 47 prohibitions and how they impact on intellectual property rights (IPRs) and licensing arrangements. While it may be true that both intellectual property and competition laws share a common goal of promoting market efficiencies and the development of innovative and useful activities, there may be occasions when the goals are divergent.

The IP owner or rights holder now needs to be mindful that in entering into arrangements where his intellectual property is licensed to other entities, such arrangements do not fall foul of the competition laws, in particular Sections 34 and 47 of the Act.

The Section 34 Prohibition

An agreement will fall within the Section 34 prohibition if it has as its object or effect the appreciable prevention or restriction of competition in Singapore. The Competition Commission of Singapore (CCS) guidelines set out the general framework for assessing licensing agreements. The 3 pertinent questions are as follows:
 

1. Is the agreement between competing entities or non-competing entities? Generally agreements between non-competing entities will be less likely to restrict free-competition as compared to agreements between competitors, which seek to lock out other businesses from using the same technology.
    
2. Does the licence agreement and the provisions contained in the agreement restrict actual or potential competition that would have existed in the absence of such an agreement? In dealing with this query, the CCS will consider the impact on both inter-technology competition (i.e. competition between undertakings using different technologies) and intra-technology competition (i.e. competition between undertakings using the same technology).
    
3. Even if the agreement falls within the scope of Section 34, does the licence agreement have a net economic benefit? This is perhaps the most contentious issue. An agreement may have a net economic benefit where it contributes to improving production or distribution or promoting economic progress while at the same time, it does not impose on the undertakings concerned the possibility of eliminating competition in relation to a substantial part of the goods or services concerned.

The Section 47 Prohibition

What amounts to an abuse of dominant position under the Act?

The Section 47 prohibition extends to any conduct on the part of one or more undertakings, which is an abuse of a dominant position, in any market in Singapore. Companies planning to enter into technology or other intellectual property licences will now have to assess their conduct involving intellectual property in order to ensure that it complies with the section. 

The aim of compliance is to ensure that an undertaking that is dominant in a relevant market either in Singapore or elsewhere does not abuse that dominant position in a market in Singapore. The 2-stage test for the Section 47 prohibition is as follows: 

• Whether an undertaking is dominant in a relevant market either in Singapore or elsewhere; and
   
• If it is, whether it is abusing that dominant position in a market in Singapore.

The relevant market must be determined to assess whether an undertaking is dominant. An undertaking will not be considered dominant unless it has substantial market power. This is assessed through various factors such as:-

• Its market share and the degree of fluctuations in market shares. A market share above 60% is likely to indicate that an undertaking is dominant in the relevant market;
   

• Existing competitors in the market whom its customers would be able to go to if it raises its prices;
   

• Barriers that potential competitors would face to enter the market. Lower entry barriers usually indicate less dominance by the incumbent market players; and
   

• Its ability to sustain a long period of sale below cost.

Where the dominant position is acquired through successful innovation or economies of scale, such conduct is not an abuse of dominance. Section 47(2) of the Act lists broad categories of business conduct within which particular examples of abusive conduct are most likely found. In general, abuse of dominance occurs in situations where the dominant firm uses tactics such as sustained extreme low pricing to take unfair advantage of its position to drive out existing and potential competitors. Other predatory behaviour include making sale of one product conditional on other unrelated products or services being purchased together. Such conduct may be abusive to the extent that it harms competition, for example, by removing an efficient competitor, limiting competition from existing competitors, or excluding new competitors from entering the market.

Ownership of an IPR will not necessarily create a dominant position. The exercise of an IPR by a dominant undertaking will not usually be an abuse when limited to the market for the specific product which incorporates it. Competition concerns may arise if the dominant undertaking attempts to extend its market power into a neighbouring or related market, beyond the scope granted by intellectual property laws. Conduct that constitutes an abuse of a dominant position in a market includes conduct that protects enhances or perpetuates the dominant position of an undertaking in ways unrelated to competitive merit. In certain circumstances, a dominant undertaking’s refusal to supply a licence may constitute an infringement under the Section 47 prohibition if there is no objective justification for the refusal.

Abuse in Related Markets

It is not necessary for the dominant position, the abuse and the effects of the abuse, to be in the same market. An example of an abuse in related markets is where the undertaking is dominant in Market A, but not dominant in related Market B, and where the undertaking offer special discounts in Market B, to buyers who remain loyal to it in Market A, so as to help maintain its dominant position in Market A.

It is against the above backdrop that certain contracts or arrangements relating to licensing of IPRs require some careful consideration. 

Grantbacks

One frequently sees grantback provisions in licence agreements. Under a grantback provision, the licensee agrees to grant to the licensor, rights in the technology which has been improved or modified by the licensee. Such a provision may have an adverse impact in that it does not incentivise the licensee to innovate and carry out its own R&D research.

Furthermore, history has shown that parties originally engaged in a dispute concerning alleged IPR infringement, may choose to resolve their dispute by way of cross-licensing arrangements. Interesting legal issues that arise from such a method of dispute resolution include whether such cross-licensing arrangements if made exclusive, will be in breach of the competition laws.  If the parties, in their eagerness to resolve their dispute by way of cross-licensing arrangements with grantback provisions, fail to fully consider whether such an arrangement is anti-competitive, they may well find themselves back on the drawing board in crafting a resolution to their dispute where such arrangement is later found to be void. 

Refusals to Supply a Licence

The basis of property rights is the right to exclude. Ownership of an IPR does not normally impose on the IP owner an obligation to license the use of that IP to others, even where the IPR confers market power on the IP owner. Therefore, a refusal to supply a licence, even by a dominant undertaking, is not normally an abuse.

In limited circumstances, where the refusal to supply a licence by a dominant undertaking relates to an essential facility, with the effect of substantial harm to competition, the refusal will be an infringement under the section 47 prohibition. A facility will be viewed as essential only if there are no potential substitutes, through duplication or otherwise, and if the facility is indispensable to the exercise of the activity in question. Essential facilities are rare in practice because IPRs by themselves are generally unlikely to create essential facilities. In determining whether a refusal to supply a licence constitutes an abuse under the section 47 prohibition, the impact on the technology and innovation markets will be considered.

 At first blush, the above legal requirement appears offensive. Indeed a review of the jurisprudence in the European Courts suggest that the courts are still grappling as to when an IP owner has wrongfully refused to license its IPR. This writer however submits that this should not be an issue of too much concern. The law has already recognized that where there are useful things, they should be enjoyed by all, albeit with due compensation to be paid to the creator. For instance, under the Patents Act, there already exist provisions pertaining to compulsory licensing.

Exclusions

The Section 34 prohibition does not apply to vertical agreements as stated in the Third Schedule of the Act. A vertical agreement is an agreement entered into between two or more undertakings where each of them operate at different levels of the production or distribution chain.

The Section 47 prohibition does not apply to the matters specified in the Third Schedule to the Act by virtue of section 48. Some of the exclusions are: 

• Conduct to the extent to which it is engaged in order to comply with a legal requirement, that is any requirement imposed by or under any written law;
   

• Conduct, which is necessary to avoid conflict with an international obligation of Singapore and which is also the subject of an order by the Minister;
   

• Conduct which relates to any product to the extent to which any other written law, or code of practice issued under any written law, relating to competition gives another regulatory authority jurisdiction in the matter.

Conclusion

It will be interesting to see how the new Competition Act will be interpreted by the CCS and the courts in future dealings on IPRs.  As more references are issued to the CCS in future, there will be no doubt that there will be more clarity in due course.

Daniel Koh
Treasurer, LES Singapore 2006/2007