Malaysia: How does competition law interact with IP rights?
The Malaysian Competition Act 2010 (CA) which has been in force for the last six years prohibits anti-competitive and abusive practices which would have an effect on competition in any market in Malaysia, irrespective of whether the commercial activity was carried out within or outside Malaysia.
The Malaysia Competition Commission (MyCC), an independent body established under the CA is empowered to enforce the CA and issue and publish guidelines in relation to the implementation and enforcement of competition laws.
A commonly stated objective of competition law is to enhance the process of competition and to increase economic efficiency with a view to ultimately benefitting consumers with competitive prices, higher quality products and services and wider choices. It essentially seeks to prohibit or control cartels, monopolies and abuse of dominance.
It is well known that IP rights generally enjoy a special status, in that IP rights can have certain monopolistic features as the law generally recognises that there are justifications for such rights. Competition law operates to exercise IP rights within the limits and boundary of the exclusivity that IP rights give. A balance needs to be struck as to whether the behaviour of the IP owner in the exercise of these IP rights is anti-competitive so that both competition and IP can coexist and the rights of IP owners and those of consumers are protected. Very recently, the MyCC issued draft IP and Competition Guidelines (draft guidelines) and has welcomed public feedback on the guidelines. The guidelines hope to address many of the uncertainties arising from this complex interface.
There are essentially three key prohibitions under the CA, i.e. anti-competitive horizontal and vertical agreements between enterprises and abuse of dominance.
Horizontal agreements, such as agreements between enterprises at the same level of the production or distribution chain (such as between IP owners of competing or potentially competing companies) which are prohibited would include price fixing, market sharing, bid rigging and controlling market access and production.
Prohibited vertical agreements are essentially agreements made between enterprises which operate at different levels in the production or distribution chain which are anti-competitive in nature and include certain distribution, supply, licensing and contract manufacturing agreements.
Anti-competitive terms to look out for include terms which impose exclusive distribution rights in one territory, obligations to buy from a single supplier, market partitioning, tying and bundling and resale price maintenance. In the draft guidelines, an exclusive licence by the IP licensor will not infringe the CA unless the licence is coupled with anti-competitive conditions such as price fixing and tying/bundling.
An enterprise is in a dominant position if it possesses significant power to adjust prices, outputs, or trading terms without effective constraint from competitors or potential competitors. The percentage of market share of the company is not necessarily conclusive in determining whether the company is in a dominant position. It is stated in the draft guidelines that the normal exercise of IP rights by an IP owner will not constitute abuse. An abuse of dominance could occur in two ways, either through exploitative conduct or through exclusionary conduct. Exploitative conduct under the draft guidelines includes attempts by a dominant enterprise to use the opportunities provided by its market strength in order to harm customers directly. An example would be an IP owner increasing the price above competitive level. Such an assessment of anti-competitive behaviour must, however, be balanced with the basis for the high price which should not interfere with the incentive to innovate. Exclusionary conduct, which aims to exclude equally efficient competitors from the market, in the context of IP rights must be assessed based on the impact on competition in the market and not on its impact on competitors.
The maximum penalty for infringing the CA is very onerous and is up to 10% of worldwide turnover of the enterprise. There are also numerous criminal provisions for obstruction and breaches of the CA. Hardcore cartels such as price fixing, market sharing, bid rigging and limiting production or supply are viewed as the most serious of infringements and the MyCC since the CA came into force has imposed penalties on businesses that are found to have infringed the CA.
With a strict competition law regime in place in Malaysia, it has become essential for enterprises operating in Malaysia and those with IP rights to regularly monitor and review their business practices and strategies to ensure compliance.