28 May 2019

It has been a busy time for Malaysian competition authorities this quarter.

  • The Malaysia Competition Commission (MyCC) has taken the bull by the horns on the tension between intellectual property law and competition law. It Gazetted guidelines on intellectual property rights and competition law on 5 April 2019.
  • MyCC has also announced its intention to introduce a framework for merger control at the end of the year.
  • But before that, and hot on the heels of the announcement of a proposed mega merger between two telco giants, the Malaysian Communications and Multimedia Commission (MCMC), which has jurisdiction over the competition regulation in the communications sector, published guidelines for mergers and acquisitions and authorisation of conduct on 17 May 2019.
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MyCC’s Guidelines on Intellectual Property

Anti-competitive Agreements

At the core of intellectual property law is the incentive and reward for innovation for the development of better products and services. For example, advances of technology which are patented give the patent holder an exclusive right to prevent or stop others from commercially exploiting the patented invention in exchange for the disclosure of the technical information, which could spur other innovations. Such exclusive rights conferred by intellectual property law must be reconciled with the need to avoid unjustified restrictions on competition. The evolution of competition law overseas has taken a more economic approach recognising the need to encourage investment and reward innovation.

Locally, MyCC considers IP licensing to be generally pro-competitive. However, MyCC would be concerned with anti-competitive agreements or abuses of dominance by IP owners.  When entering licence agreements, one needs to test whether the applicable conditions have the object or effect of restricting competition, for example price restrictions (such as fixing floor prices), exclusivity and territorial or other limitations, or conditions which foreclose market entry.

Red flags include:

  • Exclusive dealing
  • Price restrictions
  • Limitations in scope or field of use
  • Territorial limitations
  • Tying
  • Licence and grant back

This is particularly significant if one of the parties, usually the licensor, has market power.

Agreements between competitors can also be detrimental to competition where intellectual property rights are used in price-fixing, market sharing, restricting production or market access. Cross-licensing or patent-pooling agreements may be anti-competitive if it forecloses market access to the patented technology. Agreements which limit technical development or investment may also fall foul of competition law.

It is important to remember that even if a restriction is prima facie anti-competitive, it may be justified and relieved of liability if there are net benefits and such benefits flow to the consumer, but these need to be identifiable and quantifiable, and should be properly documented in case the conduct is investigated in the future. Note that there is no limitation period for investigation of a breach of competition law, and an enterprise may be called on to account for its conduct in the, hopefully, not too distant past.

Abuse of Dominance

Ownership of IP will not necessarily confer market power, and even if an enterprise is found to be dominant in a market, this is not problematic unless there is an abuse of its dominance. The MyCC takes the view (consistent with other jurisdictions such as the EU) that a dominant enterprise has a special responsibility to ensure that its conduct does not impair competition in the relevant market. Abuses of dominance can broadly be characterised in two groups: exploitative conduct and exclusionary conduct.

  • Exploitative conduct include the dominant enterprise’s use of it market power to harm customers (e.g. increased pricing above the competitive levels).
  • Exclusionary conduct include practices to exclude competitors from the market. MyCC highlights that the measure of abuse is against the process of competition, rather than individual competitors. In other words, it is only abuse if the competitors eliminated are “as efficient” as the dominant enterprise. Less efficient competitors being eliminated are considered normal outcomes of a competitive market.

Competition authorities are loath to engage in price regulation, largely because prices should be determined by a competitive market and that intervention by a regulator may dampen innovation. MyCC has similarly noted that it will be careful to ensure that its intervention does not interfere with the incentives to innovate.

Red flags include:

  • Non-competition
  • Product hopping
  • Refusal to licence
  • Discriminatory conditions
  • Tying and bundling
  • Predatory pricing
  • Hoarding scarce supplies
  • Margin squeeze
  • Loyalty rebates and discounts
  • Refusal to licence Standard Essential Patents (SEP) on Fair, Reasonable and Non-Discriminatory (FRAND) terms
  • Royalty Stacking

Should you encounter these, do reach out to us for a discussion.

MCMC stretches its reach into M&As

Although the Communications and Multimedia Act 1998 (which was the first statute to confer competition law regulatory powers in Malaysia) does not expressly deal with mergers and acquisitions (M&A), the MCMC interprets the term “conduct” which substantially lessens competition to include M&As and joint ventures on a lasting basis, and then widened that to include consolidations, tender offers, purchase of assets and management acquisitions. While there is no mandatory filing requirement, the breach of the competition rules allow the MCMC to investigate and penalise transactions which have the purpose of substantially lessening competition in a communications market in Malaysia.  The MCMC can also issue directions to a dominant licensee where its conduct has the effect of substantially lessening competition.

MCMC is of the view that M&As which involve a licensee in a dominant position or which results in a licensee obtaining a dominant position would raise competition issues. The MCMC has determined, and can from time to time determine, licensees which it considers to be dominant. Otherwise, the indicative level of dominance is 40% of market share.

As the assessment process may involve public or third party consultation, the MCMC does not encourage parties to an M&A to notify it unless it has been publicly announced, but MCMC does have a process for confidential assessment.

Parties may apply to MCMC for assessment of whether a proposed transaction is anti-competitive. They have an additional option of making a parallel application for authorisation of conduct. Conduct can be authorised if there are efficiency benefits, or there are national interest grounds for authorisation. The MCMC has indicated that it will use the national policy objectives as a basis to decide whether or not conduct should be authorised. Authorisation may be subject to undertakings to address competition law concerns.

Also importantly from and M&A perspective, especially in the context of cross-border transactions, the MCMC has given indicative timelines for the above processes.

The M&A Guidelines complement MCMC’s economic regulation through the existing standard access obligations on bottleneck facilities and the mandatory standards on price and non-discriminatory access terms.

Should you have any questions on competition law, you may contact Sharon Tan.

This alert is for general information only and is not a substitute for legal advice.