The Commerce Commission (“Commission”) has issued a warning to Consolidated Alloys, following the Commission's investigation into whether aspects of a patent litigation settlement agreement were likely to breach the Commerce Act.
This is the first time we are aware of the Commission taking enforcement action in relation to an agreement to settle intellectual property (“IP”) litigation, and as there is very little case law on the IP exemptions in the Commerce Act it is interesting to see the Commission's approach to enforcement in this area.
However, despite this investigation relating to the enforcement of IP rights, the Commission's Investigation Report does not refer to the IP exemptions in the Commerce Act 1986 (“Commerce Act”).1 Additionally, despite the Commission's long-stated view that an output restriction between competitors is prohibited by the existing s 30 price fixing prohibition, the Commission concluded that this restriction did not breach s30 on the basis each party was free to “independently determine their selling prices”.
The IP exemptions in the Commerce Act
There are two IP exemptions under the Commerce Act. Section 45 of the Commerce Act provides an exemption from the price fixing (s 30) and anti-competitive agreement (s 27) prohibitions for any agreement that authorises an “act that would otherwise be prohibited by reason of the existence of a statutory intellectual property right”. Section 36(3) provides an exemption from the misuse of market power provision for conduct that “seeks to enforce a statutory intellectual property right”.
The settlement agreement
Consolidated Alloys and Edging Systems had entered into a settlement agreement following a dispute about a patented softedge flashing product. Consolidated Alloys had sought to prohibit Edging Systems from selling its own flashing products (EZ-Edge), which Consolidated Alloys claimed infringed the patent of its patented softedge flashing product (Flashguard-Z). Clause 5 of the settlement agreement required Edging Systems to pay Consolidated Alloys royalties on its sales of EZ-Edge, and clause 8 restricted Edging Systems from selling any other softedge flashing product other than EZ-Edge until 2023. However, Consolidated Alloys' patent expired in August 2015, meaning the restriction in the settlement agreement was eight years longer than its patent right.
The Investigation Report
The Commission was concerned that clause 8 was a restraint that restricted Edging Systems' ability to compete in the market for soft edge flashing products.
Despite the investigation relating to an IP settlement agreement, the Commission does not refer at all to the Commerce Act's IP exemptions. We presume it took the view that the s 45 IP exemption did not apply on the basis that Consolidated Alloys was not “authorising an act” that would otherwise be prohibited by an IP right, rather it was seeking to prohibit an act that would otherwise be allowed at the expiry of the patent period.
The Commission did not take issue with the agreement up until 10 August 2015 when the patent expired (with the Commission assuming that patent to be valid for the purposes of its investigation), rather it took issue with continuation of the restraint in the settlement agreement for a further 8 years until 2023, which it said meant the “sole purpose was to substantially lessen competition”, and “a restraint that is eight years beyond the expiry of the patent is likely to have the effect of substantially lessening competition in the market”.
Previous Commission Enforcement
The Commission's approach of taking enforcement action against IP rights holders that enter into agreements that go beyond the scope of their IP right reflects previous enforcement action that the Commission has taken. Most notably, in 2010 the Commission reached the view that the four major New Zealand music recording companies' licensing agreements lessened competition as they each appointed a single copyright collecting society, PPNZ, the exclusive right to license their music, thereby, creating a monopoly. The Commission considered those exclusivity clauses went beyond the scope of their respective IP rights and did not “authorise an act” that would otherwise be prohibited and so it was concerned it would breach s 27. The Commission concluded that investigation by requiring the recording companies to enter into a settlement whereby they agreed to remove the exclusivity clause and develop their own direct dealing regime.2
Given IP rights and access to data are becoming increasing focuses for competition regulators overseas, this decision to take enforcement against Consolidated Alloys could signal the Commission increasing its focus on the area of IP rights – an area that has had comparatively little focus in New Zealand in the past.
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