Intellectual Property and Misuse of Market Power in New Zealand

Recent changes to New Zealand’s Commerce Act 1986 enhanced the restrictions on the misuse of market power and also changed the extent to which intellectual property rights are an exception to the market competition that the Commerce Act promotes. Will attempts at enforcing IP Rights be seen as a misuse of market power?

Background

Modern competition law and intellectual property law have an inter-twined and even inter-dependent history. Both grew out of attempts to diminish the power and influence that monarchies had over commerce and allow for competitive and innovative markets that encouraged resources to be allocated in ways that lower prices, improve quality, and provide more choice for consumers, while also giving incentives to innovate.

The classic example of this is the English Statutes of Monopolies Act 1623, section 1 of which voided all monopolies, commissions, grants, licences, charters or patents of or for the sole buying, selling, making, working or using of any thing within England or Wales. Section 6 of that Act provided an exception for the granting of limited term patents for the sole working or making of any manner of new manufacture (invention), provided that such grant was not contrary to the law nor mischievous to the State, by raising prices of commodities at home, or hurting trade, or being generally inconvenient. Section 6 of the Statutes of Monopolies Act 1623 has been and remains central to New Zealand’s patent legislation, as evidenced by it being part of the definition of a patentable invention in the current Patents Act.

New Zealand’s competition law is currently provided for in the Commerce Act 1986 and is primarily administered by the Commerce Commission. A key focus area of this Act is Part 2, which specifies the types of restrictive trade practices that are prohibited, being contracts, arrangements, understandings or covenants that substantially lessen competition. Within Part 2 of the current Act sections 36-36B relate to misuse of market power. When the Act commenced in 1986 section 36 prohibited those with a dominant position in a market from using that dominance to (i) restrict others from entering that or any other market; (ii) prevent or deter competitive conduct by others in that or any other market; or (iii) eliminate others from that or any other market. Subsection 36(2) provided an exception to that prohibition for the purposes of enforcing statutory intellectual property rights.

Although not involving intellectual property rights, litigation in the 1990’s gave rise to concerns about section 36 not being fit for purpose on account of it being hard to establish that conduct by a market participant with a dominant position in the market amounted to abuse of that dominance. This eventually led to section 36 being strengthened by way of revision and expansion in 2001. Instead of applying only to those with a dominant position in a market its application was broadened to those with a substantial degree of power in a market. Sections 36A and 36B were added, with 36A capturing conduct in trans-Tasman markets and 36B specifying that the existence of an anti-competitive purpose may be inferred from the conduct of relevant market participants. 

Section 36 was further strengthened with effect from 5th April 2023 by being triggered when a substantial lessening of competition in a market is an effect or likely effect of conduct by a party with a substantial degree of market power. The 2001 amendments had prohibited businesses with a substantial degree of market power from taking advantage of that power for specified purposes, with the possibility of that purpose being inferred rather than needing to be established in evidence. Nonetheless, a review found that it had the potential to fail to deter or penalise some forms of anti-competitive conduct, was costly and complex to enforce and its application to business conduct had some unpredictability. The new test, which better aligns with Australia’s, means that businesses with substantial market power who engage in conduct that has the purpose of, or has or is likely to have the effect of, substantially lessening competition in identified markets, may be in breach of the Act. Such conduct by business with substantial market power creates an onus on them to establish that they are not in breach of the Act, irrespective of whether conduct on or after 5th Apil 2023 gives effect to a contract, arrangement, understanding, or covenant that was entered into before, on or after 5th April 2022. Although, if the business had obtained or applied for authorisation before 5th April 2022, any such successful authorisation would continue in effect.

Along with the above changes to section 36 the recent amendment also repealed the exception specifying that a party would not be taking advantage of a substantial degree of power in a market by reason only that the party seeks to enforce a statutory intellectual property right. Instead of being immune, conduct or arrangements relating to intellectual property rights that harm competition will be assessed under the Commerce Act, which continues to recognise that adverse effects on competition can be offset by other benefits to the public and allows the Commerce Commission to, upon application, authorise conduct that would otherwise breach section 36.

Effects Going Forward
It remains to be seen how the enforcement of IP rights by entities with substantial market power will be construed by the Courts in relation to the amended Commerce Act. While section 36 should not prohibit pro-competitive conduct, such as competing through superior innovation, better quality products or lower prices from being more efficient, the reach of section 36 will likely depend upon how widely or narrowly the relevant market is defined. This will particularly be the case for patents for new technologies for which there are no viable or approved alternatives or which are central to an industry standard. Refusing to licence a competitor or not offering a licence on fair, reasonable and non-discriminatory (FRAND) terms may be found to constitute a misuse of market power.

While some market conduct by a party that has substantial market power is likely to harm competition, the same conduct by a party without substantial market power is probably unlikely to do so. Examples of conduct by parties with substantial market power that are likely to be prohibited are:

• Refusing to supply goods or services to the downstream market
• Margin/price squeezing
• Exclusive dealing
• Offering loyalty rebates and conditional discounts
• Tying and bundling patented and unpatented goods/services
• Inducing customers to enter into agreements that extend well beyond patent expiry
• Predatory pricing
• Pay for delayed market entry agreements

Identification of the market is the first step in establishing whether a party has substantial market power. In this regard it is important to note that intellectual property can be disruptive of market definition in that instead of merely adding a further option to a market it may drive a market towards segmentation into discrete markets where one product is not substitutable or a viable alternative to another. The extent to which this is the case will be determined on a case by case basis with the determination of whether products or services are considered substitutable for one another under the Commerce Act being made as a matter of fact and commercial common sense.

An example can illustrate how nuanced market definition can be. It is well-known that some people are allergic to some products due to a protein that the product invariably contains. However, if innovation establishes a way of obtaining that type of product but without the allergy causing protein, then this may lead to segmentation of the market. The degree to which market segmentation occurs will be determined by substitutability between the standard and the innovative products, taking into account the competitive factors of innovation, quality, service, price and convenience. From the perspective of people with the allergy who had nonetheless consumed the standard product, the innovation and quality factors will lead to a preference for the innovative product that is more than whimsical, although some of those people may continue to consume the standard product due to price or convenience. For such people the standard product would have a low degree of substitutability for the innovative product. However, the innovative product would have a high degree of  substitutability for the standard product as, in addition to the people with the allergy, people who are not allergic to the protein could choose to consume the innovative product. Put another way, businesses that only supply the innovative product are little affected by businesses that only supply the standard product, whereas businesses that supply the standard product can be noticeably affected by businesses that only supply the innovative product. If a business is substantially unconstrained by competitive pressures, then it has substantial market power.

If on the evidence it is found that a market has become segmented, then it will be easier for a market participant in one of those segments to be found to have substantial market power in that newly segmented market. That said, having significant market share does not necessarily indicate substantial market power, particularly if the barriers to market entry or expansion are low. Also, more than one business can have substantial market power in the same market. A finding of substantial market power would be more likely in the market for the innovative product as the barriers to entry or expansion in the market for the standard product would be much lower.

Under the amended section 36, if that disruptive innovative product is under patent protection and owned by an entity that is found to have substantial market power in the relevant market, then if the owner refuses to licence a competitor or not offer a licence on FRAND terms that may lead to a finding of a misuse of market power. Before making and seeking to enforce such a finding the Commerce Commission would investigate and establish the effect or likely effect of the conduct in question on competition by comparing the likely state of competition with the relevant conduct to the likely state of competition without the conduct. That analysis would also take into account whether the investments in research and development that led to the innovation would have been made if the innovator was unable to have exclusive use of the new technology. It would also consider the degree to which having a licence to use the technology is a necessary input for competing for the supply of downstream products or services. Pro-competitive effects of the conduct would also be considered.

In assessing whether there has been a substantial lessening of competition in addition to considering the size of the relevant market and the availability of substitutes the Commerce Commission can also consider the extent to which competition is hindered or prevented by the conduct of a party. In the context of intellectual property rights this may occur where a party with substantial market power seeks to use legal or regulatory proceedings in an unreasonable or vexatious manner in order to hinder or exclude rivals or potential entrants. That type of scenario can arise where a party has attained substantial market power on account of obtaining patent protection for an innovative and disruptive technology.

When the patent expires they may try to make it difficult for competitors to develop market share in that market by claiming trade mark rights in terminology that consumers associate with the technology, even though their attempts to obtain trade mark registrations for that terminology has consistently been rejected due to its descriptiveness. In leveraging their substantial market power to impose or threaten to impose litigation costs on competitors who seek to use or include such terminology in their trade mark applications, the party would likely be found to be misusing their substantial market power.

Another example of potential problems in enforcing IP would be a trade mark infringement action where the registered trade mark has become the only name for a previously patented product.  Section 66(1)(d) of the Trade Marks Act 2002 allows a trade mark registration to be revoked where the owner has allowed the trade mark to become the common name of the product and two or more years have passed since the patent expired. It might be arguable that in the case of a party that has substantial market power that revocation should be allowed upon patent expiry.

Trade mark rights are also sought by parties who have had commercially successful design registrations for the shape of an article as a way of extending their monopoly by other means. Is obtaining a trade mark registration for an expired or expiring design inherently contrary to section 36 if the owner has substantial market power in the relevant market?

While the designs legislation does not allow a design to be registered for features of shape or configuration which are dictated solely by the function which the article has to perform, a shape or configuration that is largely functional can be registered. The designs legislation also requires that the features of shape or configuration need to appeal to the eye and so must have some individual character. Where a design has been registered for the shape or configuration of an article that is largely functional it is unlikely that the shape will meet the threshold of being inherently distinctive. Rather, if such a design is to be registered as a trade mark it will be on account of acquired distinctiveness, whereby through extensive use consumers associate the shape of the article with a commercial origin. Nonetheless, the functionality of a design is on a spectrum and for some designs the functionality aspect will be low enough for the shape or configuration to be inherently distinctive for trade mark registration purposes.

It might be argued that if the shape of the article is the goods, then once the goods are removed there is nothing left to function as a trade mark. This view was rejected by the Court of Appeal in Fredco Trading Ltd v Miller (2006) 11 TCLR 751 at [41]-[42] on the basis that it does not give effect to the statutory recognition that shape can be a trade mark. Provided the shape is distinctive, whether inherently or acquired through use, it can function as a trade mark even if it is also the shape of the goods. It would seem inappropriate for section 36 of the Commerce Act 1986 to categorically prevent a party with significant market power from obtaining trade mark rights in the shape of an article that had been a registered design, provided the shape meets the threshold for distinctiveness. As was also held by the Court of Appeal in Fredco at [38] even where the shape of the goods is functional it does not follow that the owner of a trade mark registration for that shape has cornered the market, as there can be other ways of achieving the same functionality. However, if in practice there is a limitation to the types of shapes that can achieve the same functionality, then that could be basis for finding a substantial lessening of competition.

Other factors that can be relevant to assessing whether there has been a substantial lessening of competition are:

• To what extent are customers or inputs foreclosed by the conduct, and what alternatives do customers or competitors in the market have?
• To what extent does the conduct impose costs on competitors or potential entrants that are not faced by the firm in question?
• Does the conduct have the effect of harming incentives to innovate by other competitors in the market?
• Does the conduct have the effect of causing competitors in the market to compete less vigorously?
• Does the conduct make it harder for potential entrants to enter the market in question in response to profitable opportunities to do so?
• Does the conduct enable the firm in question to exercise power over suppliers, customers or competitors?
• How long are these effects likely to continue?

Conclusion
The enhanced restrictions on the misuse of market power and the removal of the exception for intellectual property rights represent a significant change that will affect the strategic use of IP rights by parties who have significant market power. However, the effect will be quite nuanced and fact specific. It will be particularly important for businesses operating with disruptive technology to seek counsel on whether their conduct in relation to that technology amounts to a misuse of substantial market power.

Authors: Quinn Miller and Jim Piper

//piperpat.com/news/article/intellectual-property-and-misuse-of-market-power-in-new-zealand