Last month the Commerce Commission (Commission) issued a formal warning to Consolidated Alloys (N.Z.) Limited (Consolidated Alloys) for including an “anti-competitive clause” in a negotiated settlement with its competitor Edging Systems (NZ) Limited (Edging Systems). The clause was included in a settlement agreement to resolve a commercial dispute involving Edging Systems’ alleged breach of Consolidated Alloys’ registered patent.
There has been considerable attention paid to the intersection of IP and competition laws internationally, but IP related issues have not generally featured in NZ competition law cases.
A copy of the Commission’s investigation report is available on its website.
The “anti-competitive clause”
In New Zealand, Consolidated Alloys and Edging Systems are the only suppliers of soft-edge flashing products used on residential metal roofs. Consolidated Alloys registered a patent for a type of soft-edge flashing in 1995 which expired in 2015. Edging Systems produced a soft-edge flashing product, EZ-Edge, which Consolidated Alloys alleged breached its patent and issued proceedings. However before the trial commended the parties entered into a settlement agreement.
Under the settlement Edging Systems agreed to:
- pay Consolidated Alloys a lump sum (the lump sum payment) and royalties on annual sales of EZ-Edge for an undisclosed period of time and subject to a minimum annual payment (the annual royalty payments); and
- not sell any other soft-edge flashing products covered by the patent other than EZ-Edge until June 2023 ie eight years past the expiry of the patent (the selling restriction).
The arrangements could be viewed as a variant of a “pay-for-delay” type arrangement which have gained significant attention internationally, particularly in the pharmaceutical industry.
The Commission’s analysis
Having assumed for the purposes of its analysis that Consolidated Alloys held a valid patent (a matter that only a court could determine), the Commission concluded that in its view:
- The lump sum payment and annual royalty payments did not breach the Commerce Act’s prohibitions against price fixing or arrangements that have the purpose or (likely) effect of substantially lessening competition in a market.
- The selling restriction did not breach the price fixing prohibition, however the selling restriction did have the purpose and (likely) effect of substantially lessening competition in the markets for edge products and soft-edge flashing products.
The Commission noted that “[w]hile the clause may have been inserted to protect the royalty payments, only one of multiple purposes needs to be anti-competitive to breach the Commerce Act. An intended consequence of the clause was to exclude the only likely competitor from entering the market with another competing product. As well as restricting the sale of competing products for a considerable period of time, it exceeded the duration of the associated royalty.”
After entering into the settlement agreement, Edging Systems went on to develop and sell a new soft-edge product, Vent Edge, in 2013 and Consolidated Alloys subsequently gave notice that the new product breached its patent and the selling restriction. However, Commission Chair Dr Mark Berry stated “following the Commission’s investigation, [Consolidated Alloys] formally advised that it would not enforce the restrictive clause in the settlement agreement. [Consolidated Alloys] has also not prevented [Edging Systems] from selling Vent Edge.”
Applying its Enforcement Response Criteria (and primarily as a result of Consolidated Alloys’ mitigating conduct during the course of the investigation and that no harm appeared to have been caused), the Commission decided not to recommend issuing proceedings and seeking a pecuniary penalty, and instead “consider[ed] a public warning is appropriate.”
While the Commission decided to take no further action it did warn that “[t]his investigation is a reminder to all businesses that it can be risky to enter into settlement agreements that contain clauses that affect the ability of other parties to compete in any market. Care is required, particularly where competitors are involved.”
The Commission’s “whistle blower” policy continues to be used
The Commission became aware of the settlement agreement in September 2014 when Edging Systems applied for and was granted conditional immunity under the Commission’s leniency (immunity) policy. Interestingly, Edging Systems only sought leniency following a presentation by a trade association executive on up-coming changes to New Zealand’s competition laws. This suggests there could be similar arrangements in other industries which have gone undetected. The Commission’s publicity of this investigation may result in further leniency applications being made.
Restraints between competitors raise significant risks
It is not surprising that the Commission investigated such a restriction extending eight years past the expiry of the patent. We are increasingly seeing (potential) competitors entering into various arrangements that restrict how one or more parties can compete. These arrangements are often entered into as a result of a sale of a business, or on becoming a member of an organisation or buying network. Arrangements between competitors restricting their ability to compete can raise competition concerns, including price fixing concerns. This includes provisions preventing competitors from actively competing for each other’s existing customers.
While the Commerce Act includes an exemption from Part 2 of the Act (restrictive trade practices) for restraints of trade in relation to the sale of a business, the restraint must be solely for the protection of the purchaser in respect of the goodwill of the business. The exemption does not extend to reciprocal non-competes, including in circumstances where the assets of a business are split and sold separately to multiple buyers.
Businesses should seek advice before contemplating any proposals that would restrict their ability to compete. This is particularly important given the Commerce (Cartels and Other Matters) Amendment Bill would criminalise cartel conduct, which would include market sharing arrangements between competitors.