Two major changes to the Commerce Act 1986 (the Act) come into effect on 5 April 2023.
The market power prohibition under s 36 will be expanded capturing a broader range of conduct and placing businesses with substantial market power under increased scrutiny. Simultaneously, the Act’s protections for intellectual property (IP) rights will be removed.
Expansion of market power prohibition
Section 36 currently prohibits businesses with a substantial degree of market power from taking advantage of that power for the purpose of restricting entry into, preventing or deterring engagement in, and/or eliminating a person from an identified market.
As amended, businesses with substantial market power who engage in conduct that has the purpose of, has, or is likely to have the effect of, substantially lessening competition in identified markets, may be in breach of the Act. It will no longer be necessary to prove the business used its market power or acted for an anti-competitive purpose.
When does a business have “substantial market power”?
Most businesses have a degree of market power. A business may have substantial market power if it has sufficient economic strength to act relatively unconstrained by competitors. This can be a consequence of a combination of market share and high barriers to market entry. The ownership of statutory IP rights could also confer substantial market power. The substantial market power threshold is not limited to businesses in a dominant or controlling position but is intended to also apply to major participants in an oligopolistic market and a leading business in a less concentrated market.
What conduct might have anti-competitive effect?
In its Misuse of Market Power guidelines, the Commerce Commission suggested that businesses with substantial market power may breach the amended prohibition by engaging in the following conduct:
- Refusing to supply goods or services to the downstream market
- Margin/price squeezing
- Exclusive dealing
- Offering loyalty rebates and conditional discounts
- Tying and bundling goods/services
- Predatory pricing
However, the prohibition is not limited to conduct of this nature and any conduct by a business with substantial market power that is likely to have the effect of substantially lessening competition in a market will be caught.
The expansion of the misuse of market power prohibition in New Zealand follows the amendments made to the Australian equivalent in 2017. Cases brought under the Australian prohibition may provide some guidance on the type of conduct that is likely to draw the attention of the Commerce Commission or could risk private enforcement action.
The first case commenced by the ACCC (Australian Competition and Consumer Commission) under the Australian prohibition alleged that a provider of marine services had engaged in conduct that had the effect of substantially lessening competition by deterring customers from switching services to a new competitor in that market by imposing access charges on a customer who intended to switch. That case was resolved by consent, with the Federal Court declaring the defendant had breached the Australian prohibition.
The ACCC has also filed proceedings against Mastercard for providing retail businesses with discounted transaction rates if they processed most or all debit card transactions through Mastercard. The ACCC alleges this conduct had the purpose and likely effect of hindering the competitive process by deterring merchants from processing debit card transactions through eftpos (the cheapest option). The trial is set to commence mid-2024.
There have also been several private enforcement actions commenced under the Australian prohibition, including proceedings brought by Epic Games Inc against Apple/Google for requiring users to use their in-app payment systems, and proceedings commenced against Facebook/Instagram by a consulting company for removing its access to those platforms.
Removal of IP exception – Competition law now applies
The Act currently has protections for IP agreements and the enforcement of statutory IP rights. Section 36(3) provides that a business does not take advantage of market power simply by enforcing a statutory IP right (eg a patent, trademark, copyright). Section 45(1) adds that the Act’s other prohibitions do not apply to the entering into of IP agreements (such as licences, settlement and co-existence agreements) in so far as they contain a provision that authorises something that would otherwise be prohibited by an IP right, or giving effect to such provisions.
From 5 April 2023, these protections will be removed. Businesses cannot enter into new IP agreements which contain provisions which substantially lessen competition in a market (prohibited by s 27) or are cartel provisions (prohibited by s 30). Cartel provisions are provisions in agreements with competitors that fix prices, restrict output and/or allocate market(s). Businesses have a further year to ensure compliance for existing agreements.
In addition, businesses with substantial market power which enforce statutory IP rights in a way that has the purpose and/or effect of substantially lessening competition in a market will now be subject to the s 36 market power prohibition. These legislative changes bring New Zealand in line with Australia.
How will competition law apply to the exercise of IP rights?
There is considerable uncertainty about the extent to which the removal of the IP exception will impact the exercise of IP rights in New Zealand. Little to no guidance can be gleaned from Australia, as the only publicised case concerned an application for authorisation of an IP settlement agreement where the application was withdrawn before a final determination was made.
An owner of IP rights might have a substantial degree of power in a market simply by virtue of its ownership of those rights, especially if there are no acceptable substitutes for the products/services the owner supplies in that market (for example, where the party is the first to patent a particular technology).
The Commission considers this situation in its Draft Guidelines on the Application of Competition Law to Intellectual Property Rights and notes that a refusal to license to a competitor or even a potential competitor may be a misuse of market power in those circumstances. This may be another way in which to challenge certain statutory IP rights that is additional to the remedies available under IP law, for example, under the Copyright Act 1994 fair use infringement exceptions and licensing scheme regimes, the compulsory licensing regime under the Plant Varieties Act 2022, and in respect of patented inventions, under the Patents Act 2013 regimes for compulsory licences to be sought through the courts and granted in circumstance where the market is not being supplied, or is not being supplied on reasonable terms, and for the export of certain pharmaceutical products to certain countries.
In addition, IP licensing agreements, settlement or co-existence agreements between competitors often contain restrictions which could be viewed as potential cartel provisions (ie territorial, field-of-use or customer restraints). These provisions may breach the Act’s cartel prohibition unless one of the Act’s exceptions applies or may substantially lessen competition in the relevant market.
What do the Commerce Act changes mean for your business?
Commerce Commission investigations are incredibly costly and time intensive and a proactive approach is recommended. Accordingly, businesses with strong market positions should re-assess all their commercial practices to determine whether any of them could potentially have the effect of substantially lessening competition in the market. Businesses holding IP rights in particular should assess their current practices for compliance.
This article was co-authored by Jovana Nedeljkov (Senior Solicitor) and Soomin Yang (Law Clerk) in our Competition team.
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