The US automotive press is full of articles about new cars which have been released by a manufacturer, but which will not be sold into the US market. In a recent turn of events, it has been reported that the 1064 hp Chevy Corvette ZR1 won’t be sold in Europe.[1] European car lovers may lament the loss since it is also reportedly the most powerful V8 an American automaker has ever put into a production car. Heady stuff indeed.
Of course, in little old New Zealand we are used to cars at the top of the food chain (and those lower down) not making it to our shores as options to be purchased new. When I was a long haired (and probably slightly smelly) mid-teen with a freshly minted license about all I could aspire to owning were predominantly English or Australian vehicles, with a smattering of locally assembled variants of the same models.
What exactly does any of this have to do with intellectual property? During my career I have been asked on a number of occasions whether a client can be compelled to supply their intellectual property (“IP”) protected goods to a person or market. Until recently, the answer was generally that they were free to decide to whom and in what form the goods were supplied. That is because the main legislation to govern competition law in New Zealand (the Commerce Act 1986) included a general exemption for actions taken by a party in relation to IP rights in the form of s.45 which read:
45 Exceptions in relation to intellectual property rights
(1) Nothing in this Part, except sections 36, 36A, 37, and 38, applies—
(a) to the entering into of a contract or arrangement or arriving at an understanding in so far as it contains a provision authorising any act that would otherwise be prohibited by reason of the existence of a statutory intellectual property right; or
(b) to any act done to give effect to a provision of a contract, arrangement, or understanding referred to in paragraph (a).
There was also a more specific restriction with regard to s.36 (taking advantage of market power) which read:
These exceptions were included in the Commerce Act because it was then thought that competition law and IP rights were inconsistent: because competition law seeks to prevent monopolies, whereas IP rights confer statutory monopolies with regard to specific IP.
This inconsistency was likely permitted because a fundamental rationale for the grant of IP rights, and particularly patent rights, is the underlying social contract. Using patents as an example, in return for public disclosure of an invention, a patentee has the exclusive right to make, use and sell an invention in New Zealand for a finite period. After that time other parties can make and improve on the invention in New Zealand thus building up the pool of knowledge available to all.[2] This limited statutory monopoly provides an incentive for inventors, creators, innovators and entrepreneurs to create new inventions.[3] The benefits that result from such innovation are generally considered to outweigh any costs imposed on society by the limited monopoly rights granted in respect to the IP.[4]
Of course, the operation of this regime is entirely dependent on the ability of rights holders to protect and enforce their exclusive rights. If the certainty of exclusivity is undermined, the incentive of innovators to create is weakened. The dominant means by which patentees can protect their rights (and preserve their exclusivity) is the ability to freely enforce and licence those rights. Such enforcement is strictly regulated by the Patents Act 2013, and is guided by well over a century of case law. Appropriate checks and balances are also built into the Patents Act. It was therefore thought that the IP exemptions in the Commerce Act provided a suitable compromise between competition law and IP law.
However, all that changed on 5 April 2022 with the coming into force of the Commerce Amendment Act 2022 which repealed the above exemptions. So, does this mean an IP rights owner can now be forced to supply goods or services protected by those rights? As in most aspects of the law the answer is – it depends.
Agreements relating to statutory intellectual property rights are now clearly within the ambit of the Act. This means that any agreement, contract, or action taken in regard to an IP right can fall foul of Part 2 of the Commerce Act which prohibits:
a. Entering into new contracts which contain a provision that has the purpose, or is likely to have the effect, of substantially lessening competition in a market (s 27);
b. Engaging in cartel provisions (s 30); and
c. Taking advantage of a substantial degree of power in the market to prevent competition (s 36).
The Act, which serves to promote competition in markets for the long-term benefit of consumers within New Zealand, also prohibits resale price maintenance (e.g. refusing to supply goods unless the recipient agrees not to sell those goods at less than a price specified by the supplier). So, refusing to sell goods to another party because they won’t agree to a minimum resale price will fall foul of the Act.
Refusing to supply goods for any other purposes will generally not contravene the Act unless you have a substantial degree of power in the market and your refusal to supply goods has the purpose or effect of substantially lessening competition in that market.
Clearly it all depends on how the “market” is defined. The starting point for assessing how the market is defined is to identify:
- the goods or services supplied and their close product substitutes (product market), and
- the geographic region in which the goods are supplied (geographic market).
It is generally accepted that IP rights do not necessarily, of themselves, confer substantial market power. The Commerce Act does not prohibit a firm from developing a superior product to its rivals, which may influence its position in a market or even extend existing market power. Market power comes from a lack of effective competitive constraint, and competitive constraint for goods protected by IP rights can come from any substitutable goods.
Returning to my car analogy, the market for the supply of transportation in New Zealand is unlimited by geography (e.g. it applies to the whole of New Zealand) and extends to all competitive and substitutable forms of transport. So, unless and until Tesla prefects its vision of a dystopia in which all forms of transport are driverless, electric and puerilely named[5], car manufacturers remain safe to ignore these shores in favour of larger and more lucrative markets. For other goods / markets the considerations may not be so black and white and a specialist assessment is normally recommended.
[1] The Chevy Corvette ZR1 Won’t Be Sold in Europe, Report Claims (roadandtrack.com)
[2] Finch, James & Wells Intellectual Property Law in New Zealand (2nd ed) at 2.1.
[3] Ibid at 1.3.
[4] Ministry of Business, Innovation & Employment “Discussion paper – Review of Section 36 of the Commerce Act and other matters” (January 2019) at 208 <https://www.mbie.govt.nz/dmsdocument/4325-discussion-paper-review-of-section-36-of-the-commerce-act-and-other-matters>.
[5] The writer is prepared to rescind these comments in return for carriage of Tesla’s IP portfolio in Australia and New Zealand.
