Calm down, Chicken Little – New IP laws won’t punish creativity

By Caitlin Burnett and Ben Lenihan

Last week, we met with a client who was anxious to learn if the rumours about a change to the Commerce Act were about to ruin their market position.

Apparently, they heard from other lawyers that the removal of exceptions for intellectual property (IP) rights in the Act would mean there’d be no protection for any of their bright ideas or innovations.

By April 2023, when these updates are to come into force in New Zealand, they were led to believe that it would be open season on IP rights leading to the looming collapse of creativity and the end of the (business) world.

Or so thought the nervous client.

We were happy to give the client some good news that the sky wasn’t falling.

In fact, while the Commerce Amendment Act 2023 represents a major update to the 1986 edition, it really is just New Zealand catching up to the rest of the developed world.

But the client’s nerves made sense. Historically, IP and competition laws in New Zealand have uncomfortably rubbed against each other. By granting limited monopolies on new ideas, the legal settings do encourage innovation and creativity, but they’ve never jibed too well with anti-monopolistic competition laws that aim to make New Zealand a flatter playing field.

A lot of Kiwi companies – our client being one of them – have benefited from a carve-out in competition law that treated things like patents and trademarks differently from other forms of property or assets.

The updated Commerce Act, which passed its third reading in March, gets rid of key exceptions for IP outlined in Section 45 of the older Act. Along with a strengthening of Section 36 (which blocks dominant companies from anti-competitive behaviour), the updated Act gives wider powers to the Commerce Commission to sniff out monopolistic actions.

Essentially, the changes introduce an effects-based test for anti-competitive behaviour. So, whether a company with powerful IP rights or licenses intends to limit competition in a market or not, the law no longer cares. It now only judges the effect of those rights on the market. Even if there’s a small chance the rights might be anti-competitive in the future, that’s a no-no according to the Commerce Commission.

This anti-competitive behaviour update to the Act was good to clear up for the client. But what really worried them was the changes to Section 45 of the Act, relating to the safe harbour of IP.

From 2019, New Zealand stood alone in the developed world with its exemption for IP rights from prohibitions on cartels and other anti-competitive agreements. This meant that owners or licensors of impregnable IP rights could effectively capture a market and there wasn’t much a competitor could do about it.

Obviously, the only companies that need to worry about the repeal of Section 45 are those with substantial market power due to their special access. After April 2023, should they choose to enforce those IP rights in the market, they might suddenly find a giant legal wall blocking their way if the Commission thinks enforcement of those rights will substantially lessen competition.

Now the client’s hands were in the air. What was the point of getting IP protection for their products in the first place? After all, if a company can’t enforce those rights in the market, why invest in innovation at all?

Our answer is simple: the US, Canada and the EU have had IP laws like this for the better part of a decade and there seems to be plenty of innovation and creativity coming from those jurisdictions.

Back in 2019, Australia also moved to repeal section 51(3) of its Competition and Consumer Act 2010 (CCA), which provided similar exceptions for licences or IP rights from anti-competitive prohibitions.

The Australian Competition and Consumer Commission’s (ACCC) Harper Review panel, set up in 2014 to assess competition policy in that country, recommended repealing the exemptions in section 51(3), citing similar logic to the New Zealand Commerce Commission’s decision:

“In those jurisdictions, IP assignments and licences and their conditions are assessed under competition laws in the same manner as all other commercial transactions. The courts in those jurisdictions distinguish between competitively benign and harmful IP transactions, taking account of all relevant circumstances of the transaction and the conditions imposed. There is no evidence that this has diminished the value of IP rights in those countries.”

So far, the ACCC’s forecast has been accurate, and the sky did not fall for businesses. Even with these greater restrictions on enforcing IP rights, Australian companies continue to churn out amazing innovations.

The reality is New Zealand’s old approach to IP law was outdated when compared with most of the rest of the developed world. So, the updated Commerce Act is simply bringing New Zealand into line with the global standards that were already far more pro-competitive than this country.

We should point out here that it can’t be known for sure if the coming changes to the Act will hurt companies in an unforeseen way or compel innovators who have great ideas to selfishly hold onto them fearing they will lose market share without the ability to leverage their IP rights. It is certainly possible these dynamics could occur, at least in some circumstances.

Yet if a company has a patent, then it is clearly in its best interests to leverage this monopoly by doing something with that patent. No one makes money by unreasonably burying a patented invention if there is a legitimate demand for those products or services in the marketplace.

Our advice to the worried client was to reassess their IP rights and licensing arrangements for any sign that the Commerce Commission might find them prickly. But aside from that, their operations should become much smoother now that New Zealand’s IP law settings are more closely aligned with global standards.

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